The Savings Institute of South Africa (SASA) has designated July as the annual “Savings Month” on the South African calendar. The purpose of this initiative is to challenge investors to strive towards living within their means and to reinforce positive financial behavior.
With this in mind, I figured it would be a good time to share with you the Financial Pyramid, a fascinating concept. In the world of finance, it’s crucial to build a base before you can rise to the top, otherwise everything will collapse on frail foundations, hence the allegory of a pyramid.
The Base| Budgeting
The base of your financial pyramid should be a solid financial plan. This includes your written budget, short-term and long-term goals, as well as an investment plan to be implemented in the future.
You should have a positive cash flow, meaning, no longer using debt to fund your lifestyle. If you are heavily indebted, you should aim to settle this as soon as possible.
Once you have implemented the base, you can move onto the first building block: Wealth Protection.
Wealth Protection | Risk Management
Are you prepared if your assets are damaged or if the unimaginable happens and you lose your income-generating ability? Further still, what happens to your assets in the event of your death? This step is often skipped, as the benefits are not tangible in the way that investments are. This is really a grudge purchase if you will, however, without proper protection, your entire financial plan is at risk. Protection measures include:
- Short term insurance
- Life insurance
- Medical Aid
Wealth Creation | Investing
This is the stage that most investors wish to start at, but there is a reason we start at the beginning.
Here, you will max out your retirement fund contributions and tax-free savings accounts, and then initiate a discretionary investment portfolio. Once you have built your net worth to an amount sufficient to fund your lifestyle and retirement, you have the capacity to invest in higher risk prospects, allowing you to speculate on investment opportunities. This should only be done with money you can afford to lose.
This speculative investing is very risky, so you don’t want any debt by this stage. Also, you should only invest a small portion of your total investments into speculation.
Lastly, you’ll want to begin tax planning, especially as your retirement investments increase.
Wealth Management | Distribution
Managing your wealth requires a highly respected financial planner to advise you on your journey of realising your goals. They will continue to monitor and proactively manage your investment portfolios to optimise returns, taking your capacity and ability for risk into consideration.
In addition, it’s crucial to construct an optimal estate plan (executed via your Will) from a tax and liquidity perspective, to ensure your loved ones are adequately taken care of in the event of your passing. This brings enormous peace of mind to your life, allowing you to live fully in the present. This is the stage in which you should be indulging in your financial freedom, as you continue to build your legacy.
Each individual is uniquely wired, with differing priorities over various time periods; however, following the above Financial Pyramid is one way to ensure a robust financial plan that can withstand short periods of volatility without risking long-term aspirations.
We at Resolute are here alongside you as you navigate this journey of Life.