By Brett Mackay
Looking back at the last few years, which have been so tough on so many people.
Here is some insight on how to apply three key lessons many of us learnt.
1. Be prepared for a crisis in the short-term.
A key personal finance rule that has been reinforced of late is the importance of having some sort of an emergency fund, or at least a short-term savings account, that can be accessed in times of crisis.
Remember that while investing will build your wealth, saving will secure it, so this is probably not an investment, but rather a savings plan.
Should your income suddenly be interrupted or reduced, having an emergency fund or short-term savings account to dip in to as a substitute income can be a lifesaver. Equally so if you are suddenly faced with urgent unexpected expenses in a crisis.
Not only will your money grow in a Money Market Fund, having savings that are easily accessible will mean you don’t have to take on debt to cover emergency expenses.
When times get tough, having additional debt has the opposite effect of having emergency cash. Not only will you have to pay back money for goods (or good times) bought in the past you will also probably have to pay interest and costs.
As a side note, having funds in a short-term savings account can also give one the flexibility to load up on assets when there are dips in the market. There has been a lot of stock market volatility over the last few years, which creates good opportunities to invest extra funds when unit prices are low.
2. Think about the long-term.
Unfortunately, investors are more likely to do the opposite of buying in a dip: they sell in a dip. Selling your investments after prices have fallen will simply lock in your losses. In other words, it will prevent you from regaining lost ground when the market turns upwards again, which it inevitably does.
As a general rule of thumb, especially with your long-term investments, it is better to keep your eyes fixed on the horizon. You can expect volatility in the short-term, that is part of long-term investing. The dips will be followed by spikes, followed by dips and spikes, but the long-term trend is upwards.
You are better off ignoring the short-term volatility and keeping your eyes on the horizon. Tackling long-term goals, such as retirement, as long-term projects gives us the best chance of success and makes it far easier.
It can be hard to ignore noise in investing as in life, which is why so many of us live day-to-day, focusing on our immediate needs. Especially in a time of inflation and rising interest rates, like we find ourselves now, it can be difficult to see beyond the ever-increasing costs of essentials, from groceries and petrol to school fees and the rent or bond payments.
Often the urgency of our short-term needs diverts our attention from something equally important: our long-term needs.
3. Educate yourself.
Nobody cares more about your money than you do, and the best way to take care of it is to pay attention. Start by asking questions. Key questions to ask:
– How much am I paying in fees?
– What difference will that make to my overall savings in the long-term?
– Am I using the available tax incentives to lower my tax bill and boost my savings?
The more informed and critical your approach, the more confidence you will have in your ability to make good decisions and defend your own best interests. It is never too early or too late to start. The best time to start is when you start earning a living, the second best time is now.
Brett Mackay, consultant, 10x Investments
*The views expressed here are not necessarily those of IOL or of title sites.
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