THE FIRST STEP IN WEALTH CREATION
I grew up in a household that didn’t have a lot of conversations about finances. It was a typical household in that my father was the main bread winner, and my mother would do all the shopping. They must have spoken between themselves about basic financial concepts like budgets for food and school fees, but they never really had the conversations with their children. Ultimately this was not to my detriment as the basic concepts of finance are very easy to learn and to grasp. I use this very basic example of my background as an introduction as growing one’s wealth does not need generations of ingrown financial understanding. The most important financial concepts are universal and, in this month’s Financial View, we look at the first step in wealth creation.
Wealth creation is a journey that requires careful planning, discipline, and a clear vision of what you want to achieve. The first and arguably most crucial step in this journey is setting clear financial goals. Without a destination in mind, it’s easy to get lost or sidetracked. Here’s how you can start:
Define your goals
Begin by identifying what wealth means to you. Is it financial independence, early retirement, buying a home, or securing your children’s education? Your goals should be specific, measurable, achievable, relevant, and time-bound (SMART). For example, instead of saying “I want to save money,” you could say, “I want to save for a deposit for a house within the next three years.”
Assess Your Current Financial Situation
Before you can set realistic goals, you need to understand where you currently stand financially. This involves taking stock of your income, expenses, debts, and assets. Create a detailed budget to track your spending and identify areas where you can cut back. Knowing your starting point will help you set achievable goals and measure your progress.
Prioritise your Goals
Not all financial goals are created equal. Some may be more urgent or important than others. Prioritise your goals based on their importance and the time frame in which you want to achieve them. For instance, building an emergency fund might take precedence over saving for a vacation.
Create a Plan
Once you have your goals and priorities in place, develop a plan to achieve them. This plan should include specific actions you need to take, such as setting up debit orders for automatic savings transfers, investing in retirement savings, or paying down high-interest debt. Break down your goals into smaller, manageable steps to make them less overwhelming. It often helps to engage with a financial advisor to help create the plan as they have deeper understanding of the various available financial products how they work and tax structures.
Monitor and Adjust
Regularly review your progress towards your financial goals. Life is unpredictable, and your circumstances may change, requiring you to adjust your goals and plans. Stay flexible and be prepared to make changes as needed. Celebrate your successes along the way to stay motivated.
Setting clear financial goals is the foundation of wealth creation. It provides direction, motivation, and a sense of purpose. By taking this first step, you’re setting yourself up for a successful financial future.
Returning to my example, I had grown up in a large family. The income that my parents earned was adequate to put food on the table and to educate all of us but with many mouths to feed the income generally didn’t stretch to many luxury items. In my young teens we moved to Johannesburg from the Cape, and it was noticeable that Joburg of the 90s was a lot more resplendent with wealth than I ever imagined. I remember coming into Joburg at dusk and just being in awe at the CBD with all the buildings lit up. It was a clearer demonstration of money than I had never seen in my life – it was almost magical.
That feeling of being in awe was probably my biggest motivator in terms of myself wanting to increase my own wealth. For me key to that was to always contribute as much as possible to my retirement savings – this will give me flexibility as I get older but more importantly it brings time into my investments. Time is the fertiliser for compound interest – the longer compound interest can work, the greater the returns. Understanding compound interest will be the next concept to understand in wealth creation. It is never fun to save, the more you put aside the bigger your investment becomes and with time on your side your investments returns will also increase and ultimately your capital grows. They say, “Pay yourself first” this means putting structures in place that so that a deduction comes off your salary or bank account each month that is put aside for your future. One day in the future you will be happy you did this. As it is said you are sitting in the shade today, only because someone planted a tree many years ago.
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