Forget Brexit and the bogeyman — just do a simple budget
Chasing strategies that will give us the best return often lead us to doing nothing
Investors are losing their minds as the coronavirus grinds the Chinese economy to a halt and markets are falling hard. The coronavirus is occupying a lot of space in the minds of many investors, space that used to be occupied by issues such as the US-China trade wars, a Trump presidency, Brexit, PIIGS (Portugal, Italy, Ireland, Greece, and Spain), Grexit (a Greek exit from the EU), QE (quantitative easing), state capture, credit downgrades (though that is making a comeback), and so on.
Market commentators describe these passing issues as noise, and while they have a short-term effect on markets, they often fade into memory as a new issue comes to the fore. Successful investors tend to ignore or add little weight to these issues and focus on long-term principles and ongoing analysis of what really matters (earnings).
As a financial-planning practitioner, I have had many discussions over the years with clients and prospective clients about the strategies we need to adopt to meet their investment objectives, including building enough retirement capital, going on that extended holiday, saving to fund education, a deposit for that dream home, and general long-term wealth creation. These are ultimately the things we want our money to do for us — things that bring us joy and add meaning to everything. This is why we invest.
The reason we do not achieve these objectives has almost nothing to do with the choice of funds we invest in, active or passive management, value or growth, small or large caps, or any passing issue that is dominating news headlines. Often investors get tripped up by something as simple as not running their financial affairs with a budget. The simple budget remains the foundation and cornerstone of wealth creation. Its simplicity often hides its importance and effect.
Notice how few people get excited at the work done on the foundation of a new building. Most people want to see what the building will look like when it is done. Preparing the foundation is dirty work. It involves excavation, rubble removal, digging deep holes and pouring tonnes of concrete. It never looks good. Yet, without a proper foundation, it matters little what the building will look like. Ultimately it will come crashing down or be torn down due to safety concerns.
It amazes me that countries and companies spend a lot of time and effort compiling their budgets, yet individuals mostly tend to ignore or avoid them altogether. A Gallup survey in the US found that fewer than 31% of households there run a budget.
Read any Sanlam Benchmark Survey, Alexander Forbes Benefits Barometer or Old Mutual Savings & Investment Monitor and you will see the dire statistics about members withdrawing their retirement savings when changing jobs. It was an important issue identified in Treasury’s retirement reform programme.
Scratch below the surface and financial distress and over-indebtedness are the main reasons for this behaviour. Withdrawing retirement savings in the accumulation phase destroys more retirement plans than Regulation 28 of the Pension Funds Act ever could. Investment strategy doesn’t even feature as a reason for members withdrawing their funds.
I met a client recently who had been saving less than R50 a month since the mid-1970s in a bank product. I asked him how he maintained that commitment for so long. Simple, he said, “it went into my budget on day one and stayed there”.
I found that if he had invested that money on the stock market, his investment would have been worth more than double what it was.
However, it struck me that because he had put money away in the first place, he now had more than R1m extra — a small part of his total retirement pot — that he could use in his retirement. Too often we get caught up in chasing strategies that will give us the best return that we end up doing nothing. It was his habit of budgeting, and not whether he invested in shares or the money market, that resulted in him retiring with more than enough capital, putting him into an elite minority of retirees.
When done properly, the budget is a rich source of information. A simple observation of income vs expenses will alert you to a coming debt crisis. By classifying your spending into consumption and investment you will be able to see whether you will have anything to show for your money in a few years’ time. A more sophisticated budget will facilitate stress testing to show the effect of rising interest rates on debt repayments and your overall budget.
If one of your financial objectives is to secure your children’s financial future, you must ask yourself is there education savings or life cover in my budget? If not, then it is just a dream and not an objective you are working towards.
The coronavirus is a concern and a serious matter. However, it is unlikely to threaten any investor’s objectives and goals quite like the absence of a good budgeting habit. It trumps the power of any US president — past, present or future.
• Gradidge is the director of Gradidge Mahura Investments and holds the Certified Financial Planner accreditation.