10 Golden Rules
1. Have a financial plan in place and review it regularly with your financial planner
Your financial planner is your guide to point out any hazards and help you along the way.
Without a financial plan you won't have a clear direction or defined path to get there. You should make sure that your plan is still relevant.
As your circumstances change, you should update your plan so that it is still taking you on the correct path.
Ultimately your financial plan is your guide to retirement and beyond. Your financial plan will ensure you can afford to do the things you want to as you progress through life.
2. Start now
It's never too late to start investing. Even small amounts can grow considerably over time, thanks to the magic of compounding interest. The earlier you start and the longer you invest, the more time your investments have to grow.
3. Become an investor not just a saver
An investor is a wealth accumulator. Investors make their money work hard for them by investing in assets that grow in value over the medium to long term; Shares are a typical example of growth assets.
A saver has a short-term focus and generally leaves their money idling away in a cash account which does not have the growth component associated with shares and can lose value in the medium to long term due to inflation.
4. Pay yourself first
Make sure you have a realistic budget in place and aim to put aside as much as you can afford.
As a general rule you should try to invest at least 10% to 15% of your after tax income each year.
If your budget is not realistic, you will eventually "break it" and will achieve nothing. Saving a little is better than not saving at all.
5. Invest regularly
Make investing a habit. Have money deducted directly from your bank account into a regular savings plan. This will make it easier to save and leave you time for the more important things. It will also help you to stick to your budget.
By investing regularly you will also be able to utilise the "Dollar Cost Averaging" method of investing, which is a very powerful tool. It is based on the principals that 'time in' the market is better than 'timing' the market and by investing regularly you do not need to monitor the price you buy assets as they will even out in the long run.
6. Reduce consumer debt
High interest rates on credit cards and personal loans erode your ability to create wealth. You should aim to minimise the size of these debts as soon as possible even if it means reducing your savings in the short term.
7. Reinvest your investments
If you don't need the income from your investments, leave it where it is. That way it will keep working for you and you will be able to earn interest on interest. You can always withdraw the money at a later date if you require it.
8. Don't put all your eggs in one basket
By investing in more than one asset class you are not depending on the performance of that asset class.. There are two ways to diversify your investments, you can:
Design a diverse portfolio with your financial planner by allocating a portion of your investment to various asset classes.
Invest in a diversified fund and let a professional investment manager do the diversification for you. Diversified funds are made up of a number of asset classes and are structured in such way as to achieve their predefined goals according to their allocation to various asset classes.
9. Harness the power of compounding
Compounding is when your investments earn money and those earnings are in turn invested so they can earn money.
By reinvesting your earnings, you are able to earn more. As your investments grow so too do your earnings, which creates a handy upward spiral in your wealth accumulation.
10. Invest in growth assets for medium to longer term goals
Over the longer term, growth assets (shares) will outperform income-producing assets like bank deposits. This is because they have both a growth and income component - as the company grows, so does the value of your shareholding. This also produces income in the form of dividends.
Therefore your investment will keep pace with inflation and maintain its value over the longer term; an income-producing asset will gradually deteriorate in value in the longer term.
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