Personal investing

Five tough financial decisions you may have to make… And why they are worth it

If you are lucky enough to get a bonus or a 13th cheque, should you spend it or save it?

Money decisions are never easy and often come down to personal circumstance and choice. Should you buy a home or rent one? Should you save for retirement now, or should you first pay off your debt? 

Tough financial decisions are part of life. But when we are faced with these decisions, the long-term benefits of short-term sacrifices not always clear. Below are some hard choices or circumstances you may be faced with along the way and some things to consider before you make a call:

1. Save for the long term, or spend now

Investing even a small amount each month , rather than spending it, can make a big difference to your long-term financial well-being. Parting with your hard-earned cash may feel more rewarding if you are committed to a long-term objective and you can feel as if you are slowly making progress towards achieving your goals. Ask yourself what long-term goals you want to achieve and work out what actions you need to take to get there. To help you stay motivated, consider small rewards that you can give yourself along the way that don’t impede on your goals.

2. Preserve your retirement savings when you change jobs, or cash in

It's essential to preserve your retirement savings when you change jobs. While it’s tempting to take the cash, this is the worst course of action. You may believe you will have plenty of time to make up for the years of saving, but not preserving will cost you more years than you may realise. Not only will you have to start again, you will also miss out on the full power of compounding (interest earned upon interest), and you will be liable for tax on your savings.

Instead of taking the cash, you can transfer your money from your current employer’s pension or provident fund to a preservation fund or to a retirement annuity (RA).

3. Upgrade your car, or save towards a new car

Consider not upgrading your car to the latest model. Instead of paying the bank an additional R2 500 per month for your new car, you could invest that amount for five years and then take advantage of compounding for the next five years. If you had done this 10 years ago, investing into a unit trust such as the Allan Gray Balanced Fund, your total contributions would be R150 000, but your investment would have grown to R403 077.

4. Thrown a curve ball: react or stick to your plan

The key ingredients for reaping the rewards of compound interest are time and patience. However, our emotions get in the way and sometimes results in us abandoning our investment objectives in favour of switching between investments, or trying to time the market. This can destroy the value of your investment. It’s hard not to panic if the market suddenly dives. A good, independent financial adviser can assist you in putting a plan together and encourage you to stick to it when your emotions are telling you otherwise.

5. Retire now, or work for a bit longer

You need to be realistic about how much capital you require to be able to enjoy an income in retirement close to what you had when you were still working. Postponing retirement and continuing to save while you earn can have a significant impact on the income you enjoy in your golden years. While deferring retirement is not the most attractive notion, it has a doubly positive impact in that you have more years to save, and fewer years to live off your savings.

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