Create wealth for yourself from your salary

You may not be able to become a millionaire, but at least you won't become one of those people you see at traffic lights with a cardboard sign.

July 9, 2003

Many of us believe wealth can only be created through some miracle - like winning the lotto. There are however ways of greatly increasing your wealth. And while you will not become a millionaire, you will at least not become one of those people at traffic lights with a cardboard sign.

Research has shown that only 5% of all people make sufficient provision for their retirement. More than half will be dependent on family, more than 10% will simply be very poor and about 1% will be rich at retirement.

The good news is that anybody that earns a reasonable salary can become comparatively rich over time. The skill is in how you invest your money and over what period.

There is, in fact, a reasonably simple formula: you have to save about 15% of your salary - every month - for 25 years, and you will be rich. But how many of us stick to this regimen? Most South Africans spend most of their money enriching banks through debt payments while saving less than 5% of our salaries every month.

The key step towards achieving this potential goal is to stop waiting for the miracle. Debt to banks is what most South Africans spend most of their money on. Rather than trying upgrade to a higher level car than the one you are driving right noe, motivate yourself to buy the most affordable car you can manage with.

Many South Africans spend between 25% and 35% of their salaries on car payments. By simply changing this ratio, you could make most of the money available you need to save on a monthly basis in one fell swoop.

As with every other successful initiative, you also need a plan to become wealthier. I does not happen by itself and it does not happen overnight.

A key features of any such plan is to get rid of your most expensive forms of debt first. These include most forms of short-term debt like store accounts and credit cards (who often have higher charges than banks).

Also, start a retirement annuity today.

Ideally you should put as much as 15% every month into one of these funds. If you really cannot afford this amount, start paying as much as you can now and adjust these amounts over time. Most companies allow for building in an automatic premium increase function over time anyway, but it is very important to remember about the magic of compound interest - interest on interest. In the end, it is this magic that will make most people rich and for this potion to work, you need to start building that nest egg now.

Remember that banks work on one very simple principle: use investors' money to lend money to other people, but charge borrowers more interest than paying to investors.

This is how banks make profit. They keep the difference. So the interest on the debt you have will always exceed (as a percentage) the interest you earn on money saved. This is why you have to limit your interest bearing debt as far as possible.

As all good dieticians will tell you, you need to reward yourself every now and then. So you are allowed to treat yourself to something nice and in strict terms, irresponsible, every now and then. The trick is to do so without derailing the main thrust of your plan. It is a recognised fact that expecting people to always make-short term sacrifices for long-term gain, without any short-term awards, can be demotivating in the long term.

It is great to be able to attract all those cute numbers with wearing the latest fashions and driving the newest cars. But keep in mind that when you are older, you will have less of an ability to earn money and a shorter period in which to create your wealth.

If you have maintained your financial discipline over time you will be able to afford those nice things when you need it most - when you are older! –QFN

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