The Importance of Starting EarlyLiam Hendrikse
Well, a lot has happened since my last installment. The markets have continued their volatile ways, and a lot more people have been asking me the same question: "Is now a good time to invest?" My answer is always the same: "Investments are just one part, of a holistic financial plan." A lot has to do with overall risk management, tax reduction, and staying ahead of the rate of inflation.
The opportunity that presents itself, however, to people who may never have "invested" money, or developed a financial plan, is the opportunity to learn about what holistic financial planning is all about, why it is so valuable, why so few people do it properly and get the right advice, and why now is the "perfect storm" to start thinking about getting started.
How do you manage risk? Well, before you manage risk, it is helpful to identify your goals and concerns, with respect to your financial plan. Basically, what do you want, and when do you want it? Are you interested in learning to invest wisely? Pay off debts? Make a major purchase? Reduce taxes? Being able to quantify these goals provides you with a foundation to work with, and then you can begin to figure out how you’ll achieve those goals.
There is risk associated with everything in life, not just a financial plan. You need to identify the risk, your personal risk tolerance, and implement a plan that reduces the risk as much as possible. For example, you may want to purchase your 1st home in 5 years time. The importance of working with a financial planner, gives you the opportunity to take a "snapshot" of your current, personal financial situation, develop a "road map" to get to that goal, with a level of risk that you are comfortable with. It’s like having a personal fitness trainer, for your finances.
As we are talking about risk, let’s have a look at the rate of inflation - the single biggest risk to everyone’s financial plan. Since 1950, the rate of inflation has run at an average of about 3.9% each year. This means, that the value of a dollar in 1950 was not the same as in 1951; the value in 2007 not the same as in 2008, and so on. In other words, inflation erodes the purchasing power of your money. Over time, this can be quite significant. Looking at the chart below we see that as time goes by, the actual value of $50,000 is significantly reduced.
| YEAR |
2% INFLATION |
4% INFLATION |
| Current |
$50,000 |
$50,000 |
| 1 |
49,000 |
48,000 |
| 2 |
48,020 |
46,080 |
| 3 |
47,060 |
44,237 |
| 4 |
46,118 |
42,467 |
| 5 |
45,196 |
40,769 |
So, the importance here is to find a way to fight the rate of inflation, with your money. That is why I stress the Importance of Starting Early. The longer you do nothing, by letting your money sit in a bank account, the less valuable your money becomes. Of course, the type of vehicle used to address the rate of inflation, can be different for different people, and I will discuss this further next time.
It’s like Karl Lagerfeld says: "I like today and perhaps a little future still, but the past is really something I'm not interested in. It’s fun, no?".
In other words, plan your future now. I don’t necessarily agree with not being interested in the past, as we can learn a great deal from other people’s mistakes - but I’m not going to say that to his face!
Liam Hendrikse is an independent financial advisor, and a model with Sutherland Models. He provides 1st and 2nd opinions on new and existing personal financial plans. He's also a forensic scientist, but that's another story altogether...
email: liam_hendrikse@rogers.com
This is intended as a general source of information only and is not intended to provide any personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Liam Hendrikse is solely responsible for its content.
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