If you are looking to improve your finances as part of your new year resolutions, looking at the most common mistakes and then how to improve them is a great place to start.
In my experience, most expats do not have a problem saving money once they pass the initial “party experience’”! However, in many cases, the savings made are often by default rather than by design. By this, I mean that almost all of the available income after expenses simply accumulates in a bank-deposit account. There may be a property involved with mortgage payments covered partially or fully by rental tenants and there may also be a dabble with crypto currency. Financial advice may have either not been available or perhaps actively avoided with the aim of a “do-it-yourself” approach to save fees or costs.
Consider the same principle you may have with home improvements. Some tasks you might undertake solely by yourself and other projects may require the help of skilled labour. Even with both approaches combined, it is still your home and you are always in control.
The costs and fees of financial instruments or products are published and available for comparison, but it is the unseen costs of mistakes or poor planning which can significantly outweigh such charges and cost you even more dearly. For example, I have come across people who had been sacrificing all other planning with the sole aim of clearing a mortgage, which on the surface is a sensible goal before investing. However, losing 5, 10 or even more years of building additional capital will in fact cost you tens or even hundreds of thousands in “cost of delay”.
The foundations of financial planning are to manage debt, build emergency cash savings, plan for retirement, invest for growth and to protect dependents against loss caused by premature death.
So, its sensible to allocate excess savings or cash for investment but with goals. However, investments expose you to the risks of the stock market. Your investment could fall in value in the short term and it may fluctuate up and down on a regular basis over time. That’s why most investments are made for at least 5 to 25 years (e.g. for retirement), to provide time for overall growth and allow room to recover from any bumps in the road.
Hence to the consideration that is Access vs Growth. For many people, the real questions are simply how much to save and how much to invest over how long. To help work that out, it’s a good idea to list out your financial goals and set a time frame for each. More can be achieved by setting an amount and a timeframe and getting started.
Where that money goes is the last third of the equation. This can be written as AMOUNT x TIME x PRODUCT/SERVICE = GAIN. Of these, I can have only influence over the last part. If however, I am somehow able to encourage someone to start earlier than they would have and allocate the right amount, they will already be two thirds of the way toward their gain.
Finally, for how much should you be covered as regards supporting dependents or children if your income is permanently stopped due to a premature loss of life? It’s a topic that is often avoided but sadly happens. How much should you be covered for? The simple answer is your annual salary multiplied by their years of dependency, until they are able to support themselves.
In summary, like physical fitness, you can’t expect to get the full results you want or need by simply turning up at the gym and doing some exercise. You should have a carefully constructed action plan and a positive push to help you work every muscle group and watch the improvements in your health. With the right guidance, education and support, your physique would be leaner, stronger and the initial discomfort replaced by euphoria. Similarly, it’s very achievable to do the same for your money and your wealth building.
