No need to repeat mistakes on personal level

Steven Nathan, CEO of 10X Investments.

Few people would want to swap places with South African Finance Minister Malusi Gigaba as he tries to balance the national budget after the financial mismanagement of the recent past. But it was not always like this, says Steven Nathan, 10X Investment’s chief executive officer.

“10 years ago, we were in a strong place, but while other countries reined in their excesses after the Global Financial Crisis, we partied on like it was 2007, spending and borrowing freely, layering on rules and regulations, ratcheting up taxes, as if our economy could carry any burden imposed by government,” he says.

Today, Nathan adds, South Africa faces a “massive deficit and a potential debt trap”. He says this is not sustainable and we should expect a painful adjustment at some point. The readjustment will affect all of our wallets, but we can at least avoid piling on misery by not making similar, short-sighted mistakes in our personal finances
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One way or another, we all operate on a budget, says Nathan.

“It’s about projecting income and expenses, allocating resources and making sure the books are balanced and any shortfall is funded. That would be a lot easier if we lived within our means, saved before we spent and didn’t fund our lifestyle with debt,” he says: “Once we stray from that ideal, we mortgage our future.”

To balance the books, it’s often tempting to ignore contingent liabilities, and skimp on paying for insurances, or an emergency fund.

Nathan says our biggest such liability is retirement.

“We may know the value of our pension savings, but we ignore the attached obligation and keep it off-balance sheet. This inflates our immediate sense of wealth and spending power.”

Because no one is demanding this money, and there is no formal repayment schedule, we think there’s always next year. Except next year, adds Nathan, it’s a little harder to make up the shortfall, because the rate at which you must save is now a little higher.

“Leave it for a few years, and it’s a lot higher, and in practice, unaffordable. This is a slippery slope, but with a poverty trap at the bottom.”

Nathan recommends consulting one of the many financial planning tools online to project your retirement obligation in today’s money terms, as well as to project the long-term value of your current savings and savings rate.

It’s the gap between the two values you need to watch. If there is a shortfall, you should find a way to save more, sooner rather than later. Kicking the can down the road means you don’t just miss out on contributions, but also the long-term return you earn on them. That is by far the bigger loss, and it’s almost impossible to make that up. But a slight correction now can save you from a major adjustment in future.