Principles:
- If you fail to plan you, are planning to fail
- Money must work for you, you must not work for money
- The key to being financially independent is to live within your means
- To follow the correct order of priority, build a financial plan like a house. The foundation is the assurance to provide for the unforeseen, i.e. life, disability and medical cover and cash for emergencies (see ‘Three Accounts’ below). The ‘walls’ are the ‘Long Term Savings’ for retirement/financial independence and the ‘roof’ is the ‘Medium Term Savings’.
In Practice…
Debt: most people have it and it often creates a hurdle to achieving financial independence. Having a ‘Debtonation Plan’ is useful to overcome this hurdle. Here’s one that will get anyone out of all their debt within five years, if they stick to it and don’t create any further debt.
The 'Debtonation' Plan |
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| Debt | Interest | Amount Owing | Repayments | New Repayments |
| 1 | 22% | V | A | A + 200 until V = 0 |
| 2 | 17% | W | B | B+A+200 when V=0 |
| 3 | 15% | X | C | C+B+A+200 when W=0 |
| 4 | 11% | Y | D | D+C+B+A+200 when X=0 |
| 5 | 8% | Z | E | E+D+C+B+A+200 when Y=0 until Z=0 |
Three Accounts: Account number 1 is the Emergency Account. Three months of income, usually in ‘cash’. Account number 2 is the Medium Term Savings Account which is for the new car, the deposit on the house or next property, education of the children, the next holiday etc., in short, for the ‘lifestyle’ acquisitions. The most practical vehicle for this is unit trusts. Account number 3 is the Long Term savings Account for retirement/financial independence. Starting with equities, then adding property but when retirement or financial independence is reached it should include cash again. A third into each of these asset classes is a prudent balance and should be maintained. A 30 - 50% exposure to offshore in each of these classes will add to a portfolio’s stability.