LETTER FROM A FRIEND

Dear Paul,

 

Be grateful for making it through 2024 in relatively good order. But we are back on the tread mill and yet another year is ahead of us.

You had a good year in 2024, despite being retired and the trick now is not to rest on our laurels (we may do that in 10 years’ time) but maintain commitment to our financial discipline. We have got to keep at the fore of our mind that our financial health in coming years will depend on the balance between consumption and savings/investment. The process should see you consuming less and less, while investing more and more of your income. That will be your measure of success.

At the risk of sounding like a broken record, here is what you should be doing in the New Year to ensure we end it on a high, like we did last year.

1.       It is not how much you make but how much you keep

We all want to be paid. Being paid is always sweet. But what will improve our financial fortunes is how much we keep of our income through saving and investing than how good we look spending our money. Easier said than done. They say save your money today so it can save you in the future.

Saving 50 percent and investing 25 percent of all your income is a good start. We should maintain that discipline with a view to pushing up your investing ratio in 2025 to between 30 - 40 percent. We will only be able to do that if we stay the course in 2024.

 

2.        Shed your ego

There is no amount too small to save or invest. Us “corporates” we dream of investing big numbers and therefore miss the chance to build over time. No wonder we are so corrupt. We are waiting for the big deal. Hence the story of the big boss and his driver, who when they were both retired, the driver was well off because he was not afraid to put aside a bag of cement when he could. A bag of cement is not even drinking money for the big boss. But because of not taking care of the cents through his career the big boss finds himself with few shillings from his investments, with huge expenses built up during the good old days.

 

3.       When you see risk, seek  knowledge

Everything you do will come with risk. In the face of risk you can choose to back off and not give yourself a chance at good returns or research the deal before you turn it away. Knowledge is the greatest mitigant against risk. Money is being made everyday in this economy. The ones who are making the money are silent, allowing the ones not making money to be the loudest. But if you paused and looked  harder there is opportunity everywhere. The problem is that when you are not in the deal, you don’t know the deal, and think everyone is gnashing their teeth like you.

But about risk. You would think nothing of driving from home to town – you have been driving for 30 years, the risk is minimized by your knowledge and experience. How much riskier does the same trip look if you had the car keys to your ten year old child?

Go further than copying your neighbor in researching new opportunity.

 

4.       Don’t overestimate what you can achieve in a year

The cliché that the race to your financial freedom is a marathon not a sprint, bears repeating. This time next year you should be better off than you are now or not. But expect to be only marginally better. But seen against the rest of your life, that small gain will be the foundation for the gains of the next 20 years. Stick to the process, the results will take care of themselves. If you can grow your portfolio just 10 percent a year, at the end of 20 years it would have grown nearly sevenfold and the ensuing income with it. Think about that. You need to be in bed with compounding rather than at war with it.

5.       Guard against lifestyle creep

Maybe I should have started with this. With increased income the temptation to consume more will be your biggest battle. If you are consuming 25 percent of your income now, let it remain at that percentage but preferably lower as your income increases. A wise man once said he makes ten shillings eats one and reinvest nine, repeat until rich.

We have talked about this before all of the above is simple but not easy to do. No enterprise of real value is easy. The battle is really with yourself. We are seduced by complexity but its really simple and we should not be suspicious because the process is simple.

Low income, bad investment environment, your friends blasting while you are lying low like an envelope, are all outside your control. You can only control your attitude and effort. Focus on that.

Otherwise Happy New Year, wish you the best  and see you on the other side.

 

Sincerely

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