Caught in the rat race… The scenario which most new employees find themselves can be likened to what Robert Kiyosaki (the international bestselling author on personal finance) termed “rat race.” It refers to how job seekers are caught in a self-perpetuating circle produced by a system that promises financial freedom through a well-paying job but never delivers.
Countless of well-meaning young employees are ignorantly caught in this vicious circle that continually perpetuates financial hardship either at the termination of their employment or after retirement.
It is obvious most people have fallen prey to this resident evil because they have mostly unknowingly perpetuated the seeds of mistakes of past generations of workers. Those mistakes are listed below, you should not fall a victim.
1. Living beyond your income and failing to develop a savings and investment plan
As basic as this principle of money management might appear, most employees surprisingly don’t have a savings and investment plan. And when they do save or investment, it is done haphazardly without recourse to sound investment principles. In a bid to measure up to societal expectations, many employees get into huge debts as soon as they receive their first salary that in no time develops into a self-replicating circle they never break away from. This forms the foundation of their inability to save or invest for the most part of their working years.
2. Failure to invest in the development of your skills
It is important that people develop a mindset of not just working to earn money but as an opportunity to develop their skills. Jobs could be lost, but skills developed remains with the individual. As a result, financial investments made towards skill development in terms of books bought, conferences attended and additional courses taken will pay off when the job is lost or when the individual decides to quit and start his business or company. Note that although this kind of investment might not seem to yield results immediately, it will surely do in the future.
3. Failure to acquire knowledge on the differences in the major asset classes
Most young people get carried away with the euphoria of securing a job and neglect acquiring vital financial education on the various asset classes available to investors. This is in regards to issues relating to their volatility (fluctuations in market price) and liquidity (ease of conversion to cash).
The major asset classes popular today among investors include: equities, real estate and government bonds. These asset classes exhibit different degrees of volatilities and have varying levels of liquidity. This is clearly evident from the events of the global financial crisis of 2008 when equity demonstrated its highly volatile nature as stock prices plummeted although it was also highly liquid as people could cash out relatively easily. This is however in sharp contrast to the stability exhibited by the real estate asset class. Nevertheless, real estate has low liquidity in comparison to equities. This simply means that it takes more time to get a property sold than it will to convert stocks into cash, other things being equal. Bonds, on the other hand are less liquid than stocks but more liquid than real estate. However, its maturity date (i.e when it can be converted to cash) limits its liquidity.
As a result, it is important you become well acquainted with the differences in the asset classes mentioned above by knowing which suits your financial needs at any point in time before approaching retirement.
4. Not giving thought to starting and growing a business
Don’t wait till after retirement or when you resign or lose your job before starting a business. Growing a startup takes a lot more than committing huge capital and following through on principles read in a book. You need to roll up your sleeves and get your hands dirty in the muddy waters of startup development, especially if you live in this part of the world. According to the 2015 doing business report by the World Bank currently ranks 170 out of 189 countries studied with respect to the ease of doing business. The country performed poorly in major indices such as starting a business (ranked 129); getting electricity (ranked 187) and registering property (ranked 185).
Therefore, by taking the courage of starting a business alongside your regular job, you will learn a lot from your successes and failures and would have amassed a wealth of experience while still enjoying a constant flow of income from your current employment. Thus, when you finally retire or decide to quit your job, you won’t need to start learning the fundamentals of the game and would have a greater likelihood of avoiding the mistakes that could lead to the failure of your business bringing about the loss of your hard earned money. My advice: make hay while the sun is still shining by starting a business while still employed.
5. Failure to employ the services of a financial advisor
A financial advisor is one who gives prudent counsel on financial and investment matters, often showing the risk and return involved in an investment decision. The concept of a financial advisor is not popular with South Africans due to the underdevelopment of our financial market. Nevertheless, one could seek advice from those who are experts on financial and investment issues before making any major decision. This could be a stock broker, banker, chartered accountant or serial investor (an experienced investor).
6. Failure to draw out a financially backed exit plan
While most people will be quick to admit the need to draw an exit plan as soon as they get employed, they find it most difficult to back such a plan financially. In essence, they fail to develop a financial plan that will ensure their exit goes as planned. This is closely related to their inability to make disciplined saving and investment decisions when still on their company’s payroll.
7. Failure to build a house of your own before retiring
Most people get carried away with the huge amounts they receive as salaries and fail to build their houses. Instead, they expend a substantial part of their salaries on luxuries such as expensive phones, home appliances and cars not commensurate with their income level while still residing in rented apartments. And when they eventually retire or they get sacked unexpectedly, they soon discover they cannot cope with the ever increasing rental fee and decide to build a house. This project will then consume a substantial part of their gratuity or savings which should have been channelled into viable investments.