Unlike most in the financial media, I am determined to resist the temptation of restarting this column with a review of last year (you were there, so you probably know what happened) or predictions of what will happen this year (my crystal ball is broken). Nor will I write about how to keep New Year resolutions, even though I do think that setting goals is the most important thing that you can do for your finances.
Instead, let's think about whether or not your financial plan has been working - do you feel like you are getting ahead? If the answer to that is that is "no" and you feel like you are swimming hard but making no headway, you need to know why this is - and you may need some patience.
Author Tim Hurdson once said that we tend to overestimate what we can do in the short-term, but underestimate what we can do in the long-term. This is certainly true when it comes to finance: we are in a hurry to get ahead and are frequently discouraged when there appears to be little progress. Perhaps, your financial plan is working, but it all seems too slow?
There is seldom a king-hit to be made for your finances - no silver bullet that can be fired to get you quickly and easily from where you are now to a good place. Instead, building wealth and getting ahead financially is usually a long (and sometimes hard) haul. I wish I had a quick and simple solution for financial success, but I don't. Many thrash around looking for a king-hit - but overnight success usually comes at the end of 25 years' hard work. The quest for a silver bullet (overestimating what we can do in the short-term) leads to almost certain financial failure, however, you will be surprised by what you can do financially if you give yourself time.
There are two main parts of a financial life that require patience: repaying debt and investment. Most of us find that it seems to take forever to repay debt. You make your mortgage payments for a few years and think that you have paid a lot of money to the bank (you have). However, when you look at your mortgage balance, it has reduced by a disappointingly small amount: all that money and you still have a lot of debt.
This is because the mortgage payments that you have been making are made up of part interest and part principal repayments. At the start, interest is the bigger part: initially, the payment is nearly all interest and you are reducing the principal of the loan just a little. Gradually, painfully slowly, the principal owing reduces and as this happens a bigger and bigger part of each payment is comprised of principal repayment rather than interest. The final years of your mortgage repayments are mostly principal repayments: these are the gravy years, but it takes time to get there. The keys are to make those payments as big as they can be - and patience.
When you have repaid debt, you can start to invest to enjoy compound interest. However, again this seems intolerably slow to build at the start. The investments that you have earn interest and, as time goes by, you will earn interest on both the capital that you had originally and the interest you have earned. This snowballs and is as close to a cast-iron guarantee of success that you can get in finance. Provided you do not give up and withdraw in the slow and boring early stages, Einstein's eighth wonder of the world (compound interest) will do its work to make you wealthy for certain.
Both repaying debt and investment are slow to start and require a lot of small steps - you are unlikely to ever get a giant leap to instant wealth but with patience and time, you are almost guaranteed success.
Therefore, have a look at what you are doing to be sure that it is the right thing - whether repaying debt or investing you need to do so as efficiently as possible and ensure that you are making the most of what you have. Then you need to be patient - you will not seem to make great progress in the short term, but in the long term, you can move financial mountains.
Martin Hawes is an authorised financial adviser and his disclosure statement is available free of charge at www.martinhawes.com. This article is of a general nature and no substitute for personalised financial advice.
- Sunday Star Times