PRINCIPLE 4: THE PRINCIPLE OF HAVING A LONG-TERM PERSPECTIVE
This principle relates to how you build your financial house. Building a solid financial capital requires not only a solid foundation but also a strong structure that balances the immediate, short-term and long-term needs to enable you pursue your goals as well as weather a variety of storms as they come. Consequently, having a long-term perspective affects your savings and consumption decisions since every spending decision affects both your current and future wellbeing by either enhancing it or diminishing it. Saving money today, leaves less money for consumption while at the same time increases your ability to spend in future.
The ultimate goal is to finish well, taking care of your needs, not being a burden to others, being a blessing to others, having rich and meaningful relationships with family and friends and walking intimately with God. For parents, preparing your children to be financially independent, responsible adults and citizens will be one of the most rewarding outcomes of your life if you chose to invest the necessary resources now.
Time is the most important resource and one we often underestimate its importance especially in early adulthood. When used well, it multiplies our efforts and impact. For instance, saving and investing small amounts of money early in life enables you to take advantage of compound interest resulting in exponential growth of savings, reducing the actual effort needed to meet financial goals. This in turn affords you more quantity and quality time with your children in their first decade of life, enabling you to instill important values that will guide them for the rest of their life. Meanwhile you will build a strong bond with them that will enable you to continue influencing their lives even during the turbulent teenage and early adulthood years.
The following examples illustrate some of the lessons I have learned in relation to this principle.
- Time is an ally not an enemy: Start saving for long-term needs early to take advantage of compound interest minimizing your direct savings required to meet a goal. For instance, as a young adult you can enroll at age 25 in a retirement plan that offers tax benefits. Starting with a minimum monthly saving of Kshs. 2,000, increasing this amount annually by 10% and assuming an investment return of 10% year on year, you will have an estimated retirement fund of approximately Kshs. 20M at age 60. Your own savings will account for only 27% of this fund. By waiting until you are age 40 to start saving for the same goal, you will need to start saving a minimum of Kshs. 14,500 per month and grow this amount by 10% every year to achieve the same retirement goal. Your own savings will account for 43% of the fund and it might be a challenge to keep up with the required level of savings.
*This is a simple illustration that does not take into account effect of tax on investment income, which would affect the person starting to save later in life more severely than one who starts early due to limits on tax allowable savings.
- Prepare for increasing cash flow demands: As you start making investment decisions realize that cash flow needs will exponentially increase in your 30’s and 40’s as you raise a family, make lifestyle changes and possibly take care of your aging parents just to mention a few needs. As you build and accumulate wealth, focus on income generating investments to build passive sources of income to cover increasing demand for cash and emergencies. For some, this might mean less investment in non-productive assets such as land held for speculative purposes but on the bright side you might have multiple streams of income.
- Evaluate the short-term and long-term aspects of a need: In a rent or mortgage decision your housing needs will vary as you move through life phases such as when single, with young children and when the children leave the nest. What stage of life should define your housing needs? If you are tight on finances, you might rent a house you cannot afford to buy while you buy a house that will suit your needs in the long term. This might free your resources to diversify your investments and sources of income as opposed to putting all resources in a home being house rich and cash poor later in life.
- Count the full cost: This is particularly important when making buying and debt decisions. In a mortgage debt decision, evaluate the decisions based on various factors such as; full cost of the deposit, monthly repayments, full interest expense, mortgage protection insurance, property insurance, maintenance costs among others and not just your ability to make monthly repayments. This should prompt you to repay the mortgage sooner rather than later. In a car purchase decision, consider the full purchase cost, maintenance cost, insurance cost and salvage value. You might want to postpone the decision to change your car or decide to buy a different car model.
- Make the most important thing the most important thing: Regularly evaluate your actual performance against your finishing well goals and align your efforts and resources accordingly. Are you working hard for your children? You might want to ask them what they really need from you. They most probably will want to enjoy the toys with you.
The scriptures urge us to live this life with an eternal perspective as per the following verses:
- 1 Corinthians 3:12-15(ESV): Now if anyone builds on the foundation with gold, silver, precious stones, wood, hay, straw—each one’s work will become manifest, for the Day will disclose it, because it will be revealed by fire, and the fire will test what sort of work each one has done. If the work that anyone has built on the foundation survives, he will receive a reward. If anyone’s work is burned up, he will suffer loss, though he himself will be saved, but only as through fire.
- John 6:27 (ESV): Do not work for the food that perishes, but for the food that endures to eternal life, which the Son of Man will give to you. For on him God the Father has set his seal.”
- Luke 9:25 (NCV): It is worthless to have the whole world if they themselves are destroyed or lost.
- John 15:16-17 (NCV): You did not choose me; I chose you. And I gave you this work: to go and produce fruit, fruit that will last. Then the Father will give you anything you ask for in my name. This is my command: Love each other.
- 1 Timothy 6:6-7 (ESV): But godliness with contentment is great gain, for we brought nothing into the world, and we cannot take anything out of the world.
In the next article, we will look at the fifth and last money management principle: Giving.