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Money management is full of trade-offs.

You usually have to give up something to gain something. This is required in your personal finances, financial planning and even investment strategy.

Finding the balance for what works for you is crucial.

1. The trade-off between rational and reasonable:

When fine tuning your personal finances (CREATING ORDER), it might not be rational to spend R3,000 on shoes this month, but it might be reasonable.

The rational spreadsheet would certainly not include that line item.

But if it allows you to stay committed to the greater spending plan in the months ahead (and have something left over to invest), then perhaps it is reasonable.

Feeling like you are unable to live life in the present often leads to a plan being abandoned all together.

Rather make reasonable decisions and progress.

2. The trade-off between flexibility and returns.

A good example of a trade off in financial planning (HAVE PURPOSE) is illustrated in the tax planning element.

You want to pay less tax? Of course you do. It increases your returns or what you get to keep.

Well then you are going to have to put your money into accounts which gives you some tax relief. Such as Retirement Savings accounts.

But you lose some access to your money when you save in a retirement fund*. In an Retirement Annuity, for example, you can only access funds at age 55.

And when you access your funds, you have to use two-thirds of the money to buy an annuity income of some sort (Life or Living).

You have less flexibility around your choices but you did get to grow your funds without paying tax.

AND you could contribute to retirement funds before paying tax. This is definitely a worthwhile boost upfront.

3. The trade-off between certainty and returns.

When structuring an investment solution (MAKE PROGRESS) we typically want high returns with little to no downside.

But the real world does not work that way.

The mix of assets we have available to invest in have different characteristics. This means they respond differently to each other during the investment cycle and have different jobs to do for you. 

‘Income assets’, like bonds and cash, give you more certainty about your returns. But the price of the certainty is lower returns.

Whereas ‘growth assets’, like shares and property, provide less certainty about your returns short-term. However, over the long-term you probably grow your money much faster.

Your investment mix (asset allocation) is therefore a trade-off between certainty required and returns required.

Each objective you have, will have a required return and a level of certainty required, depending on your time horizon.

*If you want to understand your options and trade offs when it comes time for you to start accessing or consuming your savings (your annuity options are all about trade-offs too) you should join for a workshop. I have set up an interactive workshop to help those approaching this critical time of their lives with the foundation knowledge they need to make the tough trade off decisions – You can find out more at YOUR RETIREMENT QUESTIONS ANSWERED


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Your future becomes your present…

A plan is simply a way to bring your future into the present so you can do something about it.