As the new year kicks into full swing, many South Africans will be setting new year’s resolutions – including financial and investment goals – to improve their future. Nomi Bodlani discusses strategies you can apply to make your financial resolutions stick this year and beyond.
Most people consider the start of a new year the perfect time to set financial goals; however, without the right support, it becomes easy to give up when faced with hardship.
Recent research by PLOS ONE – a peer-reviewed science and medicine journal – on the success rate of new year’s resolutions suggests that not all resolutions are equally effective. The research finds that people who set approach-oriented goals and receive support along their journey are more likely to achieve them than those who set avoidance-oriented goals or do not receive support.
Approach-oriented goals focus on taking active steps towards an outcome (e.g. save a stated portion of your salary towards an emergency fund, which you aim to accumulate within a fixed time period), while the passive latter relies on self-restraint and the avoidance of undesired outcomes (e.g. avoid unbudgeted consumption or spending excess cash). “Support” can be as simple as identifying someone to encourage you to remain committed to achieving your goal, or more structured, in the form of partnering with a financial adviser.
The study conducted among over 1 000 people found that 58.9% of those surveyed considered themselves successful in achieving their approach-oriented goals a year later. In contrast, only 47.1% of those who set avoidance-oriented goals felt the same. The study also revealed that participants who set interim goals and tracked their progress were significantly more successful in achieving their resolutions.
Making resolutions stick
While investing for the long term can be challenging, introducing key milestones along the journey can help investors remain focused and achieve their goals. Interim goals can motivate you to keep going or galvanise you to take more action towards a goal that is in the future.
Break down larger goals into smaller, achievable milestones. Tracking your progress will help you to stay motivated and focused on your long-term objectives. It is also worth emphasising that time is a critical factor in long-term investing. Markets tend to move up and down, but time smooths out this volatility. Put simply, this means that if you anticipate some bumpiness and don’t give in to the temptation to disinvest when the market dips, you can benefit from the uplift when it comes. Time also allows you to benefit from compound growth – earning return today on return earned yesterday.
Five questions to consider as you think about your 2025 financial resolutions
1. Do you have an adequate emergency fund?
Prioritising emergency reserves will help you preserve your long-term investments for their intended purpose. You should aim to accumulate at least three times your monthly salary, invested in a low-risk unit trust like a money market or interest fund. Lifestyle changes, such as paying off expensive credit card debt and setting up automated savings to “pay yourself first”, can make saving for emergencies easier.
2. Do you have sufficient exposure to growth assets?
If you are investing for the long term, such as for retirement or young children’s tertiary education, it is important to consider options that include growth assets (like equities) that should be able to outperform inflation in the long run.
3. Are your affairs in order?
Prioritise the future of your loved ones by drafting a will or updating your existing one. Statistics suggest that at least two-thirds of South Africans do not have a valid will in place. Having a valid, up-to-date will ensures that your estate will be distributed according to your wishes. In the absence of a will, assets will be divided among family members by applying the rules of intestate succession, which divides an estate according to a set formula and may limit family members’ inheritance.
4. Are your investments well diversified?
Diversify investment risk by going offshore. As the adage goes, don’t put all your eggs in one basket. In today’s interconnected world, where various social, economic and political factors affect how markets perform, it is important to have a diverse investment portfolio that includes an offshore component. Through offshore investments, you can ensure that your risk is spread across different markets as they go through cyclical ups and downs, while still protecting capital and yielding favourable outcomes. Investing offshore will also give you access to companies and sectors that aren’t available locally.
5. Are you sacrificing your future security for short-term needs?
Try to avoid dipping into long-term investments for short-term needs unless you really have no other option. In a two-pot world, where it may be tempting to access a portion of your retirement investment, it is important to see how this can undermine your retirement prospects. Withdrawing a seemingly small sum today has both immediate and long-term repercussions: In the short term, withdrawals are taxed at your marginal tax rate rather than the more favourable retirement tax table, and, more concerningly, any withdrawal means losing out on years of growth on that portion and having less at retirement.
If you are not sure where to begin with setting financial goals or know that you struggle to stick to your plan despite your best intentions, consider working with a good, independent financial adviser. Financial advisers are well-positioned to help you create a personalised financial plan, manage emotional decision-making and take the necessary actions to make progress towards achieving long-term financial and investment goals.