Phase 3: maturity to seniority (40-60)
This is sometimes called the "consolidation" phase. It is the phase when the children leave home and, as shown in Figure 40, your expenditure falls while your income continues to increase, but at a lower rate. This is so because your business will most likely have reached maturity and is highly profitable by this stage, or you will have advanced well as an employee - in many cases to close to the top of the hierarchy.
This of course assumes that you followed the rules that pertain to phase 2. Consequently, it is the time when gap between I and E increases and you will be saving more than the amounts possible in phase 2. Your FSG is getting closer and you are in a position to ensure that you will reach it in this phase, provided you follow the rules that pertain to this phase:
- Nurture and exploit your personal brand.
- Aggressively repay debt.
- Cash out and separate business risk from personal assets.
- Invest assets wisely.
- Finance lifestyle assets with excess funds.
Nurture and exploit your personal brand
At the start of phase 3 you will have built a personal brand - either as a business person, a professional or an employee. It is the most valuable of all non-monetary assets and should be used to propel you to the top in your chosen career. This will ensure that I will continue increasing at a time when E is falling, and this will enable you to repay debt.
It is important not to fall into the trap of arrogance which could quickly destroy your brand and your wealth in phase 3. Success in phase 2 leads many people at age 40+ to believe too much in themselves (invincibility!); this arrogance affects decisions on risk-taking and expenditure detrimentally. Rather attempt to identify arrogant people with the purpose of avoiding them.
Aggressively repay debt
Higher I and lower E will put you in a position to repay debt at a faster rate (see Figure 2). It is likely that you enter this phase with a large outstanding mortgage bond. The highest return you can get on savings is in the share market: in the long term it delivers a mean return of over 12% pa; as you know this return is accompanied by risk (= variability of return around the mean). If your debt is costing you 12% pa and you apply all your savings to paying off your bond you are "earning" 12% pa without any risk. It is a superior deal. In fact, given the risks in the share market, it pays you to repay your bond even if the rate is 9.6% pa, because this can be called a risk-adjusted rate (RAR). If in the 12% share market the STD = 20%, the RAR = 9.6% pa.
This is also the phase when your parents pass on and leave you an inheritance (if they have not SKI'd14 it away). Regard this money as a windfall and use it to repay debt.
It should be a rule that at age 45-50, all debt should have been repaid. Given a sharp increase in net assets in this period there will be temptations (from the bank and peers) to buy lifestyle assets; avoid them.
Cash out and separate business risk from personal assets
During this phase your net worth will grow sharply and it is important to "cash out" a portion of your non-diversified assets and separate business risk from personal assets. How this is achieved in the different careers requires separate discussion.
If you are an employee with share options, cash out a portion and diversify (i.e. reduce risk) (more on this later). You should also be acutely aware in this phase that you are vulnerable. Downsizing of your employer-company in a recessionary period may lead to your retrenchment. This can be a serious setback to the timing of your FSG. You need to actively seek to expand the business of your employer by using your brand and wisdom, and recommending the employment of keen youngsters. The company owners will reward you with an extension of your working life. But you have to recognize that you must remain relevant. The company owes you a salary only if your earn it.
If you have a business or are a professional the separation of business risk from personal assets is achieved by, over time, identifying and handing the reins of the business over to youngsters with new expertise and energy. Your energy level will be lower than before and you need to recognize this upfront. Sell a portion of the business to them and sell more as you get older. Go back to your area of expertise in the company. The Bill Gates example is relevant; he handed over the reins and went back to his passion, software creation. The youngsters will respect you and most likely reward you with the chairmanship -but only if you have kept yourself relevant to the business. Thus, you will have prolonged your income-earning period.
Invest assets wisely
As you become a high net worth (HNW) individual and you have separated business risk from personal assets you will need to make decisions on investments. One of them is the choice of management of your money between self-management and external management. In the former case you will need to undertake extensive and ongoing research, which is extremely time-consuming. You should only consider this option when you have reached your FSG. However, the majority of persons who are successful in terms of their FSG use external management, which amounts to taking external advice. In this regard there are 2 options:
- Appoint a fund management firm (stockbroker or specialist firm).
- Invest in securities unit trusts (SUTs) and exchange traded funds (ETFs).
In the former case there are certain rules to follow, the most important of which is to choose the right manager, and this must be based on past performance. However, even excellent fund managers make bad decisions at times. For this reason it is good practice to implement the golden rule: diversification, i.e. choose 2-3 managers. The managers will in turn also diversify your investments. As you know this route takes advantage of low or negative correlations of return and reduces risk.
Finance lifestyle assets with excess funds
Most HNW people are tempted to buy a large motor vehicle, a larger home, a boat, a holiday house at the sea and take long and expensive holidays. Only consider these if you have reached your FSG and have excess funds. However, consider the facts:
- A larger motor vehicle is expensive to run and insure, and it is difficult (emotionally) to downgrade if you have to.
- A holiday home restricts one's travel options because you feel obliged to use it every year.
- A holiday home is a non-earning asset, i.e. a poor investment even if you can afford it. It is wiser to rent a holiday home each year and it enables you to diversify your travel destinations.