1. Spend Less
No matter how much you are currently earning, create the habit of spending less. As is often encouraged by Financial Planning experts – spend less than your income. To stay within your means you must discipline yourself NEVER to create debt.
Stay away from credit cards and bank loans. The compound interest on such credit is astounding and will enslave you for years to come. (I will discuss the inner workings of compound interest in a future article). The same applies to credit at clothing and retail stores. If you cannot pay for it with cash, do without it!
Keeping up with the Joneses will bankrupt you and bring on years of torment. As Dave Ramsey says, “The Joneses are Broke.”
2. Financial Goals
If we do not have a plan for the future, we will fail financially and as a result in every other area of life, including relationships. You simply cannot live in the moment, no matter how averse you are to goal setting philosophy.
A dream of long-term financial security or greater income is not possible without planning. Set goals and action steps for Investments, providing for your family, saving for a large purchase item, planning for your retirement or even a holiday.
Take control of your financial future. Create worthy goals which prioritize and direct your spending and investment decisions to achieve a successful outcome.
3. Create a budget
After you have set your financial goals, develop a budget. Few people work with a budget; it will require decision and commitment for the purpose of your long-term goals. When you take control of your finances through goal setting, planning, and budgeting, the results far outweigh the stresses and disappointments which result from overspending and not being able to meet your financial commitments.
Create your budget, work with it and stick to it!
“If you do not name your money, it will leave you!” In other words, if you do not allocate where your money must go, it will simply disappear from your life and bear no fruit.
4. Get Rid of Debt
You are wealthy when you have no debt! Your home loan should ideally be your only current debt, however, home loans can be paid off in as little as 7 years when you understand how compound interest works and you get rid of all other debts.
Pay off all debt; include this in your financial goals. A simple process – though not easy – is to begin paying off your smallest debts first. As each of the smaller debts are eliminated, do not spend the newly freed up money which results from fewer debts, add this new extra amount to the next debt, in so doing eliminate each debt until you become debt free. The sense of freedom in not having any debt will change your life, health and how you face each new day.
5. Build an Emergency Fund
There are many views on how this should be achieved. Some planners believe the emergency fund is step one in your financial planning, even before paying off debts. A recommended amount of savings in this fund is to begin with R10, 000. If you are already in debt then this is a difficult amount to achieve however you do need to build an emergency fund even if it is a smaller amount starting out.
Keep building the fund and DO NOT tap into it under any circumstances except for an emergency. The idea behind an Emergency Fund is to not bankrupt yourself if an emergency arises which cannot be accommodated within your budget. One also needs to understand what constitutes an emergency. Emergencies are incidents such as being retrenched from your job. You need to be able to sustain yourself and your family whilst finding a new job.
The following are NOT emergencies:
- New Appliances
- The latest Album from your favorite performer
- Dining Out, Take outs
- New Clothes (included in your budget)
- A new book from your favorite author
- Groceries (included in your budget)
- Holidays, weekends away
- Sporting events
- Christmas Presents
- Car repairs (included in your budget)
- Items on sale
6. Income Replacement Insurance
If you were to sustain an injury which rendered you unable to work and earn a living, the financial consequences to your family could be catastrophic. Income would cease, and expenses could rise due to the costs of treatment, or even long-term care.
Whether you are self- employed, or an employee of a company it is more than wise to purchase disability cover. Employee group disability cover is seldom sufficient and frequently has loopholes in favour of the employer. Carefully consider supplementing or including disability cover with an independent Registered Financial Planner.
7. Life Insurance
Most people consider Life Insurance a grudge purchase. Few people would ever drive their cars without vehicle insurance or not insure their home and contents, yet so many consider Life Insurance a waste of money.
I have often encountered a client who would rather purchase an investment, wrongly believing that this is a better purchase than Life Cover. An investment would take years to grow, but as an example, Life Insurance of say, R2, 000.000 would be paid out to spouse and family immediately on death. An investment may only have grown to a few thousand Rand over a period of time and your family would lose your income and even their home. As was once said, “Wives might not believe in Life Insurance, but widows do!”
8. Medical Aid
It is a great risk to live without Medical Aid Cover. In the case of illness or an accident, you could either not afford treatment or even die without the correct treatment.
Surgery and medical costs are very high. Medical Aid ensures that you and your family are well taken care of. Without Medical Aid your income could be exhausted and lead to consequences such as needing to sell your home to cover medical costs.
9. Severe Illness/Dread Disease Cover
40% of all South Africans are diagnosed with a Dread Illness. These include cancer, heart attacks, multiple sclerosis, strokes and so many more. The cost of treatment will usually not be completely covered by medical aid. You could also exhaust your medical aid benefits if the illness is too severe or prolonged.
Besides the cost of treatment, you may not be able to perform your job due to the illness and lose your income. Severe Illness Cover therefore will enable you to carry the medical expenses and perhaps even help prolong your life. A serious Illness could have a serious impact on your income and leave your family unable to pay the medical bills. No one can be without Dread Disease cover; the expenses could cause you to lose everything, leaving your family destitute.
Saving is good for creating an emergency fund in the short term, but saving is not the most effective plan for future income. On fixed deposit banking accounts, after costs you may only earn a return of approximately 2.9% An investment such as a good Unit Trust or even an Endowment linked to a good fund such as the Allan Gray Balanced fund or Coronation Top 20 fund is sure to bring you higher returns.
11. An Up-to-Date Will
70% of people die without a will. This is an astounding statistic. If you die without a Will, the state will decide how your assets are distributed. Estate planning is critical for your family. All assets, including life insurance, your investments, your home and everything of value must be included in your will. Your Will determines the future of your spouse and your children. Estate planning is for everyone, not just the wealthy. Don’t leave it too late, do it now! Your Financial Planner is able to assist you with a will or direct you to the right lawyer.
The above points, I believe are essential, they are however certainly not the final word on Financial Planning. Effective Financial Planning is partnering with a good Financial Planner, together you analyze your financial situation, on a long term basis you create a Life Plan which holistically encompasses and plans for the financial success of your entire life. Beginning now, to retirement and for your spouse and children after you have gone.
If you require medical attention, you seek out a doctor, legal advice requires a good lawyer, yet so many people never seek out professional financial advice with the attention of a Financial Planner. A Registered Financial Planner will address your concerns and help you create a Life Plan for both you and your family’s financial well being.
Some of the areas a Financial Planner will assist you in:
- Minimizing the Risk for you and your family
- Debt Elimination
- How much you will need for retirement
- Planning for your children’s education, and the best ways to fund it
- Investment Advice – for Short, Medium and Long Term investments
- Wills and Estate Planning