Publications
Partners
Securing financial stability is arguably now, more than ever, important in South Africa’s current turbulent economy.
A secure financial plan is crucial and knowledge about what forms part of this plan is the first step towards financial stability.
The key thing to note is that a financial plan is not synonymous with an investment plan but is only a part of it, David Kop from the Financial Planning Institute of Southern Africa explains.
“You need to make sure that you set measurable goals. Once the plan is drafted it does not end there. The plan must be periodically reviewed based on changing circumstances and economic conditions. Lastly, financial planning is a marathon, not a sprint. Be wary of people offering a quick fix,” he says.
Kop stresses the need to consider a holistic approach of what affects your finances.
“Trying to plan without knowing what you have and where you are heading will not be successful,” he says, adding that while there may be financial planners who may require a minimum investment or income level, there are plenty who don’t - so a high income stream is not necessary before starting on a financial plan.
Kop lists the essential components that makeup a personal financial plan. He refers to these as the six basic elements:
1. Financial management – this involves your budget and debt management;
2. Risk planning – regarding your life, disability, medical aid and insurance for your personal belongings;
3. Investment planning – understanding your risk profile and investment goals;
4. Retirement planning – understanding what you would like your retirement to look like one day and how you will get there;
5. Estate Planning – what happens to your assets and how your beneficiaries will be looked after when you die and;
6. Tax planning – the tax consequences of your financial decisions.
Managing family obligations
Most of our Money Makeover candidates have extended family obligations and Kop says these need to be included in any financial plan. A full assessment of these obligations should take place.
READ: These are the 2018 #MoneyMakeover candidates
If the breadwinner is getting some sort of financial support, then one needs to look at the origin of this support, Kop says. Was it due to a divorce and then remarriage – in this case the maintenance and divorce order will be applicable. Or was it due to the fact that the person is a sole breadwinner and now needs to support their existing or extended family? In this case it is a voluntary obligation, but it should still form part of your financial plan. Unplanned family obligations can result in serious financial consequences for the breadwinner.
Managing two income streams
One way to boost your income is to run a side business in addition to a regular job. Kop says it is important to take note of the different tax rules for the different entities.
“The most important consideration is understanding what the tax rules are when it comes to your business income and your employment income.”
Kop says it is also important to consider why the side business was started. Was it to fill an income gap or to build it until it becomes viable to run it full-time? That will help decide what to do with the income generated – whether you reinvest and grow the business or use it to supplement your bills.
Kop said a vital part of a financial plan starts with knowing what your goals and dreams are.
“The sooner someone starts the better,” he said.
Pay off debt: It is always best to pay off high interest debt like your credit card, as soon as possible. If you want to use your credit card for convenience, set-up a debit order so that it is paid in full at the end of every month.
Emergency fund: Everyone should have an emergency fund. Put some money into a bank account until you have at least two months of salary put aside. This can be kept in a fixed deposit account which offers a better interest rate.
Goals for saving: Part of forming a financial plan is setting out your goals and what you need to achieve them. The rule of thumb is that for savings of less than two years invest in cash in the form of a fixed deposit. When investing for between three and five years you can consider high income funds which invest in government bonds and property. Finally for investments of longer than five years you can invest in equities which are effectively companies listed on the stock exchange (JSE). You would access equities through unit trusts or exchange traded funds.
Pension: Make sure you are investing in a pension fund and if not, consider a retirement annuity. These products offer excellent tax benefits and are ideal for your retirement planning – because you want to be able to retire with sufficient money one day.
Insurance: Make sure you have appropriate risk cover like disability and income protection that will pay out if you can’t work. This becomes even more important if you have a family to support.
Value for money: Costs are an extremely important part of your final return on your investment, so make sure you understand the costs of both the product and the financial adviser. Good advice is worth paying for but the adviser must continuously work with you to ensure you meet your goals and not just disappear once the commission has been paid.
