When Dawn Ridler, an independent financial adviser and founder of www.kerenga.com was asked by MoneyMarketing.co.za what the top three things that make a good financial plan are, she said: “A good financial plan needs robust analysis of needs versus reality – right across the board from medical aid, tax, wills and estate plans to investment and retirement.”
New culture of splurging has emerged
But how many of us are willing to spend more money on something we can’t see – the future? Chanel lipstick, Christian Louboutin shoes or a Roberto Cavalli dress are some of the things women tend to splurge on when they have cash. But have you ever thought of how much money your material assets would be worth if you’d put all that money away in an investment policy ? Gerald Mwandiambira of the South African Savings Institute says a new culture of splurging has emerged – investments. “Things like retirement may seem like a very long time but it will come in handy one day,” he says.
According to motivational speaker and author of Heart, Mind and Money Vangile Makwakwa, “In South Africa today, only 4% of people can afford to retire. We have a population that can’t retire because they’re used to a certain lifestyle. It’s important to plan for retirement so you are able to maintain your lifestyle as you won’t be able to do that with a government pension.” Lezanne Human, FNB’s chief executive for savings, investments and fiduciary says, “From March 1, South Africans can save R30 000 a year, and R500 000 in FNB’s lifetime new tax free savings accounts.
Skydiving without a parachute
No tax is paid on interest earned, dividends received or capital gains. With household debt making up 78,3% of disposable income, South Africans are financially vulnerable and dependent on expensive debt. The intention of these tax-free savings accounts is to reduce South Africans’ reliance on expensive, short term debt if they need money.” Banks like FNB offer tax-free savings accounts that cater for your needs across the income spectrum. Getting by from month to month with out a‘rainy-day’ fund is bravery at its best to say the least.
It’s probably the equivalent of skydiving without a parachute. Life is incredibly unpredictable and between one payday and the next, one could possibly get retrenched. Drawing from an emergency fund for expenses that are unplanned minimises the impact on one’s finances. “Typically, this fund should amount to six months of your income and such a fund keeps you going if ever you are unable to work and are job seeking,”says Makwakwa. According to Mwandiambira, the target to save may seem daunting but can be achieved gradually.
He explains it’s best to start with accounts like a 32- day notice account. “This is excellent because the money is available readily, but you’ll wait for a month before funds are released. And by the time you get the money, your priorities would have changed.” What would happen if something unplanned occurs and needs loads of cash? Where are you going to head? Do you gave money stashed somewhere in an emergency account? Makwakwa says: “Don’t be caught off-guard. Open a unit trust account with a financial services firm and put away as little as R200 a month or use a bank savings account.”
Property is also another great investment
Buy instead of renting, even though you might be afraid to take the plunge because qualifying for a loan seems insurmountable. But it is doable, and the first step is to commit to doing it, then saving for it. “When saving for a large purchase like property as a targeted saving, most successful savers achieve this by setting up a direct debit from their main account to a notice account. In most instances, individuals save for a deposit on a mortgage. In this case, be sure to show your savings account statements when applying for a bond as these accounts will increase your credit scoring as a lower risk to the lender,” says Mwandiambira.
It’s important to buy property that doesn’t put you out of pocket. Before you do so, look at your budget and understand what you can afford. Talk to your bank and find out how much the property you want would cost. Makwakwa says, “Put down a 10% deposit. To determine the amount for a home loan that will best suit you, I would advise that you work from your rent. If, for example, your rental is R4 000 per month, ask yourself how that fits into your budget and from there figure out if the bond you can afford is above or below that figure.” Have you recently taken time to assess your medical aid plan? If you were diagnosed with an illness that needed more than what it could provide, what would happen? Talk to medical aid professionals about the different products they offer and see which one works for you. If, like a lot of people, your employer doesn’t offer medical aid as part of your employment package, make the means to organise your own.
Opt for a medical savings account for day-to-day benefits, but make sure you still have a hospital plan. Mwandiabira says, “When saving for such current expenses, a standard savings account works best as the money must be easily accessible.” Examining what we spend our money on is critical. Of the things you spendon, make sure to include all of the above so that even when you do fall off the wagon and misspend on luxuries, you’ll always have underlying peace because your savings basics are in order.
The author of Living Well on Practically Nothing, Edward H Romney, puts it succinctly when he said:“The urge to spend all you make is called consumer mentality. Try to get an investment mentality instead.” The more money we have saved, the more we can put away towards investing. And, of course, the more money we put away, the more compound interest works in our favour.■