No financial plan is like hitting the road with no directions
Get your financial affairs on track by starting from a young age
Having no financial plan is as bad as having no destination logged into your Google maps, says financial planner Ian Beere.
Having no financial plan is as bad as having no destination logged into your Google maps, financial planner Ian Beere told a panel discussion he facilitated for a group of 20- to 35-year-olds on getting their financial affairs on the right track.
The discussion was part of the Financial Planning Institute of Southern Africa’s annual Financial Planning Week to create awareness around the importance of financial planning and the value of getting started when you’re young.
“If you are goalless on your journey through life, when you hit that fork in the road you won’t know which way to turn. Equally, there will be surprises along the road and you’ll need to have appropriate protection,” Beere says.
The panel included independent certified financial planners from a variety of private companies sharing their advice on the basics of getting started, how to tread carefully with debt, the importance of being covered and how to look at investments. The main take out was to “spend less than you earn”.
Outlining the origins of the word budget, Greg Sneddon, financial planner and coach, says “back in the day people carried all their worldly wealth in a little leather bag. When they went to the market they knew exactly what was inside that purse. There was no credit and if you didn’t have it, you didn’t spend it”.
The word budget is a diminutive of bouge in French or bulga in Latin which means ‘leather bag’.
According to Sneddon the most widely marketed thing in the world is not a product but debt – a multimillion dollar industry that aims to get us into debt by playing on our desire for instant gratification.
“Stats show that South Africans are hopelessly in debt,” he says.
Sneddon says people have been found to spend 12% to 18% more when they’re paying with a card or using a cashless platform. When McDonalds first introduced their store card their average spend rate went up by 55% per transaction, he says.
Quick maths, you earn R25,000 a month for the next 30 years, that’s R9m not taking inflation into consideration. So your ability to earn an income is your biggest asset.Devon Card, financial planner at Crue Investment
“The odds are stacked against us. If you swipe with a card you’re going to spend more. When you draw money from the ATM you realise this is hard earned cash you’re going to have to part with.
“They say there’s good debt and bad debt. I don’t buy that! You can even buy a car by not getting into debt, it just takes a bit more time,” he says.
Sneddon suggests you “get intentional” about your money in the same way you would about exercise or your mental health. “We need to plan how we spend or save our money, otherwise it’s not going to happen,” he says.
Devon Card, financial planner at Crue Investment, told the panel that brokers often over-sell insurance, offering discounts, special offers like cash returns and package deals, but “unless you need it, please don’t buy it”.
As a young professional your most important asset is yourself, so besides short-term insurance like medical aid and insurance on your material possessions like your car, the most important long-term insurance for you is an income replacement benefit, he suggests.
“Quick maths, you earn R25,000 a month for the next 30 years, that’s R9-million not taking inflation into consideration. So your ability to earn an income is your biggest asset,” he says.
Income replacement is an insurance fund that will pay out if you are no longer able to work, for example if you’re a surgeon and develop Parkinson's disease – any injury that inhibits your ability to work and earn a salary.
According to Card it’s important to understand the definitions of disability under the terms of your policy and how comprehensive your cover is. For example, a disability policy will cover your ability to do your specific job, where as an impairment policy covers your ability to work in general.
It’s crucial to read the fine print and to fully understand how comprehensive your cover is, sometimes the more expensive option is the better one. Equally, if you don’t need it, don’t buy it, Card says.
On the core investment options, Gavin Van Dyk, financial adviser at Fiscal Private Client Services, says the building blocks for diversifying a portfolio are shares, properties, cash and bonds. These aren’t mortgage bonds but interest bearing investments.
If you’re investing for the long term you might be willing to stomach more volatility in the short term to get a better rate of return in time.Gavin Van Dyk, financial adviser at Fiscal Private Client Services
According to Van Dyk, there are many factors that impact the performance of your investments and you need to be wary of trying to predict the future. The most important consideration for investing is the purpose of your money and when you might need it.
If you need the money in the next six to 12 months for something like an overseas holiday, you would invest in a cash type investment, such as a money market fund where you know you will earn interest and your capital will be safe if the market experiences a downturn.
“If you’re investing for the long term you might be willing to stomach more volatility in the short term to get a better rate of return in time. When you’re investing for the long term it’s not so much about trying to time the market but it’s actually about time in the market,” he says.
According to Van Dyk there are no discernible patterns indicating how you can choose the best combination of investment portfolios.
“Diversification is really the only free lunch we have in investment markets. By investing in an appropriately diversified portfolio you can reduce your risk and you get a lot more certainty regarding the outcome of your investment,” he says.
Detailed research and analysis is done to determine the optimal mix to achieve your appropriate level of risk return trade-off and this can be done through a financial consultant. Your investment decisions should be made in the context of your financial plan, Van Dyk advises.
He suggests unit trusts as a better investment option for when you’re young because you can earn tax free interest before reaching a particular threshold, as opposed to an endowment fund which is better when you have already built up substantial capital.
But even before all of this, Van Dyk recommends that no matter how much you’re earning, you should be saving 15% of your salary every month.