Basic tips that can help secure your financial future
The word “financial” is enough to give most people a headache. Unless you work in the industry, or have educated yourself, you are probably not financially literate and it stops you from planning properly. Here are some tips to help you make better decisions when it comes to insurance, savings and investments.
Velmah Nzembela, head of brand and communications at insurance firm Assupol, says South Africans are all exposed to risk, in one way or another, but most of us are not sufficiently covered.
“Inflation halves the value of your money every 10 years. People suffer from dread diseases earlier and more frequently and people have to work after retirement more often."
In order to know what your needs are, you need to understand how your financial needs change across different life stages. Are the policies you buy aligned to your financial needs and have you updated the policies you took out years ago? Often there is a mismatch between risk and the product you have to mitigate that risk.
Funeral cover works on a basic premise - each month you contribute and, in the event of your death, money is paid out so those you leave behind are not burdened with your funeral expenses.
Nzembela says 55% of adults in South Africa have some access to insurance but only 8% have access to insurance that is not funeral-driven.
“More than 20% of South Africans have more than one funeral cover. This is an industry trend.”
This means taking out cover is not an issue of affordability, it’s a lack of knowledge.
Life cover, or life insurance, works in a similar way. You contribute to monthly and money is paid out to your selected beneficiaries in the event of your death. This protects those you leave behind in the long term.
“We can’t cover ourselves for only a funeral because there is life after a funeral. So often when the breadwinner dies, the lives of the dependents are not planned for,” Nzembela says.
This cover becomes more important as you progress through life – as you acquire debt, decide to marry and have children.
Savings vs Investment
Savings refers to money you set aside for the future, either for an emergency or for something you plan to buy or spend on. Savings can be accessed quickly and putting money aside involves little or no risk and is tax-friendly.
Investment, on the other hand, involves buying assets, such as stocks, bonds, mutual funds or property, with the goal of having your investment generate money for you. Investments are usually long term, involve more risk than a savings account, and fall into two categories: income or growth.
Unlike income investments, which provide you with a regular income, growth investment builds up over time, resulting in a greater return on the money you originally invested.
With any money that is either invested or accruing interest, giving it time to grow could mean doubling, tripling or even quadrupling it. As interest grows, it can offset the impact of inflation, adding value to your money in the long term.
Saving is a good way to plan for future, or emergency expenses, while investment does the same but at a higher return.
Retirement might seem like a lifetime away when you are in your 20s or 30s but it’s important to build up funds to support you once you stop working, so you won’t be a financial burden on your family. Saving for retirement should ideally begin as soon as you receive your first salary but it’s never too late to start. That said, you will build up much more if you start at the age of 25 than if you start at 50.
A good measure of how much you need to save for retirement is 10 to 15% of your gross income (meaning before tax and deductions), ideally from the age of 25 to the retirement age of 65.
It’s not about how much you earn but about how far you can stretch what you earn.
A general guide is the 50/30/20 principle. Half of your income should go to necessities, 30% should go towards discretionary items and 20% should go towards different kinds of saving, such as retirement and investment.