By Pierre Muller
With South Africa back in level four lockdown, the Covid-19 pandemic continues to have a negative impact on many families. This highlights the need for financial planning that can withstand market uncertainty.
The most important step you can take is to get a financial plan in place, a financial roadmap, something that is real and tangible, which allows you to see the bigger picture in mapping out your financial future. It needs to address unforeseen circumstances, like disability, income loss or death, as well as the very important element of having enough invested to retire independently.
Where does one begin?
1. Acknowledge and take stock of your current financial status. If you do not know where you are, you cannot navigate your way forward. Whether you are in debt or want to build your financial future, the best time to face the reality of your situation is today and any situation can be improved upon with a clear path and time.
2. Have a look at your budget to determine how any additional expense for life cover/disability cover/retirement planning will affect it.
3. Determine your financial goals and be realistic. Ask yourself: is it life cover/disability or retirement/investment planning or all of the above that need addressing?
4. Compile a list of your assets and liabilities, including any current investments and policies. Include details of the income for both you and your spouse (if applicable). Include your dreams or aspirations, such as owning a holiday home or buying a vintage car.
5. Consider tax implications, if any. The advice of a financial planner cannot be stressed enough when it comes to the complex world of tax.
6. Be aware of the effects of inflation on investment values, particularly when planning for retirement.
7. There is currently a “You Only Live Once (YOLO)” trend encouraging younger investors to take highly concentrated risks. While it makes sense to concentrate your energy and time to build your wealth, placing exceptionally high financial exposure on one idea can lead to financial ruin and a forced financial “reset” halfway through life. Diversification remains key.
8. Source a professional financial advisor, preferably a certified financial planner , to prepare a detailed analysis for you and always establish what the costs will be upfront. This advisor will be your financial coach to help you stay motivated, persevere, and reach your financial goals. It is best to work with someone you believe you can forge a long-term relationship with. Your advisor will also assist you in identifying potential financial scams.
9. Get your partner/spouse involved in the process.
10. When it comes to retirement planning, your work retirement fund will likely not be enough. There are also asset allocation limits to be aware of under Regulation 28. A financial advisor will be able to advise you on the best investments for your unique circumstances.
Defining your goals
Creating a personal financial plan starts with identifying your goals. Remember that each goal needs to be achievable within the context of your lifestyle. This serves as a reality check, taking into consideration the resources available to achieve each goal. If your resources are insufficient, certain goals must be adjusted to be more realistic. Goals are usually dependent on your monthly budget.
Everyone’s goals are different. A young family provider might lean a bit more towards risk cover, to protect their future earning capacity while they are still building up wealth. When looking at risk cover, the amount of cover needed must be determined to ensure adequate protection of assets to avoid financial loss. Assess whether you can afford the premium for this cover, considering your income versus expenses (your budget). It may sometimes mean making sacrifices to ensure the attainment of your goals.
When it comes to saving for retirement, you can calculate how much you are going to need to maintain a certain lifestyle over the years at different ages. Some factors to be aware of is the annual growth of your investments and the impact of inflation.
If you don’t have a financial plan in place, ask yourself: “What will the effect be if I die or become disabled tomorrow? Will I have enough capital when I retire, or will I be dependent on other people to survive?” A good financial plan creates financial security and ensures that all your goals will be met. It gives direction and meaning to one’s financial decisions.
Pierre Muller is a Advisory Partner at Citadel