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6 Financial Plans Every South African Should have

June 1, 2017


6 Financial Plans Every South African Should Have


Managing your money can seem tricky at times. We all know that planning our finances is important, but no one actually shows us how to do it.


We want to help you manage your money better by breaking it up into 6 areas and explaining what financial planning really is.


Financial planning is all about you. It’s about your goals, ambitions, your wants and needs, but it’s also about money. It's about:

  1. Making it,

  2. Growing it,

  3. Leveraging it,

  4. Protecting it,

  5. Enjoying it and

  6. Preserving it.


1. Making It – This is your Income Plan


Here we look at your personal earnings and your investment earnings and we look at strategies to improve your position, to stretch your rand further.


Your income plan determines strategies to improve your cashflow through a combination of tax effective strategies and the efficient use of your income.


The resulting surplus funds are then used to create wealth.


There are many different strategies, however it is important to find which ones are best for you and your particular circumstances and then implement them.



2. Growing It – This is your Investment Plan


Here we look at your short, medium and long term goals and again we're looking at the strategies to improve your position.


So how should you invest your money?

  • In defensive assets;

  • or growth assets;

  • or a combination of both.

There are four main asset classes that you can invest in, namely:

  1. Cash

  2. Bonds

  3. Property

  4. Equity

Each of these asset classes have different risk profiles and therefore different return expectations.


Each investment you have should have a particular goal or objective and the assets you in invest in should complement that objective.


For example, part of your investment plan should be to have an emergency savings account (of about 3 months’ worth of expenses). The objective/goal of this account is to be enable you to pay for expenses that are not part of your monthly budget i.e. for all those unexpected expenses.


Because these expenses are unexpected, you cannot plan when they will be needed, so you need to make sure you invest it in an asset class that is immediately available for you to withdraw from, and that doesn’t go down in value when markets go down. So for this case account cash is much better suited than equities.


For longer term savings equity and property are expected to perform better than cash and bonds. So for your retirement planning you will allocate more to the growth assets (equity and property) than to income assets (cash and bonds).


Of course you can combine the different asset classes into one investment.


A good example of this will be for your retirement plan (see Enjoying It section).



3. Leveraging it - this is your debt plan


Here we are looking at your personal debt and your investment debt to determine if you can improve your current debt structure and whether debt can play a part in your wealth creation.


So are you accessing the lowest cost debt secured against residential property or do you have more expensive debt such as credit cards or personal loans?


Debt such as credit cards, overdraft, personal loans and store accounts are known as the atomic bombs in the personal finance world.


Reducing (and completely annihilating these) should be among your top financial priorities so if you are not sure what to do with your surplus funds, start by paying these off.


There are two popular methods for paying off your debt:

  • Avalanche method – priority is to settle the highest interest rate debt first

  • Snowball method – priority is to settle the smallest debt amount first

In our book, The Wealth Navigator System™ – Financial Freedom Made Simple, we discuss how each of these work and explain which one is our preferred method.


You will be very surprised to see how quickly you can actually settle your debt if you just have a proper plan (without even necessarily paying anything more).



4. Protecting It – This is your Risk Plan


Here we are looking at your personal risks and your investment risks. You first need to understand what risks you are taking in the way you have structured your personal circumstances and how you can mitigate those risks.


So, for instance, a loss of income through the death or permanent or partial disability of yourself or your partner can be mitigated through life insurance.


We want to make sure your major assets are insured … your home … your cars … your boat.


If you have a lot of debt you need to understand the impact on your cash-flow if interest rates increase by 2% or 3% and if that would be catastrophic for you then you need to fix those rates.


We also want to make sure you can sleep at night with the investments you have in place and any investments that have been recommended for you.


So we do things like risk profiling, to determine the level of risk you are comfortable with and we educate you about what can go wrong with your strategies as well as what can go right so you can make informed decisions.



5. Enjoying It – This is your retirement plan


Here we look at your pre and post-retirement needs and look at ways to improve your position.


In pre-retirement you need to understand at what age you would like to retire and with what income, you can then determine the asset base you need to build to achieve your retirement goals and whether you’re on track or not.


To do this you first need to understand what assets you have within your retirement funds (pension, provident, preservation, retirement annuity) and which assets are outside of these.


Look at the types of funds available to you and determine what’s suitable for your needs. The right mix of asset classes (as discussed in the Growing It section) is very important.


It is generally not wise to invest all of your retirement funds in cash because your growth will hardly keep up with inflation, and on the opposite side you are restricted by law in investing more than 75% in equity and 25% in property (for retirement specific investments e.g. RAs).


Below is an example of a mix of assets that could be used for retirement funds (disclaimer: please seek professional advice to determine the optimal asset allocation mix for your particular needs):

  • 60% equity

  • 15% property

  • 15% bonds

  • 10% cash

In post-retirement you’ll be relying on your retirement funding assets so it’s all about properly managing your investments.


As you approach retirement there are various strategies that you can use to improve your position.


When you retire your investment objective/goal has changed from being growth orientated to being more income focused, and the mix of assets you invest in should reflect this.



6. Preserving It – This is your Estate Plan


Here we are looking at which of your assets go through your Will and which assets won't go through your will.


So first you need to understand how your assets are owned as this will determine how they are treated on your death.


Then you can determine whether you need just a simple will or a more complex Will that may include; testamentary trusts, powers of attorney and guardianships.


Below is what we recommend should be included in your estate plan:

  • Last will and testament

  • Asset register/balance sheet

  • List of all your policies and investments

  • Make sure all of your beneficiary nominations are correct and up to date

  • If you are a business owner, property investor or high net worth individual then explore the value of setting up a living trust (also referred to as an inter-vivos trust)

  • Calculate and provide for all of the legal expenses your deceased estate will be liable for e.g. estate duty, executor fees, conveyance fees, capital gains tax etc.

  • Strategy to reduce your tax liability on death


Wrap Up


As you can see, by focusing on these 6 areas you will ensure that every aspect of your finances will be addressed and taken care of.


We have developed a very easy and effective way for you to assess your own 6 money areas.


Our 5 Minute Financial Health Check will generate a Financial Health Report  which will score each of your 6 money areas and help you to determine which areas need your immediate attention, and which ones are already taken care of.


We see ourselves very much in the centre of the circle, with you – determining the strategies that will achieve your objectives and then we determine which products and policies and people such as your attorney, your accountant, stockbroker etc. we need to implement what's going to be right for you.


We can either use your existing people or we can introduce you to very good professionals that our other clients use.

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