Any financial plan needs to be a “living, breathing” plan – it needs to be fluid and flexible, just like life, says Daphne Rampersad of investment planning at Liberty.
In her view, one needs a “full-circle” understanding of what your financial plan is.
She lists 6 important features a financial plan should have:
Budgeting or paying off debt
Personally, Rampersad draws up a monthly spreadsheet. That works for her.
She also uses good budget apps to help her keep track of her expenses – in real time – compared to her income.
“You must identify your spending as you cannot deal with something you do not acknowledge – for instance what you really spend,” she says.
She often gets asked whether it is a good idea to consolidate your debt or not.
“There are two schools of thought. You can do that especially if your home loan interest is lower, but it depends on the rate you pay and how many years you have to pay off your home loan, as well as your age,” she explains.
She prefers only to consolidate debt if the money you put into your loans decreases your repayments.
Rampersad often gets asked how long a savings term should be. In her view, it should not be more than 12 months.
“When you save, you should save in a short-term, risk-free product like a fixed deposit or money market account,” she suggests.
The reason why she advises one should not breach a 12-month savings term is due to the impact of inflation, which eats into your spending power.
For instance, your spending power could be halved in 10 years’ time due to the impact of inflation. That is why the Monetary Policy Committee (MPC) of the SA Reserve Bank (SARB) targets inflation.
After a year of saving, you should then invest the money you saved over that period.
“Investing can be daunting. You need time on your side. You have got to start even if you start with small amounts. All you need is just to get started,” she suggests.
This brings one to the question of what to invest in.
“There are lots of investment products. So, how do you decide? That is where a financial advisor comes in,” she says.
“Tax-free savings products are good. They were introduced because SA has a poor savings culture. Any growth on an investment in such a product will be tax free and each member of the family can open one.”
She says a stokvel is probably the most popular informal way of saving in SA. At least it is a start to save. Yet, she points out that just keeping the money in the pool does not even earn market rates.
By putting a lump sum or lump sums either in unit trusts (even as little as R50 a month) or in a money market account, one can get a lot more growth than just “keeping it under the mattress”.
Risk planning should actually be your starting point, suggests Rampersad. In her view, the value of a good financial planner comes to play here too.
In general, women save about a third the amount a man saves at the same age. A 65-year old woman, when she retires, needs more than a man as she will likely live longer than him.
In general, a woman will live on average another 18 years after retiring at 65. For a man it is about 14. At the same time, about 14 of the 18 years a woman will on average live after age 65, will be spent in an unhealthy condition. That is why medical aid and things like gap cover become so important.
She again emphasises the importance of starting to save sooner rather than later. For example, if someone starts saving R200 per month at the age of 25 and another person starts saving R200 per month at the age of 30, the former will be about R592 800 better off than the latter at retirement.
Another piece of advice from her is not to withdraw from your provident or pension fund when you change jobs.
“Anything can happen to anyone, so it is important to have a will to set out your wishes clearly. And be sure to comply with the requirements for a valid will. Furthermore, remember to update it when things change,” says Rampersad.