The plan that's best for you depends on your individual circumstances. There's no one-size-fits-all plan. But all financial plans contain more or less the same elements, Stan Leslie, of Old Mutual Personal Financial Advice, says.
Here are some of the building blocks of a good plan:
Death and disability cover
"This should be your number one priority if you have dependants," Leslie says.
As a rule of thumb, you should have 10 times your annual income in life cover, to pay off debts and to generate an income for your dependants. But don't despair if this looks like a lot: you probably already have some life cover through your retirement fund; and you probably have cover on your home loan so that if you die or are disabled your dependants won't be stuck with the bond repayments.
Find out what your cover is: if you have four times your annual salary through your retirement fund, you will need to buy assurance to cover you for six times your salary.
Don't overlook the need for disability as well as death cover - a common mistake, Leslie says.
"People can envisage their own death but somehow they never think they might be disabled."
Yet if you are disabled to the point where you can no longer work, your family will have to manage without your income and support you as well.
Paying off debt
Start with the most expensive debt, usually credit card or store account debt. Then try to pay off your home loan as fast as you can. You probably shouldn't start making other investments until you have your home loan under control, Leslie says.
Paying extra money into your bond is the best investment you can make, unless you are a person who finds financial discipline difficult, in which case taking money directly off your salary into an investment which is harder to access than your home loan may be better.
Cash
At the least, you should have one month's salary available in cash.
If you have a home loan to pay off, it is probably smarter to keep this money in your bond rather than in a separate bank account, because investing extra money in your bond is the best investment you can make, provided you don't keep pulling the money out of the home loan for current expenses.
Finance for the children's education
Old Mutual has calculated that public school education for a child starting in 2007 will cost R136 120 from grades one to 12. A degree at a major university by the year 2018 would cost R202 834 - not counting residence fees, books or other expenses. Which means you should start saving, ideally, when your child is born, at a minimum of R300 a month. If your children are already half way through school, you should consider investing lump sums (from your annual bonus, for instance) into an endowment fund.
Retirement planning
Again, a rule of thumb is that you should have 10 times your annual salary to invest when you retire. Exactly how much you will need depends on your personal circumstances, in particular on whether or not you own your own house, car and so on. You must protect yourself against two main risks, Leslie says:
- The risk that you will live a long time and run out of money; and
- The risk of inflation eating away at your income.