No matter how much or how little money you have, you should have a financial plan. But do you know how to draw one up?
BJ of Cape Town thought he was doing his best for his family. He was a loving husband and father who found it hard to say no to his teenage daughters. Satellite TV, internet connections, clothing accounts: the daughters only had to ask and he provided. The family was comfortably off, with both parents earning, and there always seemed to be enough money for holidays and dinners out.
The shock came when BJ died suddenly.
His distraught wife found the family's income cut by half. Struggling to cope with the absence of her husband, she also had to deal with financial collapse: on her single salary she couldn't meet the home loan repayments or pay the school fees. BJ had not bought life assurance and the pension paid out by his company far from matched the salary he had been earning.
The family had to move to a smaller house and the kids had to change schools.
This sad little story is repeated daily all over the country: taking out too little life and disability insurance is the most common mistake people make in their financial lives, Stan Leslie, general manager of Old Mutual Personal Financial Advisers, says.
Miscalculating the amount of money you'll need in retirement is another common error, he says. Fewer than one South African in 10 will have put aside enough money to live comfortably in retirement. Yet these errors can be avoided. All you need is a workable financial plan and the discipline to stick to it: you may never be rich but at least you will have done your best.
Leslie says there are four steps to a financial plan:
STEP ONE: YOUR NEEDS
You can do a needs analysis yourself but it's best done with the help of a competent financial adviser.
The adviser will sit down with you and draw up a list of your needs, taking into account your financial and family circumstances and your priorities. Do you want to save for your children's education? Pay off your home loan quickly? Retire at 50? Do you want to save for that long overland trip through Africa you've always dreamed of?
Your financial adviser will help you sort out your priorities.
STEP TWO: YOUR ABILITY TO MEET YOUR NEEDS
With your help, your financial adviser will find out what you can afford. You must provide details of your salary and other income; your debts; and your investments. The adviser will help you identify the gaps between your needs and your ability to meet them. Retiring early may be a pipe dream unless you double the money you are putting into that retirement annuity. Providing for your kids' education may take much more than the R200 a month you have set aside so far. You may not have any disability cover. All this calls for some changes.
STEP THREE: A BUDGET
Once you know what you need and how much you'll have to set aside to meet your needs, you can draw up a budget - a financial plan. This is the tough part, Leslie says.
"You'll probably have to make some hard calls. Today we are all under pressure to spend and spend - cellphones, satellite TV, the internet. You need to stop and think for a while about what's really important to you and whether you can afford not to make some changes. You must prioritise the gaps which are the most important to you and take steps to fill them."
DSTV or life assurance? An internet connection or saving for your kids' education? Only you can decide how to rank your needs and wants and how much to sacrifice now for some future benefits.
You may not be able to plan to meet all your needs at once. This doesn't matter, Leslie says: the important thing is to make a start as soon as possible. "No one has ever come to us to say: 'I wish I'd left all this a bit later.' "
STEP FOUR: INVESTMENT
Only once the first steps have been taken should you start choosing products and signing documents, Leslie says. Beware of financial advisers who rush to sell you something before you have been through the whole process of identifying the gaps between your needs and your ability to meet them and then drawing up a budget. The investments you make should fit your financial plan. If they don't, there is no good reason to make them - certainly not to get a fat commission for your financial adviser.
STEP FIVE: STICK TO IT
There is no point in a financial plan if you don't stick to it.
"Often people get impatient because things don't change fast enough and they chop and change and switch investments. In the end they are worse off," Leslie says. So give your careful planning time to bear fruit. But do review your financial plan at least once a year, or each time there is a major change in your family or financial circumstances, such as the birth of a child, a divorce, or a promotion.
So get started, work out what you need and stick to it. Who knows? Buying life assurance rather than a satellite television subscription may turn out to be the best move you ever made.
HEALTH WARNING
Beware the financial advisor who does not ask you plenty of questions. He or she is probably just out to sell you something and make some commission. Your first interview with your adviser should take at least one hour, preferably two, and you should expect to be asked to provide detailed information about your circumstances, your habits adn your goals.
FIVE TIPS
* Start sooner rather than later, but start anyway;
* If you are a housewife, take out life assurance anyway - though your work at home may not reap monetary rewards in our society, it does have value;
* Run your old car as long as possible and save (in your home loan for instance) for a new one;
* Be honest with yourself and with your financial adviser: don't pretend you are thrifty if in fact you find it hard to say no; and
* Don't buy separate assurance to cover all your debts: you'll spend more than you need to because of administrative costs on each insurance contract. If you have adequate life assurance, you don't need a separate assurance policy to cover your outstanding debt on that washing machine in case you die before you've paid it off. Your home loan is another matter, though.