In our experience, those who have a financial plan in place are more likely to save regularly for retirement, pay their bills on time each month, and live a comfortable life. As it is Financial Planning Week, we explore what it involves to make a financial plan, the different components of a plan and how they intertwine to achieve a solid strategy to create and protect of wealth.
1. Your lifestyle goals
Identifying the goals you have for your life is the first step in the process, as these goals will form the foundation upon which your financial plan is built. Recognizing that life isn’t necessarily linear and that goals change over time, the goal is to create a plan that’s tailored enough to help you achieve your goals, but malleable enough to adapt to your changing needs. When setting your goals, it helps to be as specific as possible and attach monetary values and time frames to each goal. Not only will this help you calculate and develop appropriate solutions, but it will also help you measure your progress when reviewing your plan. While it’s always a good idea to separate your goals into short, medium, and long term, it’s equally important to rank them in terms of priority as this will give you some indication of which goals to tackle first. Don’t be afraid to be bold when writing down your goals.
Food for Thought: “The goal is not more money. The goal is to live life on your terms. (Chris Brogan)
2. Balance sheet
Taking stock of your net worth is an important next step, but don’t let the math put you off. Building wealth is usually a slow, deliberate process that takes decades to complete, and you have to start somewhere. Make a list of all your assets, including bank accounts, investments, property, business shares, vehicles, and other real estate, then subtract your debt, including your home loan, credit, and debt from retail, as well as your student and personal loans. Be sure to record the applicable repayment terms and interest rates attached to each debt, as this information will come in handy when structuring an optimal debt repayment plan. Think of your current net worth as the starting point for your wealth building strategy. Remember, if you’re just starting out on your investing journey, it’s completely normal to have high levels of debt in place, such as a bond and/or a student loan. Leveraging that debt and paying it off strategically will be part of the financial planning process, so stay positive.
Food for Thought: “Money is something we choose to exchange for our life energy.” (Vickie Robin)
3. Cash management
Wealth is what you don’t spend, which means budgeting is key to ensuring there’s enough room to save and invest. While regular expenses should be relatively easy to manage, take the time to understand how your irregular expenses fit into your budget. These expenses may include vehicle repairs not covered by insurance, medical bills or veterinary bills. Keep in mind that your budget will need to be strong enough to absorb contingencies such as gas price increases, interest rate hikes, and energy price increases. Careful scenario planning is an effective way to test your budget to ensure it’s resilient enough to withstand the vagaries of life. Finding room in your budget to save can take some ruthless calculation and serious thought about what falls under the definition of “must have”.
Food for Thought: “Financial peace is not acquiring things. It is learning to live with less than you earn, so you can give money back and have money to invest. You can’t win until you do that.(Dave Ramsey)
4. Debt management
Not all debt is bad, so don’t get overwhelmed by your debt. Good debt, like a home loan, can be used as leverage to build equity in your property and ultimately increase your net worth. It is therefore important to have a strategic view of this type of debt. This type of debt can also improve your credit score. If you have high-interest debt, such as credit card or retail debt, have a debt elimination plan in place to ensure you can pay off that debt as quickly as possible without compromising debt. other important priorities such as paying your medical aid premiums, building an emergency fund plan and protecting your income. Remember that structuring your debt repayment plan is a strategic exercise in finding the balance between reducing your high-interest debt, maintaining a good credit rating, protecting your exposure to risk while covering your living expenses and maintaining an adequate standard of living. . There’s no point channeling every spare penny into paying off debt, but in the process, neglecting your medical aid premiums, maintaining an unhealthy diet, and voiding your life coverage. Although your debt may be paid off faster, you will end up in a worse financial situation.
Food for Thought: “Debt is the slavery of the free. (Publilius Syrus)
One of the most important functions of an emergency fund is to save you from having to access debt to pay for costly and unpredictable expenses. Short-term debts such as credit card debt are expensive and will require you to pay back far more than you borrowed to pay for the emergency, which, in turn, will only cost you financially. Make a commitment to establish an adequate emergency fund adapted to your particular situation. Again, use scenario planning techniques to identify possible expenses you might face, such as an injured pet, insurance deductible on a burst geyser, or car tire repairs. Also consider your job security, whether you have another source of income, and living expenses that you would have to cover in the event of layoff. There’s no right answer when it comes to how much you should keep in an emergency fund, but a helpful guideline is to keep enough aside to get you through the night. An emergency fund is your peace of mind in times of crisis.
Food for Thought: “Save three to six months of expenses in a rainy day fund. Know why? Because it’s going to rain, and you’re no exception. (Dave Ramsey)
6. Risk protection
Although long-term insurance is more affordable when you’re younger (and probably healthier), the irony is that you’re least likely to be able to afford it when you start your career. That said, mitigating the risk of death, disability and/or critical illness is a responsibility we all face, and it’s important to have adequate coverage in place based, of course, on your financial capacity. If you have financed your home, you will need to ensure that you have sufficient bond coverage bearing in mind that this coverage may be reduced as you pay off your home loan. Getting an income protection benefit is essential to ensure that you can continue to earn an income if an accident or illness prevents you from earning an income, either temporarily or permanently. Without this type of coverage, you risk finding yourself financially dependent on a spouse or family member for the rest of your life, which is a huge burden on anyone. If you are in debt of any kind and/or have loved ones who are financially dependent on you in any way, it is essential that you have sufficient life insurance cover to pay for these expenses in the event of your death. . A well-structured risk management plan should analyze the coverage you currently have, identify areas of exposure, and design cost-effective solutions to mitigate those risks. Remember that medical aid and gap coverage are risk management solutions designed to protect against illness and/or hospitalization, so make it a priority.
Food for Thought: “A man who dies without adequate life insurance should come back and see the mess he has made.” (Will Rogers)
7. Investment planning
There is no quick way to build wealth. Time, compound interest and consistency – used strategically – are the best weapons available to increase your net worth. In addition to being a highly technical and regulated area of financial planning, investment planning involves a number of moving parts that must all work together to achieve optimal results. Estate structuring, tax planning, risk management, portfolio construction and behavioral finance are just some of the components of an investment plan and we recommend that you seek advice from an investment expert. Investing to achieve your lifestyle goals is about more than seeking the highest possible investment returns. Your investment portfolio should essentially be a comfortable mix of investment risk, appropriate returns, strategic asset allocation and tax-efficient structuring to ensure that you can not only achieve your goals, but also stay calm over the long term. against the short-term market. volatility. Additionally, the way you are invested should be consistent with your value system and worldview.
Food for Thought: “To be rich is to have money; to be rich is to have time. (Margaret Bonnano)
8. Estate planning
Although death is inevitable, the time of death is unknowable and as such an estate plan is designed to ensure that your material assets are handled appropriately upon your death. A well-structured estate plan should inform your loved ones of your intentions and provide for them properly after your death. Your estate plan should therefore be designed so that your estate is solvent and liquid and that your loved ones have the financial means to cover their living expenses for up to two years while your estate is being administered. In addition to ensuring that your will and other testamentary writings are properly drafted and legally valid, an estate plan can include a number of tools such as life coverage, retirement funds, life annuities, trusts and business policies to achieve your goals and ensure the smooth transfer of your assets.
Food for Thought: “Estate planning is an important and everlasting gift you can give your family. And setting up a smooth inheritance isn’t as difficult as you might think. (Suze Orman)