Author: Wade Hoal

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Wealth protection – how much is enough?

Purchasing any type of insurance policy is often regarded as a grudge purchase, as you can only claim against this policy should a specific event occur. One has to weigh up the likelihood of encountering such an event in deciding whether to insure against it. In most cases, we would look at the financial risk that an event may pose on your wealth or your family’s wealth; subsequently, we would build a wealth protection plan for you to ensure these financial risks that you consider to be of significance are protected against. Although insuring your belongings tends to take priority over insuring your life or ability to work, in this article, we will discuss the latter as these events tend to be far more financially devastating.

I am often asked how much life cover or disability cover should one have? How much is enough? The answer is simply that there is no one size fits all. Due to the uniqueness of each individual’s situation, we must ensure that we run through a wealth protection process to determine what benefits are needed and how much cover is sufficient, depending on your specific needs. We, of course, do not want to be overinsured, but just as critical, we must ensure we are not underinsured.

To answer the question of “how much is enough”, there are some factors that you need to consider through the wealth protection process, and from this, using our financial planning tools, we will be able to ascertain how much cover you should put in place. These factors include:

  • Your financial and family situation
  • Your financial dependents and for how long they are dependent on you. For example, providing for a six-year-old child in the case of your death is far more onerous than a 16-year-old child
  • Your cash flow needs (and how long these need to be met), such as:
    • Living expenses
    • Medical aid
    • Children’s education costs
  • Your spouse’s ability to earn an income
  • Outstanding debts
  • Current asset base
  • Where will the proceeds be invested to ensure longevity

Once we clearly understand your financial and family circumstances and what you consider the most critical risks to be covered, we can look at the different types of insurance available.

  • Life/death cover
  • Lump-sum disability cover
  • Dread disease/critical illness cover
  • Income protection for temporary and permanent disablement

Once we have decided on the amount of insurance and which types of insurance you will be putting in place, it’s vital to review this on an ongoing basis as your circumstances are continually changing. For example, as you gradually settle debt and your financial dependants get older so, the amount of cover should be adjusted. We tend to find that once debts are settled, and children are in the workplace, the need for these various types of insurance falls away, which is why most retired clients do not have life insurance. Please get in touch with us should you have any questions.

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Managing money in your 30s

Following from my previous article, ‘Managing money in your 20s – where do I start?‘, we now find ourselves a decade down the road and starting to wonder what we should be doing next, now that ‘adulthood’ has approached. We have different transitions that need to be considered and planned for. For many of us, this phase in our lives is where we get married, start families and progress in our careers.

Here are some tips to assist you in managing your money through your 30s:

  • Boost your emergency fund – in our 20s, we started building an emergency fund for those small emergencies, but now we have larger and more expensive responsibilities, which we need to protect. Ensure you are adding to your emergency fund to cater for four-six months’ worth of expenses.
  • Don’t overspend on a house – as we progress in our careers; we tend to build up our remuneration – the one mistake we make is upgrading our living standards the more we earn, and the most common thing we do is buy a bigger and better house which dries up our extra cashflow and prevents us from working on our other financial objectives.
  • Diversify your investments – as your investment and financial plan gains traction, we now need to diversify and ensure all our eggs are not in one basket – we need to ensure that our hard-earned money is placed all around the world, in various sectors and industries to reduce the risk and volatility in our investment structures.
  • Start an education fund – family planning is an exciting part of our lives, but should we not adequately plan for it, it can come back to haunt us. Make sure you begin saving for your children’s education the day they are born so that if they want to study at Harvard and become the next Harvey Specter (sorry, I love the series ‘Suits’), you can provide the funds without exerting pressure on your cashflow.
  • Make sure your risk and wealth protection plan is updated – now that we have more family responsibilities, we need to make sure our loved ones are protected in the event of death, disability and/or dread disease. Make sure you have cover in place that will cater for their needs and objectives – it’s also critical that you are not overinsured and paying unnecessary premiums.
  • Prepare an estate plan and implement a valid Will – it’s vital to ensure your wishes are met should something happen to you – we also rarely ensure that there is enough liquidity in our estates for those ‘unforeseen’ estate expenses such as estate duty, tax compliance, capital gains tax etc.
  • Build onto your RetiremeantTM savings – building on from the last decade, we must not forget to be consistent and disciplined with our Retiremeant™ savings – this is where we will start seeing the benefits of compound interest.

These are the years to build on our foundation when we started our financial habits back in our 20s. Warren Buffet’s quote sums it up quite nicely: “Someone is sitting in the shade of a tree today because someone planted a tree long ago”.

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Managing money in your 20s – Where should I start?

Getting started on sorting out your personal finances is an overwhelming task. There are so many life transitions that will have financial impacts on us in our 20s. To name a few: finishing university, starting a new job, earning our first paycheque, buying our first apartment, and if we were lucky enough to find love early on, getting married. Apart from feeling overwhelmed, it’s difficult to know where and how to begin and who to seek advice from.

While we are young, it’s important to start building solid financial habits:

  • Pay Yourself First – you are the centre of your financial affairs, so that means you should always invest and pay yourself first. As Warren Buffet says: “Do not save what is left after spending, but spend what is left after saving”. Set a goal to save 10% to 20% of your income each month to put toward your long-term priorities.
  • Create and stick to your spending plan – one of the simplest, yet most admin intensive tasks (from my own experience, even though it took me less than 20 minutes) was to create a spending plan. It’s a very powerful tool that allows you to see what’s coming in, what’s going out and enables you to manage your cash flow accordingly. This should be reviewed at least annually, or when a big item has been added or subtracted.
  • Create an emergency fund – save and put away three months’ worth of expenses into an easy-to-access account, so that you’re prepared if disaster strikes. Don’t be discouraged if unexpected expenses force you to tap into this fund, that’s what it’s there for. Much like our spending plan, the goal amount shouldn’t be static. It’ll rise or fall as your circumstances change.
  • Protect your wealth and your health – never say never, tragedy can strike anyone at any time. It is important to have enough cover in place, but to not be over-insured. Ultimately, your current circumstances will determine what cover is needed, but as a minimum, you should have income protection (disability cover), medical aid, and gap cover in place.
  • Build a healthy credit score – building and having a good credit score, will allow banks/institutions to grant you a loan at a lower interest rate when you need it. To start building your score, pay back the full amount due on your credit card, store accounts and cell phone contract every month and on time.
  • Start saving for RetiremeantTM – I know RetiremeantTM seems like forever from now. However, it’s more important than ever for us to focus on this investment goal as soon as possible, and ensure we have exposure to growth assets, such as equities, offshore and property. This positions us to beat inflation over time and not go backwards in real, purchasing power.

As with all things in life, these habits may seem overwhelming at first but will become easier and easier as and when we get more familiar with them, and it is essential to get them in place as soon as possible. I think Benjamin Franklin said it best, “If you fail to plan, you are planning to fail!”.

Podcast

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Money habits – Going back to Basics

We all have our own money story; we call this our relationship with money – this is shaped by our values, history, what our parents and grandparents taught us, experiences and general money habits. As Covid-19 has hit hard throughout the world, it may be a good time to sit back and try and understand what our relationship with money is, and whether or not this has changed over the last few months.

Do we have money habits that have been shaped by our history? Will these habits enable us to become financially free, or will they steer us into a never-ending money trap?

What if I told you six months back that Covid-19 was coming in 2020? That the stock market would be down 35%, and your salary would be cut by 20%? Would your money habits have changed, or would they be the same?

We’ve had numerous discussions with clients around this topic. On the one hand, clients have had to completely review their money habits – they have done a complete 180. On the other hand, we’ve had clients who have been unaffected, because they have ‘prepared’ themselves for black swan events such as this; they have not overextended themselves and know about every cent that goes in and out of their accounts.

In a time of panic and uncertainty, as is the case now, it’s extremely important that you go back to the basics and do a quick reflection about your own money habits. This will be different for each one of you, depending on which phase of life you are currently in.

Here are five tips to help you manage your money during this time:

  1. Take some time to revise or redo your budget – it’s vital that we understand what comes in versus what goes out and whether we are living within our means – we should be updating our budgets at least once a year, or when a material financial transition occurs.
  2. Remember to pay yourself first – you are investing in your financial freedom, and this should be on the top of the list.
  3. Pay off short term, high interest-bearing debt.
  4. Do not go into debt to maintain your lifestyle – this short-term gratification can have disastrous effects for your long- term goals.
  5. Last, but not least, don’t panic – although uncomfortable, it’s critical that we do not make emotional decisions and stick to our financial plan and investment strategies.

We are living in a time of chaos, and it is uncertain and uncomfortable for us all, but by understanding our relationship with money and tweaking our money habits (or even keeping the same), we can ensure we get through this pandemic stronger, and wiser.

Podcast

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