Financial planning is a journey, not a destination, a fact that is often forgotten when planning for your financial future in your thirties. As you journey along your financial quest, there are certain milestones and concepts you need to embrace. Once those milestones are reached, the journey begins to look very similar to a “financial rite of passage.” We all need to experience this in some way so that we become financially aware of the benefits of a sound financial plan.
When we participate in money activities, such as money earned and money spent, we realise that we have the agency and the autonomy to take our financial futures into our own hands. That power, once we journey into the positive financial framework, can be phenomenal.
Momentum speaks of four quadrants in the Financial Wellness framework:
Protect me: focusing on the loss of income, medical issues, and sudden disability
Support my family: Including my family’s medical expenses in the case of sudden death; ensure that I have a valid and executable will.
Protect my assets: My belongings, etc.
Build my future: Family business, creating my wealth, providing for my retirement
The juncture for these four quadrants is your own personalised money journey, your financial plan, your budgeting, and your debt and tax management.
Here are my top 4 financial planning tips:
Understand your risks, and the numbers associated with them. I refer to risk as being the instances of the ‘unforeseen’. This includes the effects that something happening to you will have on the people participating in your financial life and your assets. Knowing your numbers means you can successfully plan, should a life-changing event occur, and rely on your risk cover to support a potential financial shortfall (hospitalisation, loss of income, death, and disability).
Life-changing events happen. Financial planning can aid you in planning for unexpected risks as best you can.
Another example is how we believe that death just relates to your burial. In many instances, it’s the first thing that the adult in our lives tells us to “sort”; tells us when we enter the world of our personal financial journeys and planning. Yet according to morbidity rates, it’s likely to occur much later in life. If we understand our risk, we can plot and plan accordingly for the differences in risk that need to be covered.
Having a valid and executable will
There’s this misnomer that when one has none or few assets, one doesn’t need a will. But you may have a car, some money, and belongings. Having a valid and executable will mean that upon death, even if prematurely, a will still needs to be in place. Valid and executable are key concepts. It’s the way that your will is structured, who the witnesses are, and that those witnesses have not been mentioned in the will as a recipient or beneficiary for proceeds or inheritance. Therefore, making it executable for an executor. Death is certainly not just about burial, it is about the expenses associated with dying, such as the cost of the estate, the cost of executing a will, paying off your debt, and paying for your dependant’s needs. So, if you’re in a partnership or already married in your 30s, those responsibilities for your dependants would’ve continued, had you been alive.
Maintenance is another example. Oftentimes single parents are left without maintenance. Maintenance should be included in divorce orders if you, unfortunately, fall into the statistic at this young age. Being aware of what needs to happen upon death is about the wishes in your will and appropriately including these responsibilities.
Build wealth early
We often think that wealth is just about money, but wealth is a mindset. We know about the wonder of compound interest – it is earning interest on interest. If you look at the chessboard as an example, one ends up with more if one starts at one block and doubles up on every consecutive block, by the end you may very well reach millions, so the earlier you start building wealth, the better.
Instead of starting a burial cover as the first thing you tackle when you start financial planning, start a unit trust portfolio, start a money plan, start a wealth creation journey. Remember your affordability can build your bespoke portfolio and avoid adopting a “keeping up with the friends” mentality. A foundation based on the Momentum Financial Wellness wheel (the four quadrants) can include all four of those aspects regardless of income and regardless of the misnomer that it is only for a certain wealthy bracket or age.
We all eventually get old; hence retirement planning is real, and the need is to start early. The stats are alarming – less than 6% of South Africans can retire comfortably. Investment portfolios have become so accessible and user-friendly that it is possible for anyone.
So, although mortality and morbidity rates now indicate that we are living longer, what that means is that we may be living longer with having experienced injury, illness, or life-changing events. It also means that in relation to retirement planning, we need to plan to have enough money for this long life. And so, there’s the notion that because we are living longer, we must work longer. Think about it, if you work from your mid-20s right up until your 60’s, you may well live past 90. And so, in simple math, every year that you’ve worked means that you need to have saved to live comfortably for every year into old age.
Saving for a goal is more than saving. It speaks to investing for emergency, short, medium, and long-term financial goals. Saving for a goal is also about comparing the cost of debt and credit versus the cost of saving for that specific desired goal or item. When you compare the cost of debt, consider interest, and consider how long it will take you to achieve that amount needed for your goal. You will also see that interest often erodes money. And remember the definition of emergency – it speaks of an unknown event taking place at an unknown time. Any emergency fund should therefore not be used unless the emergency happens.
Live within your means
Remember when your parents said; money doesn’t grow on trees, or does it seem you can pick the money off my back; there may have been some truth to that. When we are young, we often think that we are invincible and that there are copious amounts of money on trees somewhere. Living within your means speaks to setting up a budget and a money plan, a structured, disciplined, action-driven plan holding yourself accountable for that. Weighing up your wants versus your needs. And yes, we all sometimes convince ourselves that our wants are needs too.
There’s also the concept of paying yourself last. In other words, your debt, your living expenses and your savings, your financial planning risk, and your needs all need to be attended to before you pay yourself. Aligning to the SMART acronym for managing any goal is the right place to start – S for specific, M for measurable, A for attainable, R for Relevant, and T for Time-bound.
Our greatest asset today is our ability to earn an income, be that as an employee, a business owner, or an entrepreneur – however, you wish to see it – it’s about protecting that asset. Income protection becomes necessary in protecting your ability to earn an income. Income protection can be up to 75% of your net income and protected to age 70 and sometimes for the rest of your life. What this allows for is for money to be paid monthly to sustain yourself financially and to continue with your plans in the event of an income protection claim. By protecting your greatest asset, you are also protecting your income.
In conclusion, becoming financially well does not imply that you are financially unwell. It rather emphasises the need to take ownership of your financial health. Remedy, Rectify and Recreate by becoming financially literate. Financial literacy speaks of being money mindful. As you plan and plot your life journey, almost like a roadmap, the place where you find yourself now, and your future goals and your desires is the gap that needs to be defined. And once you’ve defined that gap, give yourself permission to change your financial trajectory. If you’ve already adopted bad habits, you can possibly unlearn them. Unlearning bad habits is being relentlessly willing to review the patterns and behaviours that formed those bad habits and what you need to rework and reframe your future financial wellness.