Five Money Resolutions for a More Financially Secure 2018
There is no question that we are living in uncertain economic times, but that doesn’t mean that you can’t feel financially secure. For most people, financial security means having a reliable source of income, but there are other ways to ensure that, even during tough times, you won’t feel the crunch. We recommend committing to these five resolutions to ensure that in 2018 your financial well-being is in the best shape possible.
I Will Settle My Debt
Few things beat the feeling of being debt-free, yet so many of us still carry unnecessary debt. The first step to feeling more financially secure in 2018 is to settle any outstanding short-term debt and get ahead on your car or bond. Long-term debt items such as a car or bond are necessary, but using your overdraft facility every month or keeping a balance on your credit card when you really don’t need to, is bad financial practice and is probably costing you more than your realise.
If you have a lot of debt to pay off, tackling it can be overwhelming, but it doesn’t have to be. We all know the ‘big ticket’ items in our monthly budgets – bond, car, insurance, medical aid, staff – but it’s the things that are left over where you can make changes and save yourself money. The easiest way to do this is to make a weekly or monthly budget, so that you can manage expenses. You might feel that your expenses are already cut to the bone, but by doing a careful review of your monthly debits and other outgoings, you will be able to find items that you really don’t need. The same goes for small daily savings that can add up to a lot at the end of the month.
A good general rule of thumb is to prioritise paying off your most ‘expensive’ debt such as store cards and credit cards that tend to have a higher rate of interest. Any other unsecured loans should also be settled before making additional ad hoc payments towards your car or bond. By putting a plan in place, you are more likely to stick to it and more likely to be successful.
Finally, consider speaking to your bank about the possibility of restructuring your debt or consolidate it into a single amount. Depending on the total amount, you should be able to get a better repayment term and perhaps even a better interest rate. Banks and other financial institutions vary considerably in the rates and terms that they offer, so it is definitely worthwhile to shop around. At the same time, beware of debt consolidation offers that are too good to be true. Always ask what the full contract balance is and ask whether you will be able to make ad hoc lump sum payments towards the debt.
I Will Save More
South Africans have one of the lowest rates of savings in the world. We all know we should save more, but typically we spend whatever money is left over at the end of the month rather than saving it. These days there are numerous investment opportunities and vehicles to help you save and invest, so there really isn’t any excuse not to be saving.
You can start a retirement annuity with about R500 a month, and unit trusts are similar. If you want to make sure that you stick to it, it’s best to set up a monthly debit order that goes straight into the savings or investment vehicle of your choice. You need to be very diligent if you are going to do it on your own. It is best to speak to your financial advisor for advice on what option suits you and make sure to ask about the fees associated with the various savings options.
For short-term savings goals, you can open a savings account at a bank but make sure that the interest you earn is sufficient to beat inflation or you will end up going backwards. Another option is tax-free savings accounts. The South African retirement tax structure is designed to encourage you not to cash in any of your retirement savings or access funds prematurely, so a savings account is a great way to create a financial buffer so that you are not tempted to dip into your retirement funds.
I Will Make Sure That All of My Policies and Beneficiaries Are Up to Date
One of the easiest ways to give yourself financial peace of mind going into the new year is to check on your existing policies, investments, and insurance. You probably already have a life policy, some form of income protection, medical aid and other household insurance, and hopefully a range of investments but you should check to see that your beneficiaries are up to date and that you have enough coverage. This is especially important if you have had some changes in your life, such as a birth, a death, or a change in marital status. Retirement accounts pass directly to named beneficiaries, rather than becoming part of your estate and that can provide significant tax advantages for your heirs.
Now is also the perfect time to look at your tax plan for the year ahead. Tax rates have gone up since last year, so for those of you paying provisional tax, make sure that you have enough set aside for February.
While reviewing your investments, you can also decide whether or not you are saving enough and ask your advisor about any changes to the tax regime that may affect an existing policy or investment. You may also want to consider diversifying out of just one economy to spread your risk and make an offshore investment.
I Will Make Sure That I Have a Plan for My Retirement
Almost everyone dreams of being able to retire early, yet far too few of us want to face the reality that people who retire early – and comfortably – usually started saving early. Whether you choose to invest your money in a traditional pension, a retirement annuity, or even stocks and unit trusts, start saving as soon as you can because even if you start small, you will reap the benefits of compound growth. These days there are so many options - retirement annuities, pension funds, provident funds, unit trusts – that there really isn’t any need to have all of your eggs in one basket.
The percentage of your income that you will need to put away for retirement depends on several factors, such as how early you started saving and what level of retirement income you desire, but as a rule of thumb, you will need to have saved ten times your highest annual drawings. So if you want to retire on R50 000 a month, you will need to have R6 million saved when you retire. This may be a somewhat crude calculation, but it certainly helps to sharpen the mind.
Make sure that there is an annual escalation built into your contributions. You are allowed to contribute 27.5% of your gross income towards your retirement tax free, but that is limited to R350 000/per year. You should also strive to have a diverse portfolio with a diverse spread of sectors. Your financial advisor or banking institution will be able to assist you with the right choices based on your risk profile.
Many of our clients are entrepreneurs, so their business forms a large part of their retirement savings and is likely to be their single biggest asset. That said, even entrepreneurs should plan for the bare minimum.
I Will Be Financially Resilient
If you were given one month’s notice on your job today, would you be able to cover your bills at the end of the following month? If for some reason you were unable to work because you or your spouse because suddenly ill and required urgent care, would you be able to cover the school fees? This might seem like unlikely scenarios, but unexpected shocks do happen and can have a devastating effect on your family if you don’t have a back-up.
Before you head into the New Year, look at your and your family’s financial resilience and how you would plan for a shock. In an economy where more and more people work for themselves, it is essential that you have a buffer for times of illness, job-loss, or other accidents.
It is advisable to have between three to six months of your salary available at any point in time for shocks and crisis. Make sure that this money is liquid and can be accessed without too much cost. With this in mind, spend your bonus wisely this year to settle debt or save for a rainy day, before you go out and splurge.