You might be blessed in having a trusted financial adviser or planner who ensures that you and your family have all the right elements in place for complete financial peace of mind. But whether you have an adviser or are managing your finances without one, you need a plan.
This may be a comprehensive financial plan drawn up after an in-depth consultation with a planner, or it might be less formal, even perhaps a little vague. But it needs to incorporate all areas of household finance.
Note that your adviser is likely to outsource some functions to specialists, such as using a discretionary fund manager for your investments. The adviser’s main role is to ensure that all components are in place and that they complement each other and function harmoniously.
If your adviser focuses only on your investments, for example, and shows little interest in other aspects of your finances, that may be a sign that he or she does not genuinely have your interests at heart.
Here are the eight essential components of financial planning that you (and your adviser) need to consider to fully provide for your family’s current and future financial needs.
1. HOUSEHOLD BUDGET
This is a record of your income and expenses that lets you monitor what money is coming in and where it is going. It should guide you on how much to allocate to your various household expenses and to savings and investments, as well as on the management of credit and repayment of debt. There are apps to help you with this, which enable you to manage all your bank, investment and credit accounts from one place.
2. HEALTH COVER
While unlikely to cover all your health expenses, medical scheme membership is essential for you and your family. Even the most basic options importantly cover expensive hospital procedures for life-threatening illnesses and injuries. Short-term health insurance policies may supplement your medical scheme cover – gap cover is useful in covering the (ever-widening) gap between what a scheme pays and what a medical professional charges – but should not replace it. A major difference is that medical schemes cannot refuse you cover and cannot cancel your cover if you become too much of a liability.
3. SHORT-TERM INSURANCE
This is insurance cover for your possessions – from your house to your car to your personal belongings. But it also covers you for liability for damage to other people’s possessions or for compensation if, say, someone is injured on your property. Cover for big, expensive things – such as houses and cars – is essential; cover for smaller things, not so much. Here it pays to shop around regularly. There’s little downside to changing insurers as long as you’re aware of the differences in, say, the excess you need to pay when you claim.
4. LONG-TERM INSURANCE
This is life and disability cover, primarily for the breadwinner/s in the family, without whom your dependants would be left without an income. Some financial planners believe disability cover in the form of income protection is more essential than life cover, especially for younger people. Life cover is not essential for younger, single people without much debt, but on the other hand it’s relatively cheap. Policies come with various forms of premium escalations, which may be age-related, so be sure that, say, in 20 years’ time when you may need it most, your premiums won’t have become unaffordable. Unlike with short-term policies, you can’t shop around once you have one – you’ll inevitably pay more because you’re older.
5. SHORT-TERM INVESTMENTS
These are your savings towards short-term goals, such as an overseas holiday or the deposit on a property. They should include an emergency fund, which is savings to cover your living expenses for at least three months, in case your income suddenly dries up. The money should be in investment or savings vehicles that are not vulnerable to short-term market fluctuations, yet able to keep pace with the inflation rate. Funds should be available at short notice.
6. LONG-TERM INVESTMENTS
These are investments for events relatively far into the future (at least five years), the most important of which is the day you cease working for a living and have to depend on an income from your investments. They should ideally be in inflation-beating growth assets, and most of your retirement savings should be in vehicles fit for purpose – in other words, retirement funds of one sort or another.
7. TAX PLANNING
This involves structuring your income, investments, insurance and expenses in such a way that you legitimately reduce what you pay in tax, be it income tax, taxes on investments, or estate duty. Different financial products are subject to different tax regimes. Retirement funds, for example, famously offer generous tax concessions to encourage you to save for retirement but punish you for cashing out prematurely.
8. ESTATE PLANNING
This involves having a plan in place for when you pass away and making provision for dependants who are left behind. The essential element is a will, but you also need to nominate beneficiaries for your life policies and retirement fund benefits. Depending on the size or complexity of your estate, you may look at options such as establishing a trust.
* Hesse is the former Personal Finance editor.
PERSONAL FINANCE