Your 2021 financial cheat sheet
By Johann Rossouw
To say that 2020 was a turbulent year would be an understatement. Bad news came from all sides - the year started with wildfires in Australia and threats of a war between Iran and the US and ended with a US Presidential Election and the UK officially leaving the EU. 2020 will, however, be remembered for the Covid-19 pandemic which has wreaked havoc globally.
At the time of writing this, South Africa is in the midst of a second wave of infections with more restrictions and lockdowns looming. The novel coronavirus has not only infected millions globally but forced many economies to shut down – leading to a large increase in unemployment. With vaccines being approved, there is a bit of light at the end of the tunnel, but 2021 will most likely be another difficult and turbulent year.
In times like these, there are a couple of things we can do to ensure our financial affairs are in order.
Make sure you have a Will in place and that this reflects your wishes accurately
A Will is likely the most important document you will sign in your lifetime. Effectively, a will is a document that sets out how your assets should be distributed upon your death. Should you die without a Will in place, the Intestate Succession Act (Act 81 of 1987) will determine who the beneficiaries of your estate should be. This means you will forfeit the privilege of deciding who inherits your estate.
Dying without a Will and clear guidelines as to how your estate should be distributed will add unnecessary stress to your distraught family members. Drawing up a Will is therefore a kindness to those you leave behind.
Try to settle any ‘Bad Debt’
‘Good debt’ is defined as money owed for things that can help build wealth and increase our net worth over time. Examples of good debt include home loans and student loans. ‘Bad debt’, on the other hand, refers to debt that does little to improve your financial position – in fact the opposite, as you are paying interest on interest. Examples of bad debt are credit cards, clothing accounts, micro-loans, and pay day loans.
Use any surplus funds you might have to settle your bad debts as soon as possible – starting with the debt that has the highest interest rate. Avoid falling into the debt trap of purchasing stuff you don’t need with money you do not have.
Make sure your assets are protected
Insurance is an age-old concept where you enter into a contract with an insurer. The insurer will protect you against losses you might suffer due to certain defined events. There are many different types of insurance e.g., medical, life, disability, home contents and vehicle.
Insurance is a bit of a grudge purchase. If you never need to claim, it can feel like you are throwing money away. However, certain events like a serious illness or a car accident, can be financially debilitating without insurance. What it does, is offer peace of mind for a small monthly premium.
Build up an emergency fund
An emergency fund is a safety net used to cover any unexpected financial expenses. The main goal of an emergency fund is to avoid going in to bad debt.. Generally, financial planners recommend saving three to six months’ expenses in an accessible, low-risk, interest bearing account. COVID-19 has only emphasised the importance of having an emergency fund in place.
Invest for the long-term
Having covered the most pressing needs in steps one to four above,, you can now look to start building up your portfolio. There is a myriad of investment options available for the average investor in South Africa. To ensure you understand the options available to you and make use of the most appropriate investment vehicles and funds, it is advisable to consult a Certified Financial Planner. Important factors to take into consideration when deciding between financial planners are the following:
- The qualifications and relevant experience of the adviser
- How the adviser will be remunerated
- Whether the adviser is independent or a tied-agent
- Ask a lot of questions and be sure you are 100% comfortable with the advice being offered before making a final decision.
Johann Rossouw is a financial planner at Fiscal shares guidelines to financial independence at Fiscal Private Client Services.