Protecting your greatest asset - your ability to earn

By Opinion Time of article published Feb 17, 2021

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It’s a new year and what an exciting time if it coincides with starting a career. Earning your first pay cheque is exhilarating but at the same time it is easy to fall into the habit of spending it all. As a once-off it is forgivable, but it can be an easy habit to fall into.

According to Gavin van Dyk, Director and Certified Financial Planner at Fiscal Private Client Services, a Cape Town based wealth management company, spending your entire salary each month, and perhaps even incurring debt can be a slippery downward spiral into the dark world of debt.

Van Dyk says that by following some basic laws of finance individuals can achieve financial peace of mind, and a more gratifying life. “The choices we make today, both good and bad, affect our futures.”

For most youngsters entering employment for the first time, the most important financial asset for a long time is likely to be the ability to earn an income. And the potential for future earnings, which is aptly called human capital.

“While wealth is built through money management, perhaps even more important is the management of your own personal human capital. This can be enhanced through education, training, skills development, and experience.

“From a financial planning perspective, your future earnings potential has a significant financial value. It should therefore be apparent that losing your ability to earn – either temporarily or permanently – poses a significant risk to your quality of life. This could come about through illness or disability. Of course, death will result in the financial risk becoming even more significant if you support a young family,” explains van Dyk.

It stands to reason that risk mitigation should therefore form a cornerstone of a person’s financial plan. Van Dyk’s advice is that individuals consider five important factors that will shape their plan, he explains:

Medical Aid: Accidents and illness happen, and the associated costs can be enormous. If you are young and healthy, perhaps a hospital plan may be an economical option. In terms of the ongoing cost of being a member of a medical-aid scheme it is important to remember that they impose a late joiner penalty if you only join after the age of 35.

Income Continuation Benefits (ICB’s): These pay you a regular income if you experience a loss of income as result of disability, injury, or illness. As per your condition the pay-out can be temporary or permanent, i.e. typically up to your selected retirement age.

Capital Disability: This generally pays a lump sum benefit if you become permanently disabled and are unable to earn an income. The lump sum can be used to settle debts, cover rehabilitation costs and possible modifications to your home or car. A portion of the lump sum can also be invested to provide an ongoing source of income for you and your family.

Life Cover: Pays a lump sum to provide for your family’s financial needs on your death. Generally speaking, you would want it to cover any outstanding debt, provide for your children’s education and cover any shortfall in your family’s regular income.

Will: Dying without a will complicates and delays the winding up of your estate and may have unintended consequences. Even if you do not have any dependants, you should have a simple will in terms of which you leave any assets to a beneficiary of your choice.

“It is particularly important that the above-mentioned cover as well as your will, be reviewed on a regular basis or as your personal circumstances change. What may be sensible at this point in your life may very quickly become unsuitable as your career and personal life evolve for example getting married, having children, or getting divorced, or moving countries. Your will should be reviewed and updated at each significant period in your life,” concludes van Dyk.


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