Building a financial plan for your future is easier if you think about the events that will shape your life and then plan ahead, using these “life stages” for guidance.
The stages and things you should be thinking about are starting out and getting established (ages 18 to early thirties). At this stage, education and getting a car, rather than thinking about retirement are priorities. But, this is the time to begin thinking that far ahead.
At this stage you should concentrate on developing life-time habits such as making sure that you pay yourself first. Decide what you want to save and put this aside before spending any money. You can build future financial independence earlier than you think if you decide, for example, to put away 33percent of your earnings for the future.
Committing money to investments that stop you from drawing it out takes away temptation. A 12-month fixed investment is ideal. The money grows and you can't get it.
Deduct your compulsory savings and then set aside money for living and short-term goals.
Consider starting a long-term fund. Investment portfolios that are aligned to lifestyle goals, such as education and buying a house are good ways to go. The earlier you invest the less the investment will cost and the more you will benefit.
Wisely invest some of your budget. For example, cars just don't hold their value. Buy a pre-owned car or downsize and you will have money available when you need it.
In the mid-thirties to 50, begin to accumulate assets. With your education complete and career path decided, you are now focusing on family and other responsibilities such as home loans, saving for the future of your children and other needs.
Typically, this is the time of your life when you get established and your income increases accordingly. You should be looking at increasing your contributions to medium and long-term savings and taking out life insurance, diversifying savings and moving into shares, unit trusts and other products, reassessing your retirement savings and adjusting them if necessary.
Make sure that you have a will.
Review your investment plans regularly and get a professional financial planner to assess what you need for the next stage of your life. As you approach 50, it pays to be realistic about your health and plan for contingencies that could result if your health doesn't stay good.
Independent family and the road to retirement (age 50-65). Ironically, life gets cheaper and earnings greater at this stage. Children leave home and even begin their own families. Simultaneously, your earning power peaks. Retirement beckons.
The important things to consider now include making sure you have no debt as you approach retirement. After retirement, you have to live on investments and pensions. Major debts can be financially damaging.
Consolidate your investments so they are low-risk investments that offer steady, inflation-linked returns, adjust your long-term retirement strategy and thinking about increasing your contributions to a retirement annuity. Plan your estate and ensure that family - rather than the taxman - benefit when you die.
Errol Meyer is the head of advisory services at Standard Bank Financial Consulting.