As we head towards 2023, one new year’s resolution that people should have on their list is to start financial planning.
Starting your financial planning is a great way to kick off the new year, and it will allow people take control of their finances for the rest of the year.
People may think that financial planning is not for them, or that they are too old to start planning their finances, but it is never too late to start taking care of your financial future.
Janine Horn, a financial adviser at Momentum, shares her top financial planning tips:
1. Risk
People must understand their risks and the numbers associated with them.
Horn said: “I refer to risk as being the instances of the unforeseen. This includes the effects that something happening to you will have on the people participating in your financial life and your assets.”
“Knowing your numbers means you can successfully plan should a life-changing event occur, and rely on your risk cover to support a potential financial shortfall, such as hospitalisation, loss of income and disability.”
According to Horn, financial planning can help people to plan for unexpected risks as best as they can.
2. Having a valid executable will
There’s this misnomer that when one has nil/few assets, one doesn’t need a will. But you may have a car, money and belongings.
It’s a false idea to think that if a person has few or no assets, they don’t need a will; but they don’t think about what will happen to their car, money or belongings.
According to Horn, having a valid, executable will means that upon death, even if it's premature, a will still needs to be in place.
There are a few key concepts for a valid and executable will:
– the way your will is structured
– who are the witnesses of the will
– the witnesses must have not been mentioned in the will as a recipient or beneficiary of the proceeds or inheritance.
3. Build wealth early
Wealth is often thought of as just money, but wealth is a mindset.
Horn said that the wonder of compound interest is the way that money doubles over time.
She said: “If you look at the chessboard definition, one ends up with more than a quintillion if one starts at one block and doubles up on every consecutive block. By the end you may very well reach the number quintillion, so the earlier you start building wealth, the better.”
According to Horn, when starting financial planning, people should:
– Start a unit trust portfolio
– Start a money plan, and
– Start a wealth creation journey
Mortality and morbidity rates now indicate that people are living longer, which means that we may be living longer, even with having experienced injury, illness or a life-changing event.
Concerning retirement planning, people need to plan to have enough money due to their longer lifespans, and with that notion comes the notion that people need to work longer.
Horn said: “Think about it: if you work from your mid-20s right up until your 60s, you may well live past 90. And so, in simple math, every year that you’ve worked means that you need to have saved to live comfortably for every year into old age. Let that land.”
4. Saving
Saving speaks to investing for an emergency and short-, medium- and long-term financial goals.
Horn said: “Saving for a goal is also about comparing the cost of debt and credit vs the cost of saving for that specific, desired goal/item. So, you should compare the cost of debt, consider the interest, and work out how long it will take you to achieve the amount needed for your goal.”
“You will also see that interest often erodes money’s value. And remember, the definition of emergency speaks of an unknown event at an unknown time. This emergency fund should therefore not be used unless that emergency happens,” she said.
5. Live within your means
When people are younger, they often think they are invincible and that there is lots of money on trees somewhere -- but it's important that young people learn to live within their means.
“Living within your means” speaks to setting up a structured and disciplined budget, and a money plan that each individual will hold themselves accountable for.
Here are steps people can take to live within their means:
– Weighing up their wants against their needs.
– Paying yourself last by taking care of your debt, living expenses, savings, financial planning risk and needs first, and then paying yourself.
6. Income protection
Whether you are a full-time worker, part-time worker, business owner or entrepreneur, income protection is necessary to help people protect their ability to earn an income.
“Income protection can be up to 75% of your net income, and protected to age 70 -- and sometimes for the rest of your life,” Horn said.
“What this allows for is for money to be paid monthly to sustain yourself financially, and to continue with your money plan in the event of an income protection claim. So, protecting your greatest asset is also protecting your income.”
IOL Business