File Image: IOL
File Image: IOL

Building a second-stream of income to take you through the 'tough times' is now vital

By Supplied Time of article published Aug 19, 2020

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The Covid-19 pandemic has demonstrated the fragility of having a single source of income, particularly if you are self-employed, and have at the same time emphasised the need for more South Africans to embrace the principles of sound financial planning.

So says John Manyike, Head of Financial Education at Old Mutual who says that the belief that if you devoted yourself to tasks and remained disciplined, dedicated and worked hard that success was ensured no longer apply.

"Regardless of whether you are self-employed or gainfully employed, you should not be relying solely on the stability and ability of the clients or company to support you. The Covid-19 crisis has demonstrated that even the best businesses can experience difficulties when a 'perfect financial storm' erupts."

“If you rely on your efforts to generate income, it is likely that part of your ability to earn is tied to a personal brand. This means that over time people have bought your products and services based partially because of the rapport you have built with them. The music business, for instance, is built mainly on this mutual respect.”

However, when the 'personal buzz' goes, or you can no longer render a service, it can impact on income. Then, only those who have multiple streams of income and invested in the futures will survive.

Some of the most common mistakes that self-employed people make is:

  • They do not have a business account to contain all their business income and expenses
  • They fail to separate business and personal expenses
  • They transact mainly from a single account
  • They regard all income as personal income
  • They don’t focus on the paperwork of their business
  • They do not pay attention to their tax affairs and end up owing Sars a lot of money
  • They live for the NOW and simply buy stuff to impress

" The result is that it's hard to identify where the money is coming from and where it is going. Even worse, income can seesaw from one month to the other and is totally unpredictable," says Manyike.

"When people are doing business with you because of your strengths, and personality-which you transfer to your income-generating activity none of the shortcomings will appear serious”.

The emergence of a national economic problem like the shutdown, or even a change in service and product requirements can destroy income. Personal appeal vanishes and survival then means having had a well-balanced saving and second-income plan waiting in the wings.

The base requirement for the self-employed, says Manyike, is that business and personal are separate. Instead of taking what is left in a single account at the end of a month, the business owner should be making a regular salary and paying it into a personal account.

It then becomes easier to compensate for a ‘financial drought’ in the business and develop a personal plan.

The steps to be taken early on to secure a second, standby income are to:

  • Take a realistic look at your finances and get expert help

A qualified personal financial planner will be able to match your expectations to the funds you have available. He or she will also be able to advise on investments and build an income that can carry you through tough financial patches.

  • Take a short, medium and long-term view of your future and plan accordingly

An investment plan must take into account what your short-term needs are so that money is available to maintain your lifestyle. Longer-term investments will require a strategy that builds capital and interest, and, for instance, use investment plans like annuities and life policies to create financial security. Looking towards retirement will need long-term money that can be invested and left to grow for years.

As you get older, the investment strategy should be to reduce risk so that the funds you have built up are preserved and can pay you a pension.

  • Taking lump-sum payments from bonuses and 13th cheques when times are good and investing the money rather than spending it.

“Proper use for ‘bonsella money’ is to use it to reduce debt, reduce home loan interest or invest in a savings and investment instrument where it can earn interest and save some as part of your emergency savings plan where it can be easily accessed in emergencies,” says Manyike.

All these topics and financial tips can be found in the Old Mutual AMPD Studios Live series which features some of South Africa’s leading entertainment personalities.

For more information about the AMPD Studios Live, go to the AMPD Studios website. To join the AMPD Studio community for updates, events, and invitations, join the AMPD WhatsApp line by WhatsAppíng your name to 081 707 66 36.

PERSONAL FINANCE

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