If you’ve just started out your financial planning journey, you may feel somewhat overwhelmed by the many decisions you need to make and the number of solutions to be considered. In addition, the costs involved in implementing the requisite solutions may be prohibitive, leaving you despondent and unsure of how or where to begin. If you find yourself in this position, you may want to consider a triage approach to financial planning which is effectively a blend of prioritisation and affordability distilled into a series of incremental steps plotted over a manageable timeline.
1. Protect your income
Without a guaranteed income into the future, you will effectively be unable to build your wealth, so the first step you should consider is to secure a comprehensive income protection benefit through a reputable insurance company. An income protection benefit is a form of long-term insurance designed to pay out your nominated income until a pre-determined age (normally around age 65) should you become permanently disabled and unable to work. Disability insurance is highly technical and ideally should be navigated together with an advisor who has specialist expertise in this area. No two income protection benefits are the same making it difficult to perform price and benefit comparisons, so it is important to garner expert guidance when putting your cover in place. When putting cover in place, be sure to check whether your benefit includes cover in the event of a temporary disability and whether there are any waiting periods in place before you can claim from your cover.
Why this solution? Should you become permanently disabled and unable to generate an income, you will effectively become a financial burden on someone else (either a family member, spouse or friend) for the rest of your life. During your wealth accumulation phase, your ability to generate an income is your greatest asset and should be protected as a priority.
2. Join a medical aid
Medical aid is expensive and is often considered a grudge purchase, but personally funding private healthcare is unaffordable to most, and our state healthcare facilities are generally speaking wholly inadequate. In the absence of at least a hospital plan, you may find yourself at the mercy of our state hospitals or heavily indebted as a result of private hospital bills. Most medical schemes offer lower-cost network options that provide adequate cover in the event of a hospital event, ensuring that you have access to a private hospital facility if needed. The most important consideration is that you join a medical scheme and that you do not allow a lapse in your membership. As your earnings increase, you can upgrade your plan option and/or consider an add-on gap cover benefit.
Why this solution? Besides ensuring that you have access to private healthcare facilities should you require hospitalisation, securing a medical aid membership will avoid being saddled with late joiner penalties later on in life.
3. Settle unsecured debt
While you are servicing expensive, unsecured debt, it is difficult to begin saving and investing for the future and, as such, paying off this kind of debt should be prioritised. High-interest rates mean that the longer you delay paying off the debt, the more you will ultimately end up paying. There are loads of online debt reduction calculators available for free which can be used to develop a realistic debt elimination plan over a timeline that works for you.
Why this solution? It not only makes financial sense to pay off high-interest debt as soon as possible, it is also essential to do so in order to protect your credit score. Late or missed debt repayments can result in a poor credit score which, in turn, can affect your ability to secure financing in the future.
4. Set up an emergency fund
Once your debt is settled, consider redirecting your debt repayments towards building an emergency fund. Ideally, ensure that your emergency money is housed in a separate account and earmarked specifically for unforeseeable expenses. When determining the most appropriate level of funding, give consideration to things such as your income, personal circumstances, whether you have pet insurance, your short-term insurance cover, your health status, and whether you have any waiting periods on your income protection benefit.
Why this solution? The primary purpose of an emergency fund is to ensure that you do not have to access debt in the event that you are faced with a high, unforeseeable expense. In the absence of adequate emergency cash, you may be forced back into debt which will delay your wealth creation journey.
5. Protect your secured debt
If you have vehicle or home financing in place, consider putting sufficient life cover in place to ensure that there is sufficient liquidity in your estate to settle this debt in the event of your death. When taking out a bond, your bank will normally insist that you take out life cover to protect the bond amount but remember that you are not obliged to accept the insurance cover quoted to you by your bank. You are free to shop around and secure life cover from your own insurer keeping in mind that you will generally find this cover more cost-effective.
Why this solution? If there are insufficient assets in your deceased estate to cover your liabilities, your estate may be declared insolvent and will be wound up in terms of the Insolvency Act which, in turn, can affect the financial legacy you intend for your loved ones. Taking out debt is an enormous responsibility and ensuring that you are adequately insured is critical.
6. Draft a Will
Regardless of your net worth, it is always advisable to put a valid Will in place to ensure that your loved ones are not faced with administrative hassles in the event of your death. At the same time, you may want to consider other death-related matters such as signing a living will, becoming an organ donor, or registering as a bone marrow donor. Your financial advisor should have in-house legal expertise to help you draft a Will that gives full expression to your wishes. Ideally, ensure that you sign three copies of your Will and ensure that each copy is kept separately in a secure, fire-proof safe.
Why this solution? If you die without a Will, you will be deemed to have died intestate and your assets will be distributed according to the laws of intestate succession. It also means that your loved ones will never know your final wishes in respect of how you would like your assets to be apportioned. Further, your loved ones may be forced to make difficult decisions if you are left in a vegetative state or with regard to your organs in the event of your passing.
7. Contribute towards an RA
There are significant tax benefits when it comes to investing in a retirement annuity structure and it does not make sense to leave this ‘free money’ on the table. Your contributions towards an RA are tax-deductible (up to 27.5% of your pensionable income, subject to a maximum of R350 000 per year), which means that you can effectively invest with pre-tax money. In addition to the tax-deductible premiums, all growth and income received on your investment are free from tax, meaning that you will not be liable for CGT, dividends withholding tax or tax on any interest earned in your RA. While it is unlikely that you will be able to begin contributing 27.5% of your taxable income at the outset, consider starting with a contribution that fits your budget and then building up over time as your earnings increase.
Why this solution? Unit trust-based RAs are flexible investments that allow you to diversify your investments (subject to Regulation 28 of the Pension Funds Act) in accordance with your retirement objectives and investment timeline. The earlier you begin investing for your retirement, the more time you allow for your money to benefit from the effects of compounding.
8. Set up a discretionary fund
One drawback of an RA is that you cannot access your money before the age of 55. It is therefore advisable to have some form of discretionary investment which will allow you access to your money when required. As an investor, you enjoy an annual tax exemption on interest income of R23 800 per year and on capital gains of R40 000 per year in your discretionary investment, so it makes sense to take advantage of these tax benefits. From a tax-saving perspective, it makes financial sense to first maximise your tax-deductible contributions towards an RA although it is advisable to balance this approach against your need for access to discretionary funds and the achievement of your short- to medium-term savings objectives which cannot be achieved through an RA structure.
Why this solution? Besides for taking advantage of the annual tax exemptions, it is always advisable to set aside discretionary money so that you have accessibility to your invested wealth if necessary. While the funds in your RA will ultimately be used to provide you with an annuity income after retirement, your discretionary investments can be used effectively to supplement retirement income, fund large capital expenses, and to ensure that you don’t run into cash flow problems later in retirement.
9. Set up a TFSA
While tax-free savings accounts offer certain tax benefits, they are not necessarily appropriate investment vehicles for everyone. While contributions to TFSAs are not tax-deductible, the real benefits lie in the fact that all growth and income received on your investment are free from tax, meaning that you will not be liable for CGT, dividends withholding tax or tax on any interest earned. As such, it makes sense to fully utilise your tax-deductible contributions towards your RA before setting up a TFSA. It further makes sense to ensure that you are benefiting from the annual tax exemption on interest income earned in a discretionary investment before making use of a TFSA structure.
Why this solution? Where appropriate, a TFSA structure can be used effectively to achieve long-term goals such as to supplement retirement income or saving for a child’s tertiary education. Because of the withdrawals rules, a TFSA structure supports long-term savings discipline and allows investors full diversification.
10. Secure lump sum disability
While you are relatively young and healthy, securing long-term insurance is more affordable as you are more likely to be favourably underwritten. Besides for ensuring that you have adequate life cover in place, you may want to consider adding other benefits such as lump sum disability cover in place. Lump-sum disability, also known as capital disability, effectively pays out a pre-determined amount in the event that you are permanently disabled. This capital can be used to pay off debt, purchase property, or to implement lifestyle and/or structural changes as a result of your disability. You may also consider putting severe illness cover in place which is designed to pay out a lump sum in the event that you are diagnosed with a listed condition. Once again, this money can be used to assist with medical costs, travel, loss of earnings, or expenses not covered by medical aid.
Why this solution? A lump-sum payout in the event of a permanent disability or dread disease diagnosis can be a financial lifeline in times of crisis and can help ensure that you avoid incurring debt as a result of your health status.
Have a fantastic day.
Sue
