Financial planning goes beyond managing investments; it encompasses preparing for life’s uncertainties. This article addresses key life events and challenges that can impact financial security. From planning for death and disability to managing debt, disease, and detours, each element plays a crucial role in safeguarding one’s future. This article explores these, and other, vital considerations for comprehensive financial planning.
Delayed gratification
We all know that delayed gratification is the foundation of wealth building: forgoing the immediate pleasure of spending in order to put money aside for the future. However, practice is different to theory and it’s not always feasible (nor enjoyable) to spend a life delaying satisfaction in the present in the expectation of some future reward. If you work hard for your money, it’s only natural to want some form of reward that you can enjoy in the present. As such, as much as there’s a place for delaying gratification, we also know that enjoying some of the fruits of your labour in the here-and-now is important for keeping one encouraged and motivated. Delaying gratification works well if you also acknowledge that time is a valuable and finite resource, and spending quality time with those that you love is not something that should be delayed. Finding the balance between enjoying experiences and creating memories in the present while at the same time putting aside enough money for the future is critical and takes careful focus. At an annual Berkshire Hathaway shareholder meeting in 2019, Warren Buffett agreed that while delayed gratification is important, it is also important to know when it’s time to spend. He says, “I don’t necessarily think that for all families in all circumstances, that saving money is necessarily the best thing to do. I think there’s a lot to be said for doing things that bring you and your family enjoyment.”
Diversification
If you’ve been invested in the markets for a while, you will understand the importance of maintaining a diversified portfolio. While cash offers steady returns, relying solely on cash can result in missed opportunities for growth from local and offshore equities. Diversification involves spreading investments across various asset classes, recognising that each reacts differently to the same events. This approach helps mitigate the impact of market volatility. By including investments across sectors and industries with low correlation, you reduce the risk of major swings in your portfolio. For long-term investors, it’s crucial to include a mix of asset classes, such as shares, bonds, property, and cash, as well as various strategies and investment vehicles. However, diversification alone isn’t enough; controlling your emotions is equally vital. The future of the markets is unpredictable, and times of crisis can lead to turbulent conditions. If your portfolio is well-diversified, you’ll be better equipped to stay composed during short-term fluctuations. Remaining patient and focused on your long-term goals will help you navigate through periods of uncertainty and avoid making impulsive decisions that could harm your financial objectives. A diversified portfolio, coupled with emotional discipline, is the key to weathering the ups and downs of the market.
Disability and/or disease
No one is immune to the risk of disease or disability, both of which can significantly impact one’s financial stability if not properly protected against. Fortunately, there are a variety of mechanisms available to provide financial protection in the event of illness, disease, or disability. While medical aid is often seen as the primary form of health coverage, it’s important to recognise that a good hospital plan only covers hospital stays. It doesn’t address the long-term impact of serious diseases, terminal illness, or disabilities that can diminish your ability to generate income and build wealth. To safeguard against these risks, a capital disability benefit, which pays out a lump sum in the event of a disability, and income protection, which replaces lost income if you are unable to work, are essential financial tools. Additionally, dread disease cover is valuable, especially for those with a family history of conditions like cancer or heart disease, offering extra protection. Dread disease payouts can cover treatment costs not included by medical aid, as well as medical appliances, travel, accommodation, and other related expenses. A gap cover policy is another useful safeguard, covering the difference between what doctors and specialists charge and what your medical aid covers. These mechanisms ensure that financial hardship doesn’t compound an already challenging situation.
Detours
Creating a strong financial plan requires careful scenario planning and implementing safeguards to protect against life’s inevitable detours. These detours could include events such as retrenchment, divorce, terminal illness, property damage or loss, the death of a spouse, or business failure. While these events can’t always be predicted, they can be mitigated with appropriate planning. Effective scenario planning involves asking critical ‘what if’ questions: What if I passed away today? What if I were retrenched? What if I went bankrupt? An experienced financial adviser can guide you through this process, helping you prioritise financial objectives and find products or solutions that protect your finances. Tools for protecting against life’s detours include retrenchment cover, life insurance, disability protection, short-term insurance for property, emergency savings, well-structured ante-nuptial agreements, inter vivos trusts, and business overheads protection. Business and key person assurance are also vital in safeguarding against unforeseen disruptions. By addressing these possibilities, you can ensure that your financial stability remains intact, no matter what life throws your way.
Debt
Few people navigate life without relying on debt in some form, especially when it comes to purchasing property or a vehicle. While debt can carry a negative connotation for many, it can be a valuable tool when used responsibly to achieve long-term goals. The key is distinguishing between good and bad debt, which involves considering factors such as interest rates, loan terms, and the reason for borrowing. High-interest lifestyle debt, for instance, can expose you to excessive risk without the means to repay it. Similarly, borrowing money to purchase a vehicle involves taking on debt for a depreciating asset, making it a more expensive option. However, for many, owning a vehicle is necessary for employment, which should be part of the decision-making process. Student loans, which typically have low-interest rates, are considered good debt due to the strong link between higher education and increased earning potential. Similarly, taking out a home loan can be a form of good debt, as it allows you to invest in property that improves your living conditions while building equity. Additionally, utilising an access bond wisely can offer tax advantages, and timely repayment of your home loan can improve your credit score, ultimately contributing to financial stability.
Death
Financial and estate planning also involves putting mechanisms in place in the event of your passing on and includes the drafting of a last will and testament as well as other legacy documents such as a living will and digital will. If you suffer from a terminal illness, you may want to consider appointing a medical proxy who can speak on your behalf when you are no longer able to. You could also consider signing an advance healthcare directive which serves to provide your loved ones and medical doctors with detailed instructions as to who you wish to be cared for at end-of-life. It also involves ensuring that there is enough liquidity in your estate to pay all costs in the event of your death. Importantly, part of planning for your death means ensuring that your loved ones are adequately provided for if you are no longer around by setting objectives in respect of their future income needs, and then quantifying the capital required for such provision.
Distribution
An essential component of financial planning is determining how your accumulated wealth should be distributed upon your passing, including assets such as property, retirement funds, cash, investments, valuable items like jewellery and artwork, vehicles, and trusts. Establishing a clear estate plan is crucial for itemizing your assets and mapping their distribution while considering tax, capital gains tax (CGT), and legal implications. A well-structured estate ensures your wishes are honoured and avoids potential complications for your beneficiaries. Beyond just a Will, it’s vital to focus on estate liquidity—ensuring there are sufficient liquid assets to cover any taxes, debts, or expenses that may arise. Structuring your estate efficiently allows for a seamless transfer of wealth, reducing delays and potential conflicts. Aligning your Will with your estate plan ensures consistency and clarity, preventing confusion or contradictions. This comprehensive approach helps ensure that your legacy is passed on smoothly and effectively.
Have a wonderful day.
Sue
