Starting your financial planning journey can feel daunting, especially when faced with a myriad of decisions and a long list of potential solutions, many of which may seem financially out of reach. The sheer volume of options, coupled with the cost of implementation, can leave you feeling overwhelmed and unsure of where to begin. If this sounds familiar, consider adopting a triage approach—an effective method of prioritising your most critical financial needs and tackling them step by step in an affordable, structured manner over a realistic and manageable timeframe.
1. Secure your greatest asset: 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 or temporarily 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. Also be sure that the benefit keeps pace with inflation in order to maintain your purchasing power should you become disabled.
Key takeaway: Your ability to earn an income is your greatest asset. Securing income protection ensures that you are not financially dependent on others should disability prevent you from working.
2. Don’t gamble on your health: 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 which 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.
Key take-away: Medical aid membership ensures access to private healthcare and protects you from crippling hospital costs, while also helping you avoid penalties for late membership later in life.
3. Prioritise your 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.
Key takeaway: Settling unsecured debt frees up your income for saving and investing, while also improving your credit score and future financial opportunities.
4. Build 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.
Key takeaway: An emergency fund helps you avoid falling back into debt when facing unexpected expenses, allowing your financial journey to stay on track.
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.
Key takeaway: Life cover on secured debt ensures your estate remains solvent in the event of your death and helps preserve your financial legacy for your loved ones.
6. Craft your legacy
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, fireproof safe.
Key takeaway: A valid Will ensures your wishes are honoured and helps your loved ones avoid unnecessary complications during an already difficult time.
7. Invest tax-efficiently
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.
Key takeaway: Retirement annuities offer powerful tax advantages and investment flexibility, making them one of the most effective ways to build long-term wealth.
8. Balance access and growth
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.
Key takeaway: A discretionary investment gives you access to your money when needed and complements your long-term retirement plan with near-term liquidity.
9. Use your tax-free investments wisely
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.
Key takeaway: When used appropriately, TFSAs are excellent long-term savings vehicles that offer tax-free growth and encourage disciplined investing.
10. Plan for life’s curveballs
While you are relatively young and healthy, securing long-term insurance is more affordable as you are more likely to be favourably underwritten. Besides 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 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.
Key take-away: Lump sum disability and severe illness benefits provide vital financial support during life-altering health events, helping you adapt without derailing your financial plan.
Have a super day.
Sue
