Question: I am 30 years old and think that it is time for me to start managing my finances properly. What should I do?
Answer: I like to approach financial planning in the following order:
1. Protecting your life’s trajectory: You are earning an income and should do so until you retire. Your life and that of your family will be shaped by the income you earn and your ability to earn it in future years.
The first step on the path towards financial wellness is ensure that you and your family stay on the same financial trajectory.
You can achieve this in two ways:
Protect your income: Some companies offer income protection and disability cover as part of their employee-benefit arrangements, so check to see if this is indeed offered by your employer.
If this benefit is not offered by your company or if you are working for yourself, then you should get this cover in place. You can get this cover even if you are working for yourself and have several streams of income.
Protect your family: If you have other people who depend on your income to survive, it is important that you put structures in place to ensure that they can continue to live the same type of life should you die and your income stops. An easy way of covering this risk is to take out life insurance.
As you are young and probably healthier than you will be in future years, you should get cover at a decent rate and with a lot less hassle than you will in years to come. It is often a good idea to take out the option of future cover increases.
2. Budget and debt management: The second step towards financial wellness is to ensure that you do not spend more than you earn. Remember, in your life you will earn a finite amount of money. You can choose to spend that on great experiences or on paying back loans.
A key element towards managing your income is to have a budget. This helps to ensure that your spending is less than your income. If you would like a template for drawing up a budget, drop me a line and I will send you an Excel spreadsheet.
3. Short-term saving: You need an emergency fund to cover car and household appliance repairs and replacements.
Do not keep your short-term savings in your current account as it will just disappear in your normal cash flow. Either put it in your home loan and ensure you only remove what you have deposited, or have a separate account into which you transfer the money and do not see it. It may not give you the best returns, but you will avoid the temptation of using these savings for purposes for which they were not intended.
4. Medium- and long-term investing: Only once you have the first three financial wellness building blocks in place should you start considering making investments.
One mistake a lot of young people make when investing is to ignore the investment structure. I deal with a lot of people who have built up substantial investment portfolios without the help of a financial planner over the years. But many of these have been poorly structured and they often end up paying a lot more tax than they need to.
You can, for example, invest in the same unit trusts using a variety of structures, each of which will have different tax implications. These will have significant end results. There are three structures that you should consider for your long-term investments:
Tax-free investments: This is a great place to invest your long-term money. You do not pay any capital gains tax here, so it makes sense for you to invest aggressively with a long-term focus.
Endowments: Tax in an endowment structure is only 30%. If your current tax rate is above 30% or you expect it to be more than 30% in five years’ time, you should consider using an endowment structure as there can be a tax saving.
Retirement annuities: If you are investing for the long term, a retirement annuity will give you tax-free growth as well as an immediate tax break on your investment.
To summarise, you can ensure your financial wellness by: