This week we focus on wealth accumulation.
Life Stages & Events
Understanding the different stages and events in your life will help you make sure that you have the right financial plan in place for your particular circumstances.
There are 4 different life stages and various life changing events you may face in the years to come, each with their own financial issues.
– Protection Planning – Wealth Accumulation – Wealth Preservation – Wealth Distribution
– Marriage – Divorce – Retrenchment – Deep in debt – Empty Nest – Bereavement – Retirement
Your insurance needs will change as your life does, from starting out to enjoying your golden years and all the stages in between. Wealth accumulation means different things to different people. What does it mean to you?
• Enough money to pursue your dreams
• Paying for your childrens’ tertiary education
• Paying for a wedding, family trips or a vacation home
• Early retirement
• Being able to leave a legacy to your heirs or favourite charity
The secret to accumulating wealth – lifestyle choices determine your future
The key to accumulating and preserving wealth is a combination of good budgeting, forward planning and protecting what you have. The first step is good money management. Once you have mastered the basics of managing your money, you can start making your money work for you.
Here are some of the basic principles to follow:
Put lifetime issues ahead of lifestyle issues
The financial foundations of your life should be firmly in place before any other spending is even considered. These include life cover, medical aid, education, housing, transport and an emergency cash fund.
Stop orders and debit orders are a good way to ensure that essential expenses (including savings) are automatically deducted from your account, before the money is spent on non-essential items.
Create an emergency fund
Aim to set aside at least six months’ worth of your current salary in an emergency fund. This amount should be instantly available to you (e.g. a money market account). Relying on longer-term savings in emergencies could result in you having to sell units when the markets are down, resulting in a loss.
Don’t underestimate the ‘small expenses’
Cocktails, birthday gifts and take-aways are items we typically don’t budget for and yet, collectively, they add up to more than one would expect. The R20 you would spend on your daily latte could actually add up to a sizeable investment amount.
Use real cash as often as possible
Physically drawing money and paying for all your daily expenses keeps you in touch with how much you are actually spending. We get so used to swiping our credit cards, we often don’t even check the slip before we sign!
We live in an age where we can access almost anything immediately. This is made even easier with credit cards, overdraft facilities and HP agreements. Always consider the financing costs when not paying cash. Very often you’ll decide the item that you plan to purchase isn’t worth it.
Look after your home
As soon as something breaks, fix it! Your home is probably one of the largest purchases you’ll ever make. Do your bit to ensure it grows in value.
Invest in yourself
Money spent on continuing education is an investment in yourself. Set personal goals and reward yourself when you achieve them.
Budgeting goes beyond physical rands and cents. It extends to the choices we make every day and how the consequences of those choices come full circle and directly influence our budget.
Since none of us have a crystal ball, we don’t know what the future holds. That does not however mean that we can’t plan for future events. There is little point in accumulating your hard earned assets if you don’t protect them for the future. Traumatic events such as death and disability, and life changing choices like buying a house or having a baby all affect your financial planning. These events – if not provided for – could cripple you or your dependents financially.
Your ability to earn an income is your greatest asset, so protecting it is crucial. Temporary or permanent disability and contracting a serious disease or suffering a trauma could hamper your ability to earn an income and to provide for yourself or your family. Relying solely on a medical aid will not be sufficient.
Covering medical debts, on top of unforeseen expenses, can make a serious dent in your finances and could set your financial planning back by several years.
Balancing your priorities between the present and the future can be tricky, but the importance of sound retirement planning cannot be overemphasised.
Developments in Retirement Reform
Government continues to work on ways of increasing saving levels in South Africa.
National Treasury recently released proposals for reforming private sector pension fund offerings; complementing plans for broader social security reform that will be released later this year.
– the compulsory preservation of retirement savings (with certain waivers);
– reforming annuity products to become a better guarantee of long term income for pensioners;
– reducing retirement fund costs and complexity;
– strengthening retirement fund governance by amongst other things demanding more of trustees and
– harmonising the tax treatment of pension and provident funds.
The proposals are at a high level discussion phase at present, and will evolve over the next year as more detailed papers are released. National Treasury stressed that current pensioners or those who are to retire soon will not be adversely affected by the transition.
Click HERE for Southwood’s client budget spreadsheet which is specifically tailored to help our clients with their budgeting requirements.