Careful financial management can be your ticket to a worry-free life, says financial services company Efficient Group, sponsor of the Investment & Retirement Expo, featuring the Property Expo. The trick is to know what to invest your money in, and what not to waste it on.
It’s a misconception that financial planning is something only the rich need to do, says Peter Hewett, Efficient Advise founder and Financial Planning Institute of Southern Africa’s 2014 Financial Planner of the Year. In fact, everyone should have a plan, starting from the day they begin work, and this plan should be carefully monitored and adjusted throughout their lives as their income and circumstances change. With effective risk and investment planning, even the smallest income can be maximised to deliver returns well into old age.
Your five best (and most important) investments, says Hewett, are:
– An emergency fund – as soon as you can, put together a budget with small amount available for savings. Aim to build savings equivalent to 2 – 3 months of income, and keep it relatively liquid. Because ‘life happens’ and unexpected costs will emerge. When people are under financial pressure, they tend to take loans or jump to credit facilities, but the interest rates on these facilities can be extremely high, and many are designed to incentivise people to stay in debt.
– Invest for your retirement as early as possible. Begin with a company pension or provident fund and contribute the maximum you are permitted and can afford. Also look at retirement annuities and assess, taking account of your income structure, whether you are able to utilise the significant tax incentives available on contributions and on the underlying investment itself.
– Insurance/assurance. The cost of risk cover when you are young and healthy is very low. However, many people see life and disability insurance as a grudge purchase, while they are happy to pay for car insurance. Risk insurance is a necessary investment and can in fact be a very good investment in your early years, offering returns that could take 20 to 25 years to achieve through a similar investment. Of course, life cover does have a break-even point where a better overall return on investment would be achieved if you survive that breakeven point.
– Build up discretionary funds. Few people build up discretionary funds for their retirement. On retirement, compulsory funds do very little to allow you to structure your income. However, with a mix of discretionary and compulsory funds, you are able to structure your income to have a capital and income component. This will enable you to limit your tax liability in the early years of retirement and then as you get older and start accessing higher levels of your compulsory funds, you are able to benefit from age-based tax concessions, such as medical expense deductions and age related rebates.
– Equity and property. Property and equity generally outperform cash and bonds over time, but it is critical to have your asset allocation managed by an appropriately qualified and accredited advisor. In many cases, outside of their emergency fund, people tend to structure their investment products very conservatively, especially as they near retirement. However, equity markets outperform lower risk investments over the longer term, which means those de-risking themselves ahead of retirement are likely to significantly negatively impact on the earning potential of their retirement funds – particularly if they live for another 30 years after retirement.
In contrast, the five worst ways to spend your money are:
– Retail credit, overdrafts, clothing accounts and credit cards are very expensive forms of credit and people tend to use them to live beyond their means, compounding their financial problems. Funding current spending with future money is very risky. However, credit cards can be handy payment mechanisms if the card is settled in full every month, and can also be used in situations where a significant event must be covered – like making up a shortfall in a cash car purchase.
– Luxury vehicles. Too often, we see people overextending themselves in ‘trying to keep up with the Joneses’. If all you need is to get from point A to point B – preferably in some comfort – there is no need to buy a R500,000 vehicle. Not only are you tied into high payments for the next five years, but the associated insurance is also high. In fact, you will often see people paying almost as much on their vehicle repayments as they do on their bond. Instead, they could have had a cheaper vehicle and bought a second property, giving them an asset that appreciates, rather than one that depreciates.
– Get rich quick schemes. If it looks too good to be true, it probably is. There are many complex products on offer, some of them promising returns of up to 19%, with ‘capital guaranteed’. It should be noted that the value of a guarantee depends on who is vouching for it. Investments are far safer through a reputable company such as a major bank, which is subject to stringent controls and legislation. A legitimate equity balanced portfolio should deliver returns of around 13% over the long term, depending on market conditions, while a cash type investment would earn 1 -2 % over normal call account deposit rates and bonds would deliver around 3 – 4% over normal call deposit rates. Anything offering returns far in excess of what is available through large listed financial institutions is likely to be risky or even questionable.
– Keeping up with the Joneses. Too many people want to portray an affluent lifestyle, even when their finances come under pressure. It is important to be disciplined about saving and live within your means. To determine if you’re doing so, ask: do my assets exceed my liabilities? Look at your current liabilities vs your current income. Your net salary over the next 12 months should exceed whatever you are likely to have to pay over the next 12 months vs net salary. In addition, make sure you have provided adequately for unexpected large expenses.
– Pension fund withdrawals. We often see people withdrawing their retirement benefits when they change employers. There are significant negative long-term implications to this and it generally proves impossible to ever catch up on that loss of savings. It is best to transfer the funds to a preservation scheme or a new retirement scheme.
Efficient Group is the main sponsor of the Investment & Retirement Expo, featuring the Property Expo, from 24 to 26 October at the Coca-Cola dome in Northriding, Johannesburg. Whether you are 20-30-40-50-60 something, you should invest effectively NOW to safeguard your future. Less than 10% of South Africans are set for their life planning investments and retirement. Are you? Get to the show to discover how to take charge of your investment and life planning. This expo is positioned to assist you with perfect planning, efficient investing, positive living and healthy aging.