By Essie Bester
When planning your finances for the year ahead you need to know where you are aiming at. Once you have a clear picture of what your goal is, it is easy to work towards your target. This means your goals must be measurable, specific and time oriented.
Start by asking yourself the following questions:
Am I satisfied with my net worth?
What are my advantages? (Am I in line for an increase? Am I a homeowner? Do I have a good pension?)
What are my disadvantages? (Am I worried about losing my job, about paying off long-standing credit card debt, high bond instalments, or rental payments?)
When can I retire if I keep on saving at the current rate?
How much can I save if I deposit R100 more into a savings account each month?
How much do I spend annually on interest on personal loans, credit cards, mortgage and car loans?
What is my main dream/goal for this year? And in five/ten years from now?
What compromises am I prepared to make so that I can achieve my goals?
Should I adjust my goals?
Use the following as a guideline to determine your priorities for 2021:
- A budget – a well-planned budget will help you to make the best use of the financial resources available to you.
- An emergency fund
Questions that can help you decided how much you will need in an emergency:
How safe is my job? If you are confident that you can get by with little less reserves you may want to make provision for other financial priorities such as the repayment of debt.
Am I expecting major expenses in the near future? Check the condition of your household appliances and of your vehicle and check whether everything is still in good working order.
How much credit do I have at my disposal? An existing credit card facility for household capital is not an ideal choice at all, but if there is an emergency, it is still an option.
How good is my health? If you are suffering from a chronic illness it is a good idea to have extra savings to cover unforeseen healthcare costs.
Do I have dependants? The size of your emergency fund is relative to your and your family’s /dependants’ monthly cost of living.
- Debt – Plan to pay off (expensive) debt first, in other words debt at interest rates of more than 10%.
- Insurance – Protect yourself by taking out disability and life insurance cover.
- Medical aid scheme – This is a necessity. Choose one with a monthly membership contribution you can keep up with.
- Retirement contributions – Increase them.
- An estate plan – This is more than just a last will and testament. A good estate plan sets out who should take your financial and health care decisions should you be unable to take those decisions yourself.
- Short- and long-term goals – Start to invest with those in mind.
Save for the life you want
Once all of the above are in place you can start to save for the life you want. Investors who start early and are disciplined usually reap the rewards. But no-one builds a house without a well-conceived plan. Similarly, you cannot make an investment if you do not know what your ultimate goal with it is.
Savings accounts – A high-yield savings account is the least risky option and is ideal for goals you want to achieve within the next two years because it is accessible. However, if you have goals that are set for later than two years from now, and if you are prepared to let your money grow more aggressively you may want to consider a brokerage firm or a robo advisor.
A robo advisor is an internet-based system that provides automated investment advice by asking simple questions to determine your risk profile. It then suggests a personal portfolio tailored to your profile. The most popular robo advisors in South Africa include: Sygnia, Sanlam Smart Invest, OUTvest, Absa Virtual Investor and Bizank.
Investment options include:
The stock market – This is the most common and probably the most advantageous place for investors. When you buy a share, you own a small part of the company you bought into. When the company makes a profit, you receive a portion of the profits in the form of dividends. When the value of the company grows, the price of the shares you own rises, which means you can sell them at a later stage at a profit.
Investment bonds – When you buy bonds, you are actually lending money to a company or to the government. The government or company must then pay you interest on the “loan” for the duration of the life cycle of the bonds. Bonds are generally considered less risky than shares, but their return potential is also much lower.
Mutual funds – Instead of buying a single share, you can acquire a basket (a variety) of shares in one purchase. The shares in a mutual fund are usually chosen and managed by a mutual fund manager.
Physical commodities – Those are investments you physically own, such as gold or silver. They often serve as a protection against difficult economic times.
There are risks.
Dawie Roodt, chief economist and director of the Efficient Group, says: “The money market’s returns are very low. Shares and property are very expensive, and the stock market is a very dangerous place to be. The answer to asset management today is to decide how big your risk tolerance is. You cannot get away from market risk”.
Your credit score
If you want to buy a house, rent a new apartment or finance a major purchase (such as a vehicle) in 2021, you must also consider your credit score. You can obtain a free credit report annually from one of the following credit bureaus: TransUnion, Compuscan, Experian, or XDS.