Financial decisions, ranging from your children’s education to retirement planning, will determine the wellbeing of you and your family.
They can either hurt you financially or pave the way to a carefree lifestyle and comfortable retirement. The decisions that hurt are most often caused by preconceived ideas and limited knowledge, or by our tendency to repeat the mistakes from the past.
There are no fool proof road signs on the path to financial prosperity. However, with the right guidance, you can avoid obvious pitfalls by performing a risk profile analysis, followed by thorough financial planning.
A full risk profile looks at the following three aspects:
- Risk appetite – the degree of risk required to achieve the financial objectives, given the available financial resources;
- Risk capacity: the amount of financial risk that the investor can afford to take, and
- Risk tolerance: the level of financial risk that the investor feels emotionally comfortable with.
Armed with this information, and by avoiding the mistakes below, you will be able to create a winning investment strategy to stay on course financially.
Some of the most important life-changing choices and mistakes are:
Medical — I’m healthy enough
Your health (and wellness) is your wealth. According to Statistics SA, only 16.9% of households were members of a medical aid in the last year. About 45 million people in South Africa do not have medical cover. While the new proposed national healthcare system will aim to provide quality medical care for everyone, the infrastructure to do this is a far cry from being adequate.
The safest strategy is to take care of yourself and to have medical cover and insurance against dreaded diseases. If medical aid cover is too expensive, you should at least consider a hospital plan with gap cover to protect you against major events like accidents or serious diseases.
Life insurance — nothing will happen to me
Your death will compromise your entire family’s financial wellbeing if you have not made provision for them. This applies to both men and women.
Over the last three years, deaths among women due to cardiovascular disease have increased by 50% and one in four women will develop a heart problem before the age of sixty, according to the Heart and Stroke Foundation of SA. Make sure you have adequate life insurance so that your family, especially your children, are financially independent after your death. Pay specific attention to their educational needs, so that your dreams for their future do not die with you.
Savings — I’m ignorant about investments
Savings generate the capital needed for investments. By delaying your decisions to save and invest, you are putting your standard of living at risk. This risk is elevated if you are faced with significant life events, like being retrenched or involved in a serious accident. When investing, time, not money, is your greatest ally.
Over a period of 30 years, your own money contributes about 30% to the average return, while 70% comes from compounded growth – as long as you stay invested for the period.
Diversify – my money is safe in the bank
Diversification entails much more than randomly investing your money with different investment companies. It is a management technique to spread investments across diverse companies, asset classes and currencies, which will each respond differently to market developments. Diversification reduces your overall risk because, when the market is underperforming, only part of your portfolio will be affected, and some investments may actually benefit from changing market conditions.
Debt — I live for the present
The Reserve Bank expects another five interest rate hikes in the next few years. Debt will therefore become more expensive, which could land you in a vicious cycle of using debt to rob Peter and pay Paul. Inflation is also on the increase, having risen from 3.8% in March to
4.6% in June. During the same period food inflation was at 3.1%. The petrol price is at a record level (R16.02 inland) and may rise by a further 19 cents per litre this month. As prices are rising across the board, increasing your debt exposure can become a one-way road to financial ruin.
Retirement — no need to worry about that today
The average life expectancy in SA is 64.2 years according to the Statistician General. However, with good health and medical care, you are likely to live much longer than that. Do you have enough money for the increasing cost of living and medical expenses?
Risky decisions and bad advice — I’m getting rich soon!
Avoid errors of judgment or choosing excessively risky investments as best you can. Lending money to friends and family comes with glaring warning signs and are best avoided. Find a registered financial adviser to formulate your investment plans and beware of falling prey to get- rich-quickly schemes around the braai fire.
Although you may land in the odd financial pothole and undoubtedly face crossroads in your life, wise decisions will continue to pay dividends for years to come.