First Published on Sharenet - 2008-04-01
Are you worried about your finances? You are not alone - almost everyone feels uneasy about money, at least some of the time. And no wonder; the world in general is becoming a more complicated place and the world of finance even more so. We are bombarded with complex terminology, and choices in investing, insurance and the like seem to grow exponentially until we are left feeling confused and inadequate.
Take heart. Much of the worrying is unnecessary, as most people are in better financial shape than they think they are. And even if your finances are something of a disaster area, worrying is not the answer - taking action is. With a little guidance from us you will be able to diagnose your financial health, make plans to improve it and then feel the relief that comes from being in control.
Fundamentally, financial planning is about just that - taking control. Instead of letting money matters rule your life, you can organize your finances so that you can use money to get more out of life, now and in the future. You don’t have to become a full-time financial planner or investment specialist either. Once you have drawn up a plan and put it to work, it should only take a little time each month to keep your finances on track. Some people actually enjoy managing their money, and it becomes something of a hobby. But for most of us, a financial plan that runs almost on auto-pilot is a lot more desirable, leaving us to get on with the rest of our life.
What we need to do is work out how to use our resources better so as to reach our important life goals. These can include buying a house, sending our children to university or college and saving enough to be able to retire in comfort one day. The challenge is to hold on to a few more of the rands that flow through our hands, then to save and invest those rands wisely.
We also need to have some sort of safety net in place to deal with those unexpected rainy day occurrences. While nobody wants to dwell morbidly on the all the things that could go wrong, there are a few “what if’s” that you need to consider. What if you can’t work for a few months? What if the fridge packs up or the car suddenly needs major repairs? What if, heaven forbid, something happens to you - how will your family cope? Having asked these tough questions, you then need to take the appropriate action - perhaps by buying life insurance, starting an emergency savings fund, and making sure that you have an up-to-date will in place.
The trick to dealing with these issues is to stay focused on the objective, and to avoid complicated financial strategies and products when simple ones will do. Most people can accomplish a great deal for themselves and their families, with a minimum of effort, if they just remember to keep things simple.
The biggest problem in this regard can be those financial experts who make everything sound so complicated. It doesn’t have to be this way; if you take things step by step and keep the "experts" in check, minding your finances can be a whole lot simpler. For instance, if you need to start saving, arrange a stop-order on your cheque account to transfer a regular monthly amount into a savings account. (This is sometimes called: "Paying yourself first," and is a simple but powerful savings procedure. It is amazing how you still manage to survive on what is left in your account after paying yourself first - even those people who "can’t afford to save.")
If you need life insurance, for instance, you can keep premium costs to a minimum by arranging for a policy that provides only life cover. (In other words, there is no "investment" element to the policy. True, there is also no "surrender value" (that is, you don’t get anything back if you stop paying the premiums), but you do get to arrange the cover you need for your family, peace of mind for yourself, and all at the lowest cost possible. And you can stop paying the premiums at any time that you no longer need the life cover.
Remember that it is generally a sound rule to keep insurance and investing well apart. The returns you get from insurance investment products are often disappointing (with high up-front costs such as agent’s commission not helping your cause), and you are likely to be better off by investing in unit trusts, for instance.
And that’s another thing - if you read the financial press at all, you will know that an investment in the stock market provides superior long-term returns. But which shares should you buy, how do you build up a suitably diversified portfolio, and what about the sizeable amount of capital required if you want to invest in quality, "blue-chip" shares? All of these problems can be overcome by investing a regular, affordable monthly amount in a unit trust fund or funds, as mentioned above. You have a wide variety of funds to choose from, you get access to the finest blue-chip shares, the professional fund managers look after all of your share selection and diversification concerns, and you don’t need a fortune to get started.
If you are remotely interested in financial matters, you should be able to put in place a financial plan which takes into account all of the abovementioned matters. But what if you are not interested in the nitty-gritty, yet do realize the importance of personal financial planning? The solution may be to approach a good financial planner - preferably an independent fee-charging professional who is not tied to any particular financial institution. Such a professional can help you to put a plan in place, advise you regarding periodic changes, and educate you as you go along.
Remember that it is never too soon to start planning your financial future. It is also never too late. And while we’re about it, we should also pay careful attention to what Henry Wadsworth Longfellow has to say:
“Most people would succeed in small things, if they were not troubled with great ambitions.”
Many people have the notion that financial independence comes from high-powered wheeler-dealing, and that anything less is not worthy of their attention. Nothing could be further from the truth - discipline, a financial plan, and straightforward saving and investment strategies can deliver results beyond most people’s imaginings.
AJ is an academic and a freelance financial journalist who has written for Sharenet for some 15 years. He spent 25 years as an accountant and financial manager in various South African companies before moving into academia. He has a broad range of interests, including all aspects of business and stock market investing. Apart from a bachelor’s degree in Accounting, AJ holds a Master’s degree in Financial Management. He is also a Fellow of the Chartered Institute of Management Accountants.