Financial Literacy 101: Empowering you financially, without dying of boredom

Reading time: 11 Minutes

When it comes to the basics of financial planning, as a woman, it can sometimes seem daunting and something that can be pushed to the side or tucked away, never to be spoken about again. I am here to tell you that this does not have to be the case, and I want to help you change this narrative. This process will involve assessing your current financial situation, goals, and objectives and formulating an effective and precise strategy for getting there. On average, women save 30% less than men, yet women also out-spend men on average - spending a more significant part of their disposable income on household goods and the needs of their children. Women make significant sacrifices for their families and take time off to raise their children, which cumulates over time, later impacting them in ways they never thought it would. Women are mothers, nurturers, homemakers, chefs, chauffeurs, and psychologists; on top of that list, it's expected that we expertly manage our finances too - it's exhausting to say the least. Not to worry though, as I'm hopeful you'll feel a bit more empowered and informed to take charge of your financial portfolio once you get to the end of this article. 

As a female Financial Advisor, I love empowering women - there is such a need for this. I recently did a Women Empowerment webinar focused on financial planning, and it was the most watched and registered webinar in my company’s history. I am going to break down the most common questions I was asked, and explain it in a way I wish I had been taught when I was younger. So, let’s get stuck in, and with that I mean; let's separate the two main elements of financial planning before we get into the nitty-gritty. You would have heard of wealth creation and wealth protection by now in some form or another, and both are critical in financial planning. Wealth creation is how you can maximise your savings by investing them correctly to ensure they grow as fast as possible. Wealth protection is making provision for when times are tough; this includes insurance, life cover, disability protection, critical illness cover, and income protection so that you have financial provision and a safety net in the event of something happening to you. Essentially, this maximises your savings when things are good and helps bring you back up when life gets honest and challenging. 

Let’s look at wealth creation first

Financial goals:

Having a better understanding of, and distinguishing between Wealth Protection and Wealth Creation enables you to formulate measurable financial goals that are achievable if broken down into smaller chunks, and honoured every month:

• Short-term goals:

  These are 1-5-year goals, which include your emergency fund along with any liquid investments. An emergency fund is a short-term investment that should cover 5-6 months of your current fixed expenses, and it’s a great place to start saving. These funds should be held in a very low-risk investment that generates interest and is easily accessible should you have a medical-related emergency, a flood, or an unplanned family crisis. Another short-term savings goal could be to save up for a new car, an overseas holiday, or Christmas presents - whatever your short-term needs are. You will never regret saving and earning interest, no matter how small.

• Medium-term goals:

  These are five-year or longer goals. Ideally, the money you put aside for medium-term goals should be invested in a structure that doesn’t allow access to these funds without a penalty, as this will force you to leave the investment for a longer period. After five years, you will have earned much more interest than if you could access these funds. An example of a medium-term investment would be saving for a deposit when buying a new home or an investment property. A goal like this is measurable, as you can have a figure in mind that you would like to achieve, i.e., R 500K, so you can, therefore break down how much you will need to put down on a monthly/bi-annual basis, and what sort of interest you will need to generate in order to reach this specific goal. With this medium-term investment, you are able to invest in more aggressive funds, as you will be leaving the investment to earn more interest than the short-term investment. This puts you in a position to take more calculated risks, and get better returns on your investment. If you are a parent, a medium-term goal could be to save up for your children’s education, milestones, and family holidays. Specific investment vehicles exist to cater to these needs, which can also assist with tax breaks. You may ask yourself, "Why do I need a medium-term savings account?" The answer is simple: medium-term savings are generally more significant than your short-term goals, as the end result will be much more significant. 

• Long-term goals:

  On the other hand, a long-term goal has a much longer window than five years, like a retirement savings goal whereby you contribute towards this investment for most of your life. With such a long-term investment like a Retirement Annuity, it is important to pay attention to the monthly amount as this will be coming off your salary on a monthly basis. A private Retirement Annuity in South Africa has a minimum age of 55 that you will have to wait to get to before you can access any of these funds. In this long-term investment vehicle, you will receive tax benefits on an annual basis when you do your tax returns. However, some terms and conditions apply to withdrawing at the end of the period. Your investment will also grow significantly more in a shorter space of time, if you leave it for a few years after the age of 55 through the magic of compound interest - it's still crucial to keep paying the monthly contributions during this period.
  

  Did you know that only 6% of South Africans who are saving for retirement are able to retire on the income they require? South Africans are notorious for not saving enough. There is the “sandwich” generation, whereby adults don’t save enough for retirement and end up relying on their children. Their children in turn, are then unable to save for their retirement, and so the cycle continues. Let’s try and change this narrative. 

Salary breakdown:

Now that we have a good understanding of all three savings goals and objectives, Forbes has broken down how to achieve these goals every month - this is called the 50/30/20 rule - this ensures all three boxes are ticked in an easy-to-understand way. So what exactly is this? Forbes has divided your income into Needs, Wants, Savings, and Debt management. Let’s dive into what each one entails:

• 50% Needs:

  These are living expenses and costs we cannot avoid; it includes the food you eat, the car / transport you take, the electricity you require to power your house, healthcare expenses, and the roof over your head. Not more than 50% of your ‘take home salary’ should go towards this every month. On average, if you are renting/have a bond in SA, the maximum amount you can qualify for monthly is 30% of your salary, which leaves you with around 20% that can go towards your other expenses like car repayments, fuel, and food. If your expenses (fixed) are currently much more than 50% of your salary, think about ways you can cut these. Can you rent out a room in your house, live in a cheaper suburb, or reduce fuel costs? All of these are factors that can help you achieve your financial goals much quicker.

• 30% Wants:

  30% of your salary should be enjoyed, which may seem extravagant, but we are on earth for a good time and a long time, and we should get to enjoy some part of our hard-earned salary. The want part of your salary should be used for entertainment, memberships, hobbies, beauty routines, vacations, clothes shopping - you name it. 

• 20% Savings and Debt Management:

  This is where it gets exciting, as when you get this part of your salary right, your life might start to fall into place. This 20% includes all of the short-term, medium-term, and long-term goals we previously mentioned. How you structure each one of those savings pockets will be very much determined by your financial preferences, age, goals, and stage of life. There is no ‘one size fits all’ when it comes to where and how to allocate your funds….

Wealth Protection

So now that we have the basics of investing and making our money work for us, how do we protect ‘it’ and ourselves? You are your greatest asset! Everything comes from your ability to earn an income. As a financial advisor, I often ask my clients what they think their greatest asset is, and I've heard every answer under the sun, from their house to their car collection, and sadly, all of them are wrong. If something were to happen to you today that would limit your ability to earn an income, everything else goes down with it. This may be the less exciting part of this article, but I can guarantee you - it is the most critical. So, let me help break it down into further subcategories for you.

Insurance needs

• Short-term insurance:

  Short-term insurance is not the most thrilling thing in the world, but you can't afford not to have it - Car, household, building, and theft insurance are all examples of short-term insurance. This is very much a grudge purchase, but 100% necessary. 

• Long-term insurance:

  Let’s talk about long-term insurance. We have just established how important it is to insure your house and how you won’t even leave a car dealership without adequate insurance, so shouldn’t this be the same when it comes to insuring yourself? The technical term for this sort of insurance is ‘Risk’ cover, which houses everything from life cover, critical illness protection, income protection, and disability cover. 

  • Life cover will only pay out in the event of your death, to your nominated beneficiaries. This should also be used to cover any debt you may have, as well as to leave a legacy for your family. 

  • Critical illness cover will pay out in the event of a dread disease such as cancer, heart attack, or stroke. Medical aid/hospital plans will not cover everything, and this is therefore, critical to have. Some chemo treatments may go into the millions when it comes to the cost. There is no rule of thumb as to how much severe illness cover you should have. Instead, this will be based purely on affordability. 

  • Income protection insures your monthly salary and will pay out should you be off work and unable to do your daily job. This can pay out until the age of 65, and it’s often the most expensive list item under the risk benefits section. 

  • Finally, disability insurance pays out a lump sum if you become disabled and unable to earn an income, i.e., a taxi hits you while you’re crossing the street.

There is no one-size-fits-all company I would recommend when it comes to risk cover, and every person has different needs, wants, levels of affordability etc.; therefore, it's imperative that you seek out independent financial advice from an authorised financial services provider.

Where to from here?

Firstly, I want to congratulate you on learning the basics of financial planning - being able to grasp the concepts discussed in this article puts you in the top 10% of women in South Africa. Secondly, I want to encourage you to apply this to your own life now, along with defining what your short-, medium-, and longer-term goals are. Plan out how you'll work towards achieving them each month. Lastly, I want to challenge you to sit down and do the Forbes salary breakdown and draft your own financial plan. Sit with an experienced independent financial advisor who can ensure you meet your goals and objectives and, most importantly - enjoy this journey.

Reach out to me if you have any questions or would like my guidance and expertise in setting your financial goals: jade.k@overberg.biz