Financial Planning is a three-step ongoing process.
The keyword is PLANNING. As you know, the best plan is worthless if it is not implemented. Planning without action is an absolute waste of time. Need I say more?
I want to list 3 ideas about this step:
- Protect wealth before you create wealth
- Somebody always pays for insurance – either you do it or your family does after your death
- Your health (or ability to make money) is your biggest wealth.
YOUR HEALTH IS YOUR BIGGEST WEALTH
This is very important. You need to protect your health with a healthy lifestyle. Mental, physical, spiritual and intellectual health is important. I believe money and assets are not worth a lot in an unbalanced life. Perhaps with money you can afford a better asylum or hospital, but rather spend the money on a better vacation. Having lots of money and bad relationships does not make sense.
The message is: look after your health in a very holistic sense.
Having said this, sickness can decimate wealth in the wink of an eye. Protect your health with a healthy lifestyle and some form of medical aid or hospital plan.
Be grateful for health and the opportunities it gives you.
Now that the sermon is out of the way, let’s look at the rest.
STEP 1 – Now
Step one of financial planning always look at the present. What will happen financially, if you were to die tonight or become (physically or mentally) disabled?
If you die tonight:
- what debt will have to be paid (bonds, car loans, overdrafts, credit cards, store cards, etc)?
- What income will your family need to keep up the standard of living that they are used to? For how long do you want to provide this income? The age of children also plays a role.
- Will your family need to rent in services to replace you – a good example is a wife who does not work, but drives the children to school, cooks, and generally runs everything. Who will do all of that if the wife dies? That is what you need to consider for both partners.
- Are there any plans or dreams that you have that you would not like to die with you? Would it need money to realise? Do you want to provide for it? This could be things like a child almost at university age and you provide capital for university fees.
- How much money will the executor of the estate need to settle the estate? Remember that it costs money to cancel bonds and often there are interim interest that accrues. The executor will also charge a fee.
Adding up all these amounts will give you an idea of the amount of life cover that you need. This is the case for life insurance.
It is best done with the help of somebody who knows what has to be done and how to do it.
What if you are in a car accident tomorrow on your way to work and you are
Disability comes in many forms, but in every form your ability to generate an income is affected. In some cases people can never work again. Some cases people has reduced productivity and sometimes people can be retrained.
We prepare for the worst.
The questions are more or less the same.
- How much capital do you need to settle all outstanding debt? You definitely don’t want to be in a situation where you cannot work and your house is repossed by the bank!
- What will it cost to adapt your house to be wheel chair friendly?
- Disability has its own expenses – extra medical expenses, care expenses, wheel chairs etc. How much income do need to provide for that?
- How much income do you need to keep your family on the level that they are used to?
Once again, it is part of life insurance. Ask a financial adviser to help you. I am telling you about this. I don’t know you, so I cannot advise!
LOSS OF INCOME
In my experience, this is the one aspect of financial planning that is the most overlooked.
People get sick or are in accidents and cannot work for months on end. They are not disabled as per insurance definition. They are just sick. Most people will be able to think of somebody who was in an accident, had to spend weeks or even months in hospital and then took more months before they could return to work.
Income Protection protects you against this situation.
Nobody wants to lie in hospital and worry about medical aid premiums. If you cannot pay the medical, you might come out of the hospital a very poor person! Nobody wants to lie in hospital and worry about bond payments, car installments, credit card payments.
The first step in financial planning is purely to protect your wealth! The products that you use to do that are:
- Life Insurance
- Disability Insurance
- Income Insurance
- Medical Aid/Hospital Plan
It is important to find the right cover for your circumstances, therefore you should not try to do it on your own. Please find a financial advisor that you can work with to assist you.
When this first step is done correctly, it will lead to a Last Will and Testament. That ties the death planning together.
YOUR OTHER WEALTH
I have referred to bonds and car loans a number of times now. It assumes that you have used some of your money to buy things and (hopefully) assets. I hate doing one thing twice. Replacing something I had because of an accident is not something I like at all. It means working for that same thing again. It means using money I had other plans for to replace something I already had.
Sometimes these things are too expensive to just replace, like cars and houses.
That brings me to the topic of Short Term Insurance.
Just like you cover your own life and health, insure your house, car, clothes, phones and computers, etc against risks such as fire, wind, water, theft, etc.
I will post about this in more detail later.
This is not advice. It is information. Knowing that you need life insurance, for example, is important. Knowing how much life insurance you need is something that a financial advisor must help you. You need knowledge of local laws and circumstances and you need the right tools to do the calculations.
If you start messing with your portfolio based on this post, I surely cannot take responsibility!