FINANCIAL PLANNING – WHO NEEDS IT?
Let’s face it, money matters are never at the top of most people’s agenda’s when it comes to planning, but it is the necessary realm of people who want and desire to be successful in their lives. Success breeds success and any road to success starts with a good quality roadmap. That’s all financial planning is, designing and creating a personalised roadmap to financial security.
Financial needs of an individual can be broadly categorized into two groups:
v Wealth Protection, and
v Wealth Creation/Management
This categorization is based on your ultimate aims, i.e. either to protect what you already own/earn, or to build up funds for a particular need or purpose. Personal Financial Planning Solutions include both wealth protection and wealth creation aspects.
Wealth Protection:
This refers to your need to protect yourself, your family and your assets against losses caused by unforseen events. If you have not planned properly, an unplanned event could result in huge financial losses.
Protection of assets
You need to protect yourself against the financial impact of damage to or loss or destruction of your assets, for example:
§ Assets such as cars, cell phones or household effects could be stolen
§ An asset such as a car or house could be destroyed by fire
§ You may lose or damage someone else’s property and be held liable
To protect against this type of loss or liability you can either accumulate an enormous amount of cash to be available in the event, or you could insure your assets for a fraction of the actual cost with a short term insurance policy.
Protection of Income
Most people take out some form of short term insurance at some stage to protect their assets but this would be essentially pointless unless you look and protecting your and your family’s income against unforseen events as well, for example:
§ You, as the breadwinner, may die unexpectedly. If you are single and have no dependants then you don’t really have anything to worry about in this instance however, should you have a family and/or dependants who are reliant on you for all or part of their income, then this will be a big issue. There are also costs involved in dying that your family may be responsible for.
§ You may be involved in an accident or become sick, rendering you temporarily or permanently disabled and unable to generate an income.
§ You may suffer from a severe illness such as a heart attack, cancer or a stroke where you may need capital for extraordinary expenses or to pay someone to look after you whilst you recover
§ Health expenses – whilst you may be able to cover the cost of minor trips to the doctor, major medical expenses such as hospitalisation and surgery or even major dentistry can be financially debilitating.
To protect against these types of disaster, once again you can magically accumulate several hundred thousands of Rands, or you can insure against them using Long Term Assurance products to provide for these and other expenses in the unforseen event of them happening.
And don’t think “It will never happen to me!” because even though it might not, there is not a single person in hospital for major surgery, or a single disabled person living on grants who actually planned to be where they are. It won’t happen to everyone but do you really want to be left penniless if it does?
Wealth Creation:
Wealth creation focuses on your need to create new assets and to add value to the assets you have already accumulated. Wealth creation includes savings for a particular goal (where the funds do not already exist) or investing money (capital) which you already have, for growth or income.
There are a number of reasons for savings and accumulating capital, for example:
§ Saving for a new car or deposit on a house
§ Saving for a holiday
§ Saving for your children’s education
§ Saving to start a business
§ Saving for retirement
When saving for a particular goal, the term and the purpose is very important and affects which type of investment is utilized, there are a wide range of investments available for these needs, such as:
§ Bank Products, such as fixed deposits and call accounts
§ Unit Trusts
§ Sinking funds and endowments
§ Pension Funds, Provident Funds and Retirement Annuities
Once a suitable product has been selected you would need to select a specific sort of investment portfolio within that vehicle. Your choice of portfolio would depend on your risk profile as each portfolio is made up of a different combination of asset classes with differing degrees of risk. Risk in this context means that the portfolio you decide upon may give lower returns than what you are expecting.
Investing for Income. If you already have capital available, i.e. a lump sum of money available that you want to give you a regular income, then you will use a different type of investment vehicle, for example:
§ Investing capital from a retirement fund, at retirement
§ Investing a voluntary lump sum, such as proceeds from an inheritance or sale of an asset, to provide you with an income for a specific term or even for the rest of your life.
Wealth Management:
Wealth management differs from wealth creation. While the focus of wealth creation is the accumulation of wealth through saving and investing, in wealth management you have already built up amounts of money through investments and savings, and now you need to manage and protect those funds.
Wealth management therefore involves managing and monitoring investments already in place to ensure that the money is invested in such a way that the growth is at the best possible level to suit your profile and goals and that the funds are structured in the most tax efficient manner.
