The Financial Planning Series: a Killer Blueprint
God's plan, God's plan
I can't do this on my own, ayy, no, ayy
(taken from “God’s plan” by Drake 2018)
You are not alone now. You are searching BankerX trying to “make sense of it all”. You have made the right choice and taken the correct steps.
You have been told to plan and be financially savvy for your entire life, but nobody sat down with you to tell you what this “plan” is all about. It’s like being told to order off a Debonairs menu, but not knowing what they make. Oh, side note: Debonairs do not make pizzas. I have had garage pies which are closer to being a pizza than what they have on offer - this is a hill I am willing to die on.
A pizza is a basic meal to understand. Essentially there are 4 elements that make every pizza “a pizza”, no matter how simple or how complex it is.
The 4 elements of a pizza are as follows:
- A base that makes you happy. I love thin, you love thick. It’s still a base!
- The tomato paste/sauce. Without this, you just have a focaccia.
- Cheese, and by cheese I mean mozzarella. You can add other cheeses, but mozzarella is key
- Your choice of toppings, where you can “make it your own”.
Another reason why I love pizza, is that it has the same number of basic elements of a strong financial plan, which are:
- Wealth creation
- Risk mitigation
- Testamentary planning
A financial plan is a documented (written down) overview of who you are as an individual, taking into account the above points. We will expand the forensic detail of each core element in their own article series - in essence, a financial plan covers your assets, liabilities (debts), goals (your dreams, desires or objectives) and insurance policies.
Without further ado, let’s jump into each “ingredient” so you have the basics covered.
Wealth creation has two main parts to it, namely, discretionary investments and compulsory investments.
Discretionary investments are literally investments you can make at your own discretion (I know, go figure hey!). Purchasing a PlayStation 5 doesn’t count here. I tried this with my wife as a reason, but I saw the errors of my ways.
What makes a discretionary investment attractive is that there are generally no rules around where (geographically) it must be invested, how long it must be invested for and what you are allowed to invest into. You could literally have a share portfolio where you bought 100% into a listed chicken farm (talk about having all your eggs in one basket!).
A few types of discretionary products are share portfolios, unit trusts (local and offshore), a money market, Tax Free Savings Accounts and Endowments to a certain extent. Growth within these investments is usually taxable, either in terms of interest income or a capital gain. There are tax exemptions that SARS graciously gives us on interest growth and capital gains, but that shouldn’t detract you from making use of these products.
Compulsory investments sound terribly harsh, almost like being forced into a situation that you don’t want to be in (like waiting outside the club at 03:00 cause your friend isn’t ready to leave yet). These products have their place in your investment journey and there are many pros to using them. If, for instance, you make use of a retirement annuity, you benefit on the contributions you make in the form of a tax deduction, and the growth inside the product (capital and interest) isn’t taxed. But, and there always is a but, you are limited by legislation on how you can invest your money. Compulsory money include pension, provident, preservation, in-fund deferments and retirement annuity funds. Oh, there is one tiny T&C when you want to take your money out……depending on the value taken in cash, you might pay tax!
There will be another content piece in the series detailing the different products and their pros and cons, but this article “aint it fam”.
Let’s talk about risk, baby, let’s talk about you and me. Let’s talk about all the good things and the bad things that may be. Let’s talk about risk! If you’re a Salt & Pepper fan (jeez I’m old!), you now have that song stuck in your head. You are welcome. It will also make this section a little easier to get through.
Risk can be split into two main categories namely, short-term and long term.
Let’s start off with the easier of the two which is short-term. Short-term is cover you purchase to protect you from a potential financial loss, due to the damage or loss of an asset. It’s taking a policy to cover your car in the event of an accident, or a policy to replace your phone when you thought it was a good idea to take a selfie in the jacuzzi. Short-term insurance is typically taken out to protect you when you cannot afford to replace what you damaged or lost.
Now the harder one to talk about, cause nobody wants to even think about it, is long-term insurance. This is the cover you take over your own body. This insurance is for any severe illness you may have, a loss of a limb or organ, and being off work due to disability or illness. It’s scary to talk about because it involves injury or illness and we think we are invincible. Take it from someone who’s “been there, done that”, how important having this cover in place is. Some of you may have it through your employer, but if you don’t, I really recommend you take the time and make the effort to seek assistance from a qualified financial advisor.
This is another topic people don’t like to think about, never mind talk about. When you start contemplating your own life, what you own and who you wish to leave it all too (my details are at the end of this article), you tend to freeze up and run away from the topic.
Everyone should have a Will in place as it makes the lives of those that you love, and that are left behind, much easier. A Will ensures that your wishes are taken into consideration on how your assets are split, and it can also decrease costs in your estate. Although this article isn’t meant to delve into the deep waters of estate planning, I do want to give you a free hint: make sure your beneficiaries are noted on all your life policies. You can thank me later….or not #ThatGotDark
Yes, yes, I know…..here we go again! I can hear you shouting at me “stop telling me how to spend my money!!”. I promise you that I would never recommend something that I genuinely didn’t think would help you. It may scare you and it may even depress you, but putting some structure around your spending gives you insight into where your money goes. Whether it is analyzing your spending spree or trying to figure out why there is more month than there is money, it puts you in the power seat. There are many tools out there to put a budget together, so find one that makes sense to you. Whether it’s an App, your own spreadsheet or a template you nicked from a friend (who does that?!?), put the time and effort in and try to stick to it.
Budgeting is like exercising, the more you do it the more it becomes a habit and the less painful it is.
In summary, looking after these basic ingredients will guide you on a defined financial journey. Understanding each element and having them in place won’t just provide some sense of “peace of mind”, but will also assist you with any advisor that you work with. It will also give you a framework of understanding what you have in place, what is required and ultimately if there are any gaps that you need to address.
Just think about it, a pizza without any cheese is still edible but it isn’t ideal (lactose intolerant people are not allowed to gun me down on this point!). A missing ingredient may not be “the end of the world”, but you know something will be missing.
Don’t be afraid or hesitant to engage with a financial plan. Start slow, start small but in the end you just need to start. Just to wrap up and bring this journey full circle, I need to address this; pineapple doesn’t belong on a pizza. Putting pineapple on a pizza is akin to placing racing stickers onto a Ferrari.
Enjoy your financial planning journey and catch you on the next episode in the series.