Mondli’s current financial situation:
I pay R2 500 a month on my car including insurance, which is financed over six years. I contribute R500 per month to a retirement annuity and I have R1-million life cover. I have saved R20 000 in a money-market account.
His goals:
- To buy a house in two years
- To get married in three years
- To save for retirement
- To save for a second car
- A second house for rental purposes
- Save for my children university education
- Save for a holiday every three to five years.
Maya replies: This is a perfect opportunity to sit down with a financial planner and build a long term financial plan. You mention you have a retirement annuity and life cover through Old Mutual. The broker should, for the commission that was earned on those products, provide you with a financial plan.
They have programmes that can calculate future value of savings and also help you work your savings into your budget. I suggest you contact Old Mutual and insist on the service you have paid for, but also be wary of being sold expensive products when simple, low-cost savings vehicles work just as well, if not better.
However, there are some basic financial strategies worth considering.
Retirement:
At the very least you should be saving 15% of your salary for retirement. This is a necessary goal, the other goals you mention are mostly “want” and you need to work them into a realistic budget.
Given the information you supplied, you should be saving between R1 000 and R1 500 for retirement. A company retirement fund is a cheaper way to save than a retirement annuity, so find out from your company if they would put you on to their company retirement fund either now or when you have completed your trainee programme.
Alternatively, you can increase your retirement annuity contributions but first make sure this is flexible and that you can reduce the contributions without penalties when you are able to join a company fund.
Life cover:
Make sure you have disability and critical illness cover included in your life cover. If you do not have financial dependants (parents, spouse, children) the amount of “death” cover is less important than protecting your future income if you are unable to work
Car debt vs home loan:
You have a 2009 car yet you are already thinking of saving for a second car. Pay off this car and keep it for as long as possible. Car debt is very expensive and if it gets you from A to B keep driving it!
One of main reasons people are turned down for home loans is because of lack of affordability due to car finance. By 2015 your car will be paid off and then you would be in a far stronger position to apply for a home loan. This does mean you will have to wait longer to buy a home, but rather be in a strong financial position so that you do not get into difficulties later.
Also, start to save for a 10% deposit on a home; this will improve the interest rate you receive from the bank. You already have a good start on your R20 000 money-market account.
Savings:
You have a lot of items you want to save for. You need to decide what is important now and how realistic your goals are. You may need to adjust some time horizons.
Identify short, medium and long term goals.
- If you are saving for the next two years, save into a fixed deposit
- If you are saving for three to five years, invest in a low risk unit-trust fund (low equity prudential or absolute return fund)
- If you are saving for more than five years, a unit trust or exchange traded fund (ETF) that invests in equities (stock market) would be an appropriate vehicle.
Be aware that given your earnings, an endowment product would not be beneficial from a tax perspective and is expensive.
Children’s education: Fundisa is good product for this. It is a joint initiative by government and the unit-trust industry. If you invest up to R200 per month per child, government tops up your savings by 25% — no other investment can guarantee you that type of return. Please note that www.fundisa.co.za is NOT the correct website.
Rental property:
This can form part of a successful retirement strategy in building up additional forms of income. A good resource for more information is www.hope.co.za
It is fantastic that you are setting yourself goals and looking at ways to achieve them, but also be realistic about the time frames. Do not take on unnecessary debt to achieve these goals in a short period of time. Rather set time frames that ensure you remain in a strong financial position so that your home or new car are not keeping you awake at night!
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