You go away, but banks don't

2015-06-23 06:50

One of the most crucial elements of any great financial plan is looking after your assets. I won’t get into all the nuts and bolts of what an exemplary financial plan looks like, but you can get a fantastic introduction here.

All financial plans are ultimately based on having some form of an income stream. If you're an employee like me, that income stream is your salary.

I mentioned in a previous article that your most valuable asset might in fact be you. Not your car, your investment policies or even your house. You are worth even more when you consider that it’s you that earns a salary, it’s you that starts a business or a side-venture and it’s you that can apply yourself towards financial pursuits.

If you consider the sum of your earnings that lie ahead of you, even just the ones you’d expect, you’ll arrive at a tidy sum.

A simple calculation_ based on a R25, 000 per month salary for a 30 year old, will present you with a combined earnings figure of about R34 million.

While I have no secrets for allowing you to get your hands on all of that now, I would like to offer some wisdom that is numerically speaking, as valuable.

Uh…how many million was that?

While enticingly large in value, much of this future income is already spoken for. Bond installments, medical bills, groceries, school fees, university fees in the later years and that holiday you don’t yet know you want – a very large amount of this money will be required for your future living expenses as they arise.

Without your ability to earn a salary, these future costs cannot be paid. Granted, the expenses generally arise as the income is earned, i.e. month by month, but what happens when there is no income? What happens if you aren’t around? What happens if you die?

Let me help you with this one.

If you die, you don’t get to earn a salary. You don’t get bonuses and you don’t start that side business.

Do the expenses keep racking up?

Likely yes.

So how do they get paid?

They don’t!

Therein lies the massive warning.

We build our lives based on our ability to keep earning. We borrow money over 5 years to buy a car, now. We buy houses and agree to pay them off over 20 or even 30 years, effectively setting aside a portion of a generation’s future earnings to put a roof over our heads, now.

We have children, with visions of sending them to good schools and then to a tertiary institution.

We start to live our ‘now’, by borrowing from our future selves.

But when your future self doesn’t exist anymore – things get difficult.

Putting a value on You

It’s harder for people to think of their ability to get paid every month as an asset worth insuring, even though in my example it could be worth as much as R34 million, than it is to recognise the need to insure one’s car or house.

Your bank and debtors don’t care that you’re not around. They’ll still be requesting their debit order at the end of the month, same with your medical aid premiums. Your insurer doesn’t care.

You’re dead, so you’d probably not care too much either, but the problem now becomes that of your dependents that still need groceries, their school fees paid and a roof over their head.

If you have someone who relies on you for an income stream, whether it’s a parent, a spouse or a child and they would have no or little means to replace that income stream if you died, then you absolutely have to have a serious conversation about life insurance.

But life insurance sound horrible and I don’t want to even think about it.

Life insurance is one of the simplest things around and one of the core components of a great financial plan. A lot of your own future financial plan is based on your ability to earn money and to apply your savings to a sound investment. Without this income stream, everything falls flat.

Your spouse and your dependents’ financial plan is likely your financial plan given your intertwined lives, such that should you die, their entire plan is left wanting without the core ingredient - income. Life insurance makes sure that they still have money to work with and continue on with their financial journey.

If you think this article does not apply to you because your employer gives you ‘free’ life insurance, please think again. Most companies offer life cover in the region of 3 or 4 times your annual salary. On the contrary, if you are looking to replace your entire future earnings by way of a present-day lump sum, you may need much, much more. Find out from your HR department just how much you qualify for. Is this enough?

Don’t know?

Consult a financial advisor.

Bringing in the muscle

If there is one good example of where 'spending money to make money' actually holds true and isn't just a clever sounding thing to say, it's in paying for good financial advice. Personal financial decisions permeate almost all aspects of our lives. How much house we choose to buy and how much we'll likely end up paying on our bonds for the next 20 years, where we invest our money and what our investment returns subsequently look like, as well as how we choose to spend our income in light of our relationship with our money.

Their time spent evaluating your needs will likely cost you nothing should you decide to place your business with them, which makes it easier to engage with someone qualified to get their best advice.

How much is it going to cost?

Life cover is not expensive and the peace of mind that it brings is priceless. As with all insurance, your premium is based on your risk profile. Older people will pay more, as will people with ill health. These are all things that your financial advisor can help you with and explain to you.

Most life insurance is flexible in that it can be increased or decreased as your circumstances change. The most important thing is to get a policy in place.

A parting “please”

Don’t be afraid to reach out if you feel that you need financial advice. Nobody would dare try managing their own cancer diagnosis, yet there is something about personal finance that leaves most people very cagey about their finances, even though financial mismanagement could leave you destitute for decades in your later years.

Nobody is asking you to share your salary slip with Facebook, but I would ask that you recognise your shortcomings when it comes to knowing how to manage your money and to not be afraid to reach out if help is needed. You’d ask for a referral for a good cardiologist or a plumber, why not a financial advisor?

I suspect that it’s because people are intimidated by people who know more about money than they do, as if they are somehow better at life than you are; by admitting that you’re incapable or at least poor at managing your own finances that it’s an indictment on your character.

It is this exact reluctance on the part of people to get involved in their own personal finances that has allowed so much mis-selling of financial products in the past, which left the industry with a very bad rap.

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