Sanlam Umbrella Funds Member Newsletter
Issue 7
August 2011
Embark on the journey to wealth
CONTENTS
Providing for changing needs
By Karin Muller, Head of Sanlam Topaz
1. Embark on the
journey to wealth
2. Five common
financial mistakes to
avoid when starting
out in the job market
“Teach your children
the value of money
from a young age.”
Throughout life, there are specific stages
that bring with them specific financial
needs. To help ensure financial
wellbeing at every stage, it is important
to make wise financial choices.
Starting out as a student
other partner handles money, and plan
how financial responsibilities will be split.
It is important to ensure that if something
happens to the income of the one
partner, the other is looked after. Death
cover, in addition to disability cover, is
crucial. It is also important for couples to
research the different types of marriage
contracts.
Having children
The student stage brings a growing
sense of responsibility. It becomes
crucial to effectively manage cash flow,
to learn to live within a budget and to
make wise financial choices. It is
important to fully understand the
implications of debt - such as a student
loan - and to think about a financial plan
to pay it back and set future financial
goals.
When you have financially dependent
children, you need to draw up a will and
take out adequate life cover. If
something happens to the parents,
children need to be looked after until
they can take care of themselves. Saving
for your children’s education and
obtaining a more comprehensive medical
aid plan are also important.
Accepting your first job
Teach your children the value of money
from a young age. Show them how to
prioritise their spending and how to save
for things they really want.
A job often involves decisions about an
appropriate medical aid and retirement
savings. Learn as much as possible
about the different options you have.
This may be the first time you receive
such a large amount of money - and it is
easy to make impulsive decisions
without fully considering all your monthly
expenses.
As an individual, your ability to earn an
income is your biggest asset as this will
help to create wealth in the long run.
Protect this ability to earn by having the
right disability insurance in place. This is
a good time to find a trustworthy financial
adviser.
Getting married
The sooner couples start thinking about
how finances work in their marriage, the
better. Try to understand the way the
Going through divorce
Divorce, unfortunately, is a reality.
During such an unsettling time, financial
matters are often last on the list of
priorities. When it is, decisions can often
be
made
emotionally.
Divorce
considerations include how to split
properties and bank accounts, how to
change policies and beneficiaries, how to
settle the divorce and more. Now is the
time to take stock of all household assets
and liabilities, and to consult a
professional
financial
adviser
for
guidance.
Buying a house
For most people, buying a house is the
biggest financial decision they will make.
It is better to ask a trusted financial
adviser instead of a bank to help you
draw up a financial plan to determine
your real affordability levels.
Often, people are unaware of the real
cost of owning property and of the role it
plays in their total financial position. In
addition to home insurance, they should
invest in a policy that pays off debt if they
lose their ability to earn an income or if
they die.
Retiring comfortably
As retirement approaches, many things
change – lifestyle, tax position, needs,
expenses and mindsets. While some
expenses may decrease, such as
transport or housing, some may
increase, such as medical expenses.
Choose a medical aid plan that suits
your lifestyle and that covers your
medical needs adequately. It is important
to start saving for retirement well in
advance.
It is crucial that income keeps up with
inflation. An annuity, for instance, is a
product which will help pay an income for
a lifetime. So it helps to protect yourself
against the risk of living longer than your
income lasts.
“The surviving partner
will probably get a lump
sum that will help
provide for certain
things, but may need
advice on how to
manage it.”
Coping with the death of a partner
This is especially important to consider if
the other partner ran all the financial
affairs. The surviving spouse should
determine what policies the deceased
spouse had taken out, contact these
companies to inform them of the death,
and claim against them.
The surviving partner will probably get a
lump sum that will help provide for
certain things, but may need advice on
how to manage it. He or she could, for
instance, buy an annuity to receive a
regular income. The surviving spouse
may need to change the beneficiaries on
the policies and also change his or her
will.
Updating your financial plan during
your journey
Throughout life’s journey, financial needs
change. It’s advisable to speak to a
financial adviser to ensure that your
financial plan is current and suits your
needs.
Five common financial mistakes to
avoid when starting out in the job
market
By Peter Castleden, head of Actuarial
Product
Management
at
Sanlam
Personal Finance
Landed your first real job and enjoying
that hard-earned salary? That’s great
news. But to make sure you manage
your money properly, watch out for these
very common financial mistakes often
made by new earners.
Mistake 1: Over-estimating how far
your salary will go
If you have just graduated from school or
varsity, and received your first-ever
salary, it is very easy to fall into the trap
of believing that you have hit the jackpot.
If you have been scraping by on a
measly income from student jobs during
your studying years, your first proper
salary can seem much bigger than it
really is. As a consequence, people often
overspend from the very first day after
being paid, and battle to make it to the
end of the month. Train yourself to live in
a financially disciplined manner from day
one.
•
Suggestion: Draw up a budget before
you get paid and stick to it. Work out
how much your monthly expenses
are so you know how much is left
over to enjoy. It is important to
distinguish between wants and
needs. Needs are things like
electricity, food and rent, and wants
are things that you want but don't
need like weekends away and
jewellery. Pay for your needs and
prioritise your wants.
Mistake 2: Saying yes to all those
offers of credit
You will be stunned at how much credit
is made available to you once you have
a regular-paying job. This includes credit
cards, store cards, personal loans and
hire-purchase offers. Although this credit
does allow you to experience instant
gratification, the interest rates you pay
on these types of credit are normally
high. This is one of the biggest mistakes
that people make. Once you fall into this
potential debt trap it is hard to get out.
•
Suggestion: It is far more sensible to
save up money over a few months in
order to make big purchases. If you
buy it on credit you have to pay it
back with interest.
Mistake 3: Pre-spending your salary
before you receive it
This is related to the misuse of credit
cards. Credit cards in general are quite
convenient if used appropriately. If you
don’t use them to go into credit, they can
be a very cost-effective way of doing
most of your day-to-day transactions
(you don’t normally pay to swipe your
credit card). However, what many young
people use their credit card to pre-spend
their next salary. You can quite easily
convince yourself that it is not so bad to
go into credit on your credit card,
provided that your next salary will
remove the negative balance on the
card.
“Be sensible and buy a
car that you can really
afford.”
That’s all good and well, but you can
easily fall into the habit of spending
slightly more each month than you get
paid. When you do this, the amount of
credit due at the end of the month
steadily grows.
•
Suggestion: If you feel that you are
not disciplined enough to stay out of
credit card debt, then it would be best
to avoid credit cards altogether.
Mistake 4: Buying a car on ‘easy
credit’ terms
When starting out, many people jump at
the first opportunity to purchase a car –
either their first car, or to replace their old
rusty student model. That is fine, but you
need to be careful when borrowing
money to purchase this car. Often
vehicle financing is structured with
something called a “balloon payment”. A
balloon payment is expressed as a
percentage of the loan amount, and is
only payable at the end of the loan term.
These balloon payments can be as high
as 50% of the loan amount, and the idea
behind offering a balloon payment is that
it can significantly reduce the monthly
vehicle repayments to make the car
seem more affordable. The catch is that
at the end of the loan term, you need to
come up with a large amount of cash to
keep the car. If you cannot come up with
it your car will either be repossessed or
you will be “forced” to trade in the car,
purchase another one and start the cycle
all over again. A good rule of thumb
when buying a car on credit is to avoid
balloon payments at all costs. If you
cannot afford the car repayments without
the balloon payment, then you actually
cannot afford the car.
•
Suggestion: Be sensible and buy a
car that you can really afford – i.e.
one which you can pay off completely
by the end of the loan term. If you
can manage this, it is also worth
saving up for a few months so that
you can put a deposit down for the
car. With a deposit, you can often
negotiate a better interest rate on the
car loan.
Mistake 5: Delaying
retirement provision
savings
and
This is one of the most common
mistakes that young people make. It is a
very good idea to start saving money
from your very first salary. Saving
includes investing money for retirement
(which may seem a lifetime away but the
earlier you start, the exponentially more
you will have ‘in 40 years’ time’) and
general savings. There is an old adage
that says: "Pay yourself first". There is
truth behind this. If you delay starting to
save for a few months or years, it is very
difficult to start after that. The reason is
that you unconsciously adjust your
lifestyle to the amount of cash you have
available. If you save from the first
month, you essentially restrict the cash
available, and you adjust your lifestyle
accordingly. It is never easy to start
saving at a later stage, because you will
have to get used to living on less cash.
Saving is also a great habit to get into.
•
Suggestion: When you receive your
salary at the beginning of the month,
put your planned savings amount in
another account. Do not fool yourself
by thinking that you will save
whatever is left at the end of the
month. More often than not there will
be nothing left to save. The easiest
way to instil this discipline of paying
yourself first is to set up a debit order
“The easiest way to
instil this discipline of
paying yourself first is
to set up a debit order
which runs on the 1st of
every month.”
which runs on the 1st of every month.
Each time you get a pay increase,
also increase your savings at the
same time.
CLIENT CALL CENTRE SERVICES
Sanlam Umbrella Fund:
(012) 683-3900
Sanlam Futura Umbrella Fund:
(012) 683-3900
REGISTERED OFFICES OF THE FUND
Sanlam Umbrella Fund:
2 Strand Road, Belville,
PO Box 1, Belville 7530
Sanlam Futura Umbrella Fund:
63 Lincoln Road, Belville
PO Box 2853, Belville 7530