JOHANNESBURG – Saving and investing may become increasingly difficult in your thirties as your financial responsibilities increase.
But sound financial decisions during this phase of your life can have significant benefits in the long run.
In this column, Wouter Fourie, director at Ascor Independent Wealth Managers and the Financial Planning Institute’s financial planner for 2015/16, answers four questions about saving and investing in your thirties.
1. What are the most common mistakes associated with managing money and investments in your thirties?
In practice, we generally see seven common mistakes.
The first is failure to draw up a budget in writing. A proper budget is the starting point of all financial discipline. It is also important to include your partner in this process to ensure you are on the same page.
The second mistake is to run before you can walk – in other words, to invest before you have accumulated some savings. It is vital to have an emergency fund, which must have sufficient reserves to cover three to four months’ worth of expenses. This should protect you from a debt spiral in case of a financial emergency.
The third mistake is bad debt. A loan to buy a house is considered “good” debt. Bad debt is using credit to finance furniture, electronic appliances or vehicles. Consumers often take on bad debt in an effort to keep up with the Joneses.
Neglecting to save for retirement from an early stage is another common blunder. At the age of 30 investors may argue that retirement is still a long way off, but it is important to contribute at least 15% of your gross monthly salary to your employer’s pension fund or a retirement annuity. There are significant tax benefits to such a strategy.
A fifth common error is to contend that wills are for the elderly. Draft a will as soon as possible, review it regularly and tell your loved ones where to find it.
Investors are also prone to arguing that they can control everything and that bad things only happen to other people. Make sure you have adequate life insurance, dread disease, disability and medical cover.
Finally, investors often invest too conservatively during this phase of their life. At this stage, you still have a long way to go to retirement and are in a position to take on more equity exposure. It is also essential to get proper advice and assistance with your investment decisions.
2. Do you need life insurance during your thirties?
Life insurance is important if you have dependents. It is also imperative to ensure your dependents will be in a position to maintain their current living standard if you pass away.
A CERTIFIED FINANCIAL PLANNER® Professional would be able to assist you in determining the exact amount of life insurance you need. Other factors such as estate duty and executor fees may also have to be taken into account. Review your cover regularly as your needs change.
Insurance companies are very competitive and adjust their products over time – you may benefit from lower premiums.
3. If you are married with small children, which financial products and other investments might suit your needs?
Broadly speaking, there are three categories of products that you may want to consider. The first is risk insurance cover, which could include dread disease cover or trauma insurance, life insurance and disability cover as well as a medical aid.
You should also consider short-term insurance cover to protect your assets and belongings – your house, its contents and your car.
Lastly, protect your financial future by establishing an emergency fund, saving in a pension fund or retirement annuity and provide for your children’s education.
4. Members of the singles club may be in a better position than their counterparts with families. How can these individuals ensure that they take full advantage of their situation?
It is much easier to save a bigger portion of your income if you don’t have any dependents, but it is also important to avoid the temptation of buying all sorts of luxuries. Single individuals should also have adequate risk cover such as dread disease or trauma cover, disability cover and income protection.
It is still important to protect your ability to generate an income. If you have more disposable income available, it is vital to make use of the tax deductions allowed for contributions to a pension fund and to invest what is left in a well-structured unit trust or stock portfolio.
One of my clients started to apply these principles during his early twenties. The result? His investment portfolio grew to R1 million before his 30th birthday.