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A financial health check: Ask yourself the hard questions

Conducting a regular financial health check should trigger an early warning system should any vital signs appear compromised.

Just as we keep tabs on our mental and physical health, so too should we systematically check our financial health to ensure there are no red flags. Conducting a regular financial health check should trigger an early warning system should any vital signs appear compromised, and through the process, help boost one’s financial resilience going forward.

Spending habits

Hard questions: Are you spending more than you earn? Do you have a budget? Do you know where your money is going every month? What is your profit margin? How much do you spend each month on conveniences such as on-the-go coffee, take-away meals, Uber, and eating out?

The key to building wealth is to spend less than you earn and to invest the difference wisely and, as such, knowing what your profit margin is each month is critical. A budget is a simple, yet powerful tool to help manage your money, identify spending ‘traps’ and prioritise your expenditure, but it takes discipline to scrutinise your expenditure regularly and to critically evaluate where you are going wrong. Creating sustainable wealth requires that you cut your cloth according to your means and make tough calls on what you can realistically afford.

Savings habits

Hard questions: What percentage of your net income are you saving each month? Are your savings automated? How easily can you access your savings? How regularly do you access your savings? What are your savings intended for?

Effective saving requires a well-thought-out strategy to ensure that you are maximising your tax deductions, using the appropriate savings vehicles, and saving enough to achieve your stated goals. Before setting your saving strategy in motion, give consideration to your short-, medium- and long-term goals, when you may need to access the money, what tax deductions are available to you, the ease at which you can access your money, the tax implications of the savings vehicle you intend using, and the reputation of the product provider you intend using.

Debt levels

Hard questions: How much unsecured debt do you have? Are you using credit to fund your lifestyle? Are you making regular and timeous debt repayments? Do you have a debt reduction plan in place? How does your debt make you feel?

Debt is an easy place to end up but a difficult place to escape from. If you have unsecured debt in the form of credit cards and retail accounts, it is advisable to keep tight control of the situation. Specifically, if you’re using credit to fund lifestyle expenditures such as groceries, rent, clothing and entertainment, serious intervention is required. Besides negatively impacting your credit score and your ability to secure financing in the future, debt can place a huge emotional burden on you and your loved ones. Take an honest look at your debt-to-income ratio, being the total of your monthly debt payments divided by your gross monthly income, and take immediate action if your debt exposure is too high and/unsustainable.

Cash situation

Hard questions: How much cash are you able to access within 48 hours? How much money would you need to cover your living expenses for a period of three to six months? How secure is your job?

Your emergency capital is effectively a cash cushion designed to tide you over financially in the event of high, unforeseeable expenses, including eventualities such as job loss, serious medical diagnosis, or a personal tragedy that impacts your ability to generate an income. Lack of emergency funding can not only rob you of your peace of mind, but can force you to take out expensive debt which only serves to perpetuate the cycle of debt and inability to build wealth.

Debit orders

Hard questions: When last did you check your bank statement? How much are you spending on debit orders towards costs such as gym and club membership, subscriptions (Spotify, Netflix, Showmax, DStv), cell phone contracts, gaming, online subscriptions, etc? Which of these expenses can you realistically live without?

While the ease at which we are able to subscribe to services is convenient for our busy lifestyles, it’s not always great for our bank accounts – and keeping track of our monthly subscriptions as they accumulate can be difficult. Make a concerted effort to conduct a careful analysis of your transactional account to ensure that every debit order and/or subscription can be accounted for and vetted in terms of its place in your overall budget.

Net worth

Hard questions: What is your net worth? How diversified are your assets? Is all your wealth housed in a single asset type? How liquid or illiquid are your assets?

While it’s important to know your net worth, it’s also important to analyse the nature of your wealth to ensure that your assets are adequately diversified and that your risk is spread appropriately. For instance, if the majority of your wealth is held in business interests and formal retirement funding, you may expose yourself to liquidity risks. On the other hand, if the bulk of your wealth is in property, you may be unnecessarily exposing yourself to the risks endemic to a single asset class.

Retirement

Hard questions: Are you contributing towards an approved retirement fund, either in your personal capacity or through your employer? What percentage of your pensionable income are you investing towards retirement? What is your investment timeline? Is your investment strategy aligned with this horizon? Is it aligned with your propensity for investment risk? When last did you check if your retirement funding was on track?

While retirement may seem far away, it makes sense to take advantage of the tax benefits of retirement fund investing and to ensure that your investment strategy is geared for growth over the long term. If you don’t yet have a retirement plan in place, find an advisor who can develop a baseline plan for you aimed at maximising your tax deductions and who can help you select an appropriate investment strategy for your funds. If you’re investing through your employer’s retirement fund, make sure that you fully understand the investment strategies available to you as the default option on group schemes is often low risk, lower return nature which may not be suited to your investment timeline.

Will

Hard questions: Do you have a will? If not, why not? If you do, when last did you review and update it? Where is it kept? Who else knows about its existence and/or its location? Is it fully aligned with your overall estate plan?

We often take for granted how much changes over the course of a single year and, while you may feel confident that your will is up to date, it’s worth taking out your will to double-check its contents. At the same time, check that your will is dated, signed in full on each page, and that your spouse or a loved one knows where an original copy of the document is kept. Very often, deceased estates face massive delays because the deceased’s loved ones are not even sure whether a will exists, let alone where it is held in safekeeping.

Income protection

Hard questions: Are you a double-income household? Do you have a comprehensive income protection benefit in place? Does it include a temporary income protector? What waiting periods are in place? Do you have emergency funding to cover the waiting period? Is your insurer reputable? Did you make full disclosure when applying for cover? Are there any exclusions on your cover?

Disability insurance is one of the most complex when it comes to the long-term insurance industry, so ideally seek the advice of an independent advisor when it comes to analysing your income protector. Understanding the nuances of your cover and what they mean practically at the claims stage is key to ensuring that you are adequately protected in the event of either temporary or permanent disability. Generally speaking, your income protection benefit depends on your nominated income, so be sure to check your policy document and the details that your insurer has on record.

Short-term insurance cover

Hard questions: When last did you review your short-term insurance? Are you comprehensively insured? What excesses are applicable? Are any of your premiums in arrears? When last did you value your household contents? Is your home security in line with the requirements of your policy?

Lack of adequate short-term insurance can leave a person financially exposed. Further, short-term insurers regularly update their terms and fine print making it difficult to keep track of how you are covered and what your exposure is. Failing to review and update your policy as and when you acquire moveable property in the form of vehicles, equipment and furniture can leave you underinsured at the time of a claim event.

Beneficiary nominations

Hard questions: Do you know exactly what policies and investments you have in place? When last did you check the beneficiary nominations? Which policies pay directly into your estate in the event of death, and why? Do you understand how the beneficiary nomination process on retirement funds works?

Beneficiary nomination plays an important role in your overall estate planning, so it is important to check your nominations regularly to ensure that your insurer and/or investment provider has the correct information on their system. Incorrect beneficiary nomination can not only adversely impact the liquidity in your estate but can leave your loved ones financially vulnerable in the event of your death. Ask your financial advisor to provide you with a detailed policy and investment schedule reflecting your beneficiaries to ensure that your wishes are fully expressed and that your policies are appropriately structured to achieve your estate planning goals.

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Craig Torr

Crue Invest (Pty) Ltd

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