There are a number of money myths which, if believed, can set us on the wrong path and ultimately cost us money. Let’s examine some of them more closely.
- Myth: I must have life insurance
- Myth: It’ll never happen to me
- Myth: Credit cards are fine as long as I make the minimum payment
- Myth: Financial planners sell products
- Myth: All debt is bad
- Myth: I don’t need a will
- Myth: I can’t afford to save
- Myth: I’ll never get out of debt
- Myth: I don’t need to save for retirement because I don’t plan to retire
Reality: Whether or not you require life insurance depends entirely on your personal circumstances. Your marital status, the number of dependents, level of debt and the legacy you wish to leave behind are all determinants in assessing your need for life cover. A 25-year-old income earner with no debt, spouse or children will have little need for life cover. However, if you are married with children and have a home loan, you would be a candidate for life cover. In the event of your death, you would probably want enough liquidity in your estate to settle your home loan and provide for your spouse and children for a pre-determined period of time. Having said that, the younger and healthier you are when you apply for life cover, the more favourably you will be underwritten.
Reality: Think disability and our minds tend to think of the worst possible scenarios involving permanent injury and disfigurement. Rather than permanent disability, it is a temporary disability or illness that we should, in fact, be more concerned with. A recent survey by FMI revealed that a 25-year old has an 86% chance of suffering from a temporary disability and a 23% chance of contracting a severe illness. Discovery Life’s stats show that 46% of its income protection claims are from clients below the age of 40, while Hollard revealed that vehicle accidents are most common in men under the age of 30. Depending on your occupation, a temporary disability or illness can have massive financial repercussions if you aren’t insured. A chiropractor with a broken arm, a hairdresser with carpal tunnel syndrome, a photographer with an eye injury or a nurse with a highly contagious illness – these are all forms of temporary disabilities which can affect your ability to generate an income – and it is worth insuring against the risk.
Reality: An attractive feature of a credit card is the convenience of paying a small amount of your balance each month, and it is always tempting to do so. However, paying the minimum monthly amount is actually the most expensive option because it will cost you the most interest in the long term. The higher the interest, the more you will pay; and the longer you take to pay, the higher your debt load will be. When making payments towards your credit, always pay more than the minimum amount. Not only will you save on interest, but you will pay off your balance sooner and improve your credit score.
Reality: There is a big difference between brokers who are financially incentivised to sell insurance policies, on the one hand and financial advisors who charge a professional fee. Brokers are salespeople who sell policies on behalf of insurance companies, and who generally earn a commission which is based on the policy’s premium. Brokers are therefore incentivised to generate sales and reach policy sales targets. On the other hand, fee-based advisors do not sell policies but rather financial advice. A fee-based advisor generally quotes an upfront fee to develop a comprehensive financial plan covers investment planning, retirement funding, tax and estate structuring, risk protection, financial management and healthcare.
Reality: Expensive, unsecured debt that is incurred to sustain an unrealistic lifestyle or to finance your ‘wants’ rather than your ‘needs’ is bad debt. No debt is nice, but some debt is necessary for certain circumstances and we refer to this as ‘good debt’. Good debt, such as a home loan, is debt that is required in order to pay for big-ticket items that one would not otherwise be able to afford. A home loan allows you to enter the property market, enjoy decent accommodation and live a comfortable lifestyle. A low-interest student loan is also an example of good debt as it allows you to further your education, enhance your skills set and increasing your future earning potential. While vehicle debt can be expensive, being mobile is essential for daily functioning. Making smart choices when it comes to buying a vehicle is important to avoid being saddled with unnecessary debt. Be practical about your transport needs and don’t spend too much on a car just to keep up appearances.
Reality: If you die without a will, you are deemed to have died intestate and your estate will be wound up according to the laws of intestate succession. This means that your estate will be divided amongst your surviving spouse, children, parents or siblings according to a set formula. You will forfeit the privilege of deciding what should happen to your estate and your assets will be allocated in terms of pre-determined guidelines. Regardless of your net worth, it is always advisable to have a valid will in place to ensure that your assets are distributed in line with your wishes.
Reality: A basic tenet of building wealth is to save first and spend what is left. Spending first and trying to save what is left is unlikely to result in any real savings. Turn your strategy around and decide how much you need to put away for your short, medium- and long-term goals. Once you’ve set aside your savings, tailor your lifestyle so that you can live within your means. Don’t be afraid to start out small and increase your savings premiums over time. As you see your savings balance grow, it is likely you will become more determined to save more – after all, saving eventually becomes a habit.
Reality: Debt is one of the easiest traps to fall into and one of the hardest places to get out of – but it can be done. A bit like quitting smoking, you’ve got to really want to do it because it takes an enormous amount of hard work and sacrifice. One of the easiest ways to start killing your debt is to find an expense in your budget that you can eliminate for a few months, for instance, a DStv subscription or a gym membership. Re-direct this cash towards settling your smallest debt. Once this debt is paid off, redirect everything towards the next largest debt and so on. Remind yourself that you are making short-term sacrifices for a longer-term goal of being debt-free.
Reality: Increased longevity and massive advances in medical science mean we are all living longer and this, in turn, has impacted on the retirement industry – with many people choosing not to retire at all. The financial, physiological and emotional benefits of working longer are well-documented, although working indefinitely is not always possible. Retrenchment and illness, amongst other possible setbacks, can thwart your plans to work past formal retirement age and absence of a retirement nest egg can spell disaster. You may not have any plans to retire but it still makes sense to put a worst-case scenario in place.