No matter what the focus of the financial event has been, over the past six months, there was one question that was almost surely raised: What do you think about bitcoin?
A significant surge in the price of the cryptocurrency has sparked an interest that just doesn’t seem to be waning, regardless of whether commentators believe movements remind of 17th century Tulipmania or not. The spike (and subsequent crash) in the price of tulip bulbs in the Netherlands is often referred to as one of the first reported cases of an investment bubble.
The interest in bitcoin demonstrates how fear and greed drive investor behaviour. Am I losing out? Should I get in? Should I get out?
When money is involved, the focus is all too often on products that can “maximise returns”. Unfortunately, greed often results in investors buying high and selling low, making irrational investment decisions and jeopardising their long-term goals.
The challenge is that drafting a proper financial plan is nowhere near as exciting as watching an investment double in price during a short period of time.
And yet, research suggests that many South Africans are struggling to make ends meet, arguably putting them at risk to make irrational money and investment decisions.
According to the 2017 Sanlam Benchmark Survey, almost 73% of professional, middle class South Africans experience financial stress – emotions associated with the difficulty an individual or household may have in meeting financial commitments due to a shortage and/or misuse of money.
Unisa and Momentum’s Consumer Financial Vulnerability Index for the second quarter of 2017, showed that consumer finances have reached a point where they were very sensitive to any changes.
“This means that even a slight mishap will have a severe impact on the average consumer’s cash flow situation.”
Relative to the first quarter, consumers experienced uncertainty regarding their income and believed that they couldn’t purchase the same things they were used to. They were also struggling to settle debt and unable to save sufficiently for retirement and other goals.
An earlier version of this study showed that individuals with a written financial plan were less financially vulnerable, says David Kop, head of public policy and consumer affairs at the Financial Planning Institute of Southern Africa (FPI).
For too long, financial planning has been likened to life insurance cover, disability cover and retirement planning. These are just very small elements of a financial plan, he says.
“A financial plan is a personal plan for how you manage your finances – what your goals and objectives are.”
But what should be included in a written financial plan?
In simple terms, a financial plan starts with three basic steps.
“The first thing you need to have is a budget. If you don’t have a budget, how do you know what you can actually afford to do?”
The second part of a financial plan should review your debt situation.
This process should not merely consider sufficient life insurance cover in the event that the breadwinner passes away, but also put a process in place to manage debt.
If this shows that it will take 20 years to get out of debt, steps can be considered to reduce the payment period, Kop says.
The final step is to consider appropriate savings and investments to meet other needs and objectives.
Nigel Willmott, financial literacy programme author at the FPI, says people often think a financial plan is something that will last twenty years.
Far too often, financial plans are drafted once and left in perpetuity, he says.
“We get married, divorced, there is death in the family, there are children, people lose their jobs. All sorts of things happen in life and I think that the plan needs to be flexible.”
Willmott says often financial planners, when giving advice, largely focus on the event of retirement and the event of death, and almost nothing in between.
“Financial plans must contain an element of education, an element of coaching, an element of counselling, as well as an element of advice and in my opinion, advice comes last. It is the outcome. Clients need to be coached and educated better throughout that process and then counselled as and when required. So the plan needs to be quite diverse, not just focused on ultimate outcomes of retirement and death.”
Willmott says the financial planning process often goes wrong when the assumption is that people are ready to “buy a solution” – ordinary South Africans are just trying to get through today.
It is important to first address the three basic steps of managing money before selling products and solutions. It is also vital to help people understand their attitude and behaviour regarding money, something that is often neglected, he says.
- As part of Financial Planning Week (2 to 8 October 2017), the FPI will host free financial planning workshops over the coming weeks. For more information visit letsplan.co.za
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