If there is one thing most people can agree on, it’s that being an adult is hard. Getting your finances in order is one of the “adulting” tasks that can seem especially overwhelming – and one that is particularly tempting to put on the back burner – repeatedly. As we come to the end of 2021, now is the perfect time to reflect on the year that was and set new financial goals for 2022. From budgeting to having an emergency fund to putting the right cover in place to protect your loved ones, a solid plan will enable you to step into 2022 feeling financially confident.
Lee Hancox, head of channel and segment marketing at Sanlam, shares her top tips for your personal finances in the new year.
1. Take the first step
The best place to start may be your bank statements. Reviewing these may help you to determine whether you are spending your money optimally and will help you create a spending plan. In terms of the 50/30/20 Rule, it is recommended that you spend at least 20% of your disposable income on protecting and creating wealth – on insurance and savings.
2. Don’t DIY, do it with a pro
As tempting as it might be to try and figure things out on your own, your finances are one area where it’s best to have a professional in your corner. A financial adviser will have the requisite qualifications, expertise, and tools to conduct a thorough financial needs analysis and help you develop a holistic financial plan that addresses any shortfalls. They may also rope in specialists to assist with specific aspects of your plan. It is then up to you to stick to your plan, let your financial adviser know about any material changes in your life and to schedule regular check ins.
3. Make credit work for you
When you start working you may have student loans to pay off, and it’s tempting to take up the offer of a credit card or to blow your first pay cheque. Before taking on debt, make sure you have a solid grasp of the concept of compound interest and a keen understanding of how changes in the interest rate and term affect your repayment obligations. Not all credit is bad, but it needs to be managed very carefully so that it works for you, not against you.
Good debt typically helps you to invest in your future earning capacity or an asset that increases in value over time – student loans and home loans are examples of good debt. Bad debt on the other hand, is usually incurred when you invest in assets which depreciate in value – particularly those that are very expensive – or you borrow funds to purchase goods you can do without or are perishable. Consider your choices carefully, plan ahead for things you want and make use of emergency savings instead of credit when unexpected expenses crop up.
4. Consider your financial must-haves
Income protection cover, a type of disability cover, is a must-have – with so many earning years ahead, the loss of your income is your single greatest risk. Also, start saving for retirement now! Delaying your savings comes at a cost: due to the magical effect of compound interest, for every five years you delay, the savings contribution required from you in order to meet your retirement goal will roughly double. Medical aid and severe illness cover are also very important to ensure you’re covered in case of an illness. Establish an emergency fund for immediate needs and/or when insurance is not available.
5. Review your financial plan regularly
Much like an annual health check, a financial plan must be reviewed regularly to fine-tune where necessary and ensure you remain on course to meet your financial goals. Speak to your financial adviser to decide how often you need to meet. In addition, your financial plan should be reviewed when there is a significant change to your personal circumstances – for example, the birth of a child or taking on more debt, both of which may require changes such as additional life and disability cover, changes to your medical aid or a review of your will.
“For many, managing personal finances can feel overwhelming – that’s why it’s a good idea to have a professional in your corner,” Hancox says.