The beginning of a new year provides the perfect opportunity for reflection and re-organization of your finances. Follow these tried and tested ways to be a better financial manager in 2017!
LEAVE 2014 HABITS BEHIND
The Christmas season is a season of spending, sometimes overspending! On gifts, food, travel and niceties. As a result, the months of January and February are usually spent scrounging around for money that was wasted in December. To avoid this trap this coming year, think carefully about your January expenses, and set the money aside now.
BEGIN 2017 ON THE RIGHT FOOT
We usually don’t like to put in the work required to really understand our financial positions, but this work is required if we are to make positive strides to building financial security. The process of prudent financial management begins with understanding your current financial position. This you do by drawing up a budget (to list your income and all your expenses), and a personal balance sheet, (to list all your assets and liabilities). These two pieces of information will give you insights about whether you are living within your means or are over-indebted, or whether your assets are enough for the goals you are trying to achieve.
REDUCE YOUR DEBTS TO EASE YOUR CASH-FLOW
Being over-indebted is painful because money that you earn goes into someone else’s pocket, leaving you cash strapped. Make 2015 the year that you will pay off all your short-term debt, and remain with just your mortgage and or vehicle loans. Personal loans, credit cards and store cards are some of the most expensive types of credit you can have. Make sure to use any extra funds you have to pay them off. The best way to manage your credit card is to pay it off in full every month, so that you are not charged any interest. Most credit card will give you 55 interest free days.
THE PROVERBIAL EMERGENCY FUND
The unpredictability of life warrants that you must set aside some funds to be used only in financial emergencies. You must build up this fund to have 3-6 months of living expenses, so that you eliminate the need to borrow money when you have an emergency. This money needs to be kept in a place that is accessible and is low risk.
RE-LOOK AT YOUR INVESTMENTS
Very often we find that we have not optimized our investments to get the most return from them. We often keep funds for many years in call accounts and money market funds, when in-fact they are intended only for short term investments. An optimal investment portfolio will consist of property, shares, bonds and some cash. How you will structure your individual portfolio will depend on your financial goals, your age and risk appetite. Ideally, you will structure your investments as follows:
- Take advantage of your employer’s housing benefit and invest in property. Very often when you retire, your property and pension fund benefit are your 2 biggest assets
- Build up your emergency fund to be a cushion during financial emergencies
- Review your insurance, to make sure that you have credit life on your mortgage: a credit life policy on your mortgage will pay the balance owing to the bank when you die, so that your house can pass to your beneficiaries. If you have life cover, make sure that it is adequate for the number of beneficiaries you will leave behind, and for the liabilities that you want covered.
- Supplement your retirement income by investing in shares and bonds, either directly or through unit trusts. As an alternative, you may consider making additional voluntary contributions to your pension fund.
YOUR WILL, YOUR LEGACY
The final and most important aspect of your personal finances is protecting your assets upon your death. To do this, you need to draft a Will. A Will is just a legal documents that stipulates your wishes upon death.
In the Will, you must specify the following:
- Your assets and liabilities
- Beneficiaries: the people who will inherit your assets
- Guardians: if your children are minors, you need to nominate people who will look after them in your absence
- Trusts: if your children are minors, you can also specify in the Will that their inheritance is not to pass to them directly, but must be held in a Trust until they are old enough to have the assets in their names. If you opt for this, you must also name Trustees for each Trust. These are the people who will manage the assets in the Trust on behalf of the children.
You need a good lawyer to draft a Will and Trust Deeds for you.
In all your efforts to manage your finances better, do consult an independent financial advisor. Their role is to give advise, and not merely sell you products. They must first understand your financial circumstances before they can make any recommendations to you.