FINANCE WELLNESS COACH

QUESTION

I am 32 and think I should start doing something about my financial planning. What should I do and where should I start?

ANSWER

Step one in any financial planning process is to protect your income source.

You need to ensure that you can keep your life on its same trajectory should you be unable to work for an extended period of time owing to illness or disability. Income protection cover will pay you your salary, with annual increases for as long as you cannot work, right up to retirement age if needed.

Many people have a side hustle (or two). If this is a key element to your income, you should ensure that you get this covered. There is cover available for people with irregular incomes from second and third jobs. So, if you’re a teacher who bakes cakes on the side or a graphic designer who sells art on

Facebook, you can and should protect this income stream.

Once you have protected your income, you need to turn your thoughts to investing it.

The earlier you start saving, the sooner you start harnessing the massive benefits of compound interest. You need to get into the zone where your money starts working for you and you are financially free to do the things you want to do – not the things you have to do. I can forward you the link to a podcast of a South African who invested a third of her income each month and became financially free before she turned 40.

So what vehicles should we use to invest in? My first port of call would be tax-free savings. You can invest up to R36,000 in a tax-free savings plan each year up to a maximum of R500,000 in your lifetime. All the investment growth and proceeds would be tax-free. You can also access this money whenever you want to.

Offshore investing must be considered as part of your investment strategy. It is important to diversify your risk and get offshore exposure. If you were living in another country, would you invest all your money in South Africa?

There are several ways of doing this. You can physically move your money into a foreign fund. In the past it was quite a mission to invest offshore. However, products have evolved and you are now able to invest in a first-class offshore investment using foreign currency for as little as R100,000 with very little fuss.

You can also get offshore exposure by investing locally in offshore funds. You can, for example, buy exchange-traded funds that focus on a world index that tracks the performance of the entire world’s economy. You can even buy into funds that track the performance of markets in particular countries, such as China.

The final element of your investment plan would be to look at retirement funds.

There are big tax advantages to doing this. You get a tax break on the contributions you make. The growth inside the fund is tax-free. The downside is you can’t access it before you turn 55.

The big advantage for a 32-year-old investing for retirement is that you can choose very aggressive funds because you will have more than 20 years to go to maturity and by then all the volatility in aggressive funds will be neutralised. You can get a solid start with your savings and get the miracle of compound interest working for you by starting now.

The third element of your financial planning is to look at medical cover. You should consider getting at least a hospital plan. As a 32-year-old you probably do not have any health issues and your use of medical aid is minimal. However, as you grow older your use of medical aid will increase significantly. Now if you only join a medical aid after you turn 35, you will be liable for late joiner penalties. This is a loading that will be applied to all future medical aid premiums that you pay for the rest of your life, regardless of what scheme you join. These penalties are on a sliding scale and range from 5% to 75% being added to your monthly premium.

To summarise: as a 32-year-old you should check that your various income streams are protected and that any former forced absence from work and the ability to earn an income will not take your life off its current trajectory. Then look at investing in tax-free and offshore savings. Start putting aside a slice of your income every month towards your retirement savings and get a hospital plan at the very least.