When it comes to financial planning most people tend to start by investing and skip the steps in between. The problem with this approach is the fact that you completely expose yourself from a risk perspective.
Ideally, you should have sufficient assets built up so as to provide you with income or fund your expenses in the event of an accident, illness or disability. However for the majority of us it will take quite some time before we reach this point.
For this reason it is essential to consider the risks involved in your financial planning as well as the various ways to address these risks before you start allocating all your available expenditure towards investments.
What are the risks to consider?
The following should be considered before delving into the world of investments:
– Life Cover (Do I need it?)
– Disability Cover, Dreaded Disease Cover and Income Protection (Am I covered?)
– Medical Cover (Do I have a Medical Aid and/or Gap Cover?)
This list might already have you yawning, but all of these aspects could potentially derail your investment planning if not in place.
How can these events derail your investment planning?
If you do not have sufficient assets built up or provisions in place so as to provide you with income or fund your expenses in the event of an accident, illness or disability, then any financial plans that you have in place will most likely be rendered null and void in the event of you becoming an unfortunate statistic.
This is best illustrated by an example:
John is a 26-year old accountant currently earning R20 000 a month. His employer does not provide any employee benefits and he therefore has to make his own provisions in terms of his financial planning.
After all his monthly expenses, he is left with an available expenditure of R5000 that he can allocate towards his financial planning.
John decides to invest the full monthly amount into a balanced unit trust portfolio and not address any other aspects of his financial planning.
John’s investment portfolio yields a 15% return over the next year, leaving him with a total of R64 301.80 after 12 months of saving.
If John were then to be involved in a car accident and lose his income earning ability, all that he would have available to fund his lifestyle, medical bills and future monthly expenditure from that point onwards would be the R64 301.80 that he has managed to save.
These funds will clearly not be able to support him for very long, as he has not yet built up sufficient assets to provide him with income or fund his living expenses for the rest of his life.
How can you address these risks?
The most cost-effective way to do address these risk events would be via insurance coverage, as these financial products are tailored to address these specific needs.
People are quick to insure prized possessions such as vehicles or electronics, but are hesitant to insure what matters most, namely themselves.
This should be reconsidered, because if you are affected by an accident, illness or disability before retirement or come to your inevitable end, sooner rather than later, the aftermath could be severe.
Take note that the financial products used to address these needs do not follow a one-size-fits-all approach and therefore have to be uniquely structured to meet your individual needs.[tip title=”moneysmart tip”]It is therefore advisable to discuss your financial planning with a Certified Financial Planner® so as to ensure that your benefits are correctly structured. Please contact us if you would like to be put in touch with an advisor who can address your specific needs.[/tip]