This week our Minister of Finance, Enoch Godongwana, will be delivering his budget speech, which will outline government’s planned expenditure over the next year.
In his speech, Minister Godongwana will be highlighting what areas of need – such as housing, education, and healthcare – government intends on prioritising in terms of how much budget they are allocating to each sector.
Now, although it’s probably a given that you don’t have access to the billions of rands that government does, the principle of budgeting – planning your monthly and annual expenditure – should apply to everyone who earns an income. One key aspect of budgeting is saving, and it is an element often neglected, as the cost-of-living increases and our short-term-gratification culture dominates. In July 2021, the South African Reserve Bank reported that households were spending three-quarters of their take-home pay on debt. The need to budget and save have become even more critical over the past two years with many people having lost their job or income during the hard lockdown in 2020, and it’s important that we take control of our finances to ensure a better future for ourselves and those dependent on us.
Life insurance and savings are part of your financial plan for the future
When you think of your savings plan, life insurance is not likely to be the first thing you associate with saving up for what is important to you. Most people see life insurance as a grudge purchase, something that you only benefit from should something serious happen to you, or even worse, if you should die.
It’s important to have both life insurance and savings plans, as they each safeguard your future in different ways. Life insurance is necessary to protect you and your loved ones should anything happen to you and you can no longer provide for the family, while savings are critical in helping you prepare for unexpected expenses such as an emergency vehicle repair, fund larger future needs such as your retirement, and keep your debt to a minimum.
On the surface, life insurance doesn’t seem to have much to do with those financial goals you set yourself. But it’s important to see life insurance, disability and critical illness cover, and your savings as important vehicles that work hand in hand.
Ensure you structure your insurance cover efficiently so you can have more left over for savings
Your life insurance policy should be structured so you’re managing your premiums as efficiently as possible, paying as little as you can for adequate life cover, so you have additional amounts available to supplement your savings. Getting needs-matched cover is key so that you can ensure that you’re not overpaying for cover that you don’t need, and for a period of time that you don’t need that cover.
A good example of overpaying for insurance is cover that would pay out to look after your children if you were to pass away. You only need this cover until they’re expected to become financially independent, so you should never take out whole of life cover to cover this need, as you’ll be paying for cover after the period that the need comes to an end. Also, because the cover term is one of the factors that insurers take into account when pricing cover, you’ll pay more from the first premium for cover that’s expected to last for a longer period.
Evaluate your portfolio regularly
It’s important to set up regular sessions with your financial adviser to reassess your financial portfolio and make changes if necessary. For example, perhaps you took out some life insurance a few years ago to pay off your bond in case you became disabled or passed away. You recently came into an inheritance, however, and have since used this money to pay off your bond. Because you no longer need this cover for your bond, it is a good idea to move that cover to an area in your policy where you are possibly underinsured, or to move that amount into a savings vehicle like your retirement policies.
Be aware that a critical illness or disability can drain your savings
Critical illness has an important link to savings. For example, you could become disabled in a car crash and need to make multiple changes to your house, such as ramps and modifications to your bathroom and kitchen. If you don’t have cover in place for this, the money will need to come from somewhere and unfortunately that will mean digging into savings. A small emergency fund will not be enough to pay for the significant additional expenses that could arise from a serious illness or injury, so it’s a good idea to ensure you’ve got critical illness cover on your life insurance policy.
A financial adviser can help you
Insurance products can be pretty complicated. Making the wrong decision can have serious consequences for you and your family, so it’s worthwhile to shop around for the best advice. Fortunately, many well-qualified financial advisers can answer your questions, provide clear explanations, and help you understand what you’re buying when it comes to life insurance. Financial advisers must meet strict regulatory requirements and be properly licensed with the Financial Sector Conduct Authority (FSCA) and product providers.
If you’ve been thinking about your savings and how best to plan for your future financially, then there is no time like the present to take action. Look for online recommendations for financial advisers or ask people you know who they trust their money matters with. Start your savings plan today – your future self will thank you for it.
This article was originally published on FAnews on 22 February 2022 and is attributed to Clyde Parson, BrightRock Chief Innovation Officer. Click here to read the original online version.