10 Principles of good financial planning

Each one of these points is worthy of a little meditation:

1. Set measurable goals

2. Understand the effect your financial decisions have on other financial issues

3. Re-evaluate your financial plan periodically

4. Start now – don’t assume that financial planning begins when you get older

5. Start with what you have – do not assume that financial planning is only for the wealthy

6. Look at the total picture – financial planning involves more than just retirement planning or tax planning

7. Don’t confuse financial planning with investing

8. Don’t expect unrealistic returns on investments

9. Do not wait until a financial crisis to start planning

10. Take control – you are in charge of the financial planning process

A financial planning professional is trained in following a planning process that is systematic and thorough, so these elements will be taken into account - that's why pou should use one.

Do nothing about the interest rate cut and make R98 969.86

The Reserve bank cut interest rates by 0.5% per annum in an effort to boost the economy. The major banks implemented the cut from 19 November 2010.

This equates to a monthly saving of R32.40 per R100 000 owing on a homeloan over twenty years.

This may seem like a drop in the ocean, but it can make a real difference if ignore the reduction and keep paying the same as you were before.

Here is an example to illustrate the amazing effect of such a small commitment:

Homeloan                    R500 000
Term of loan                R20 years
Interest rate                 9.5% (before the rate cut)
Monthly repayment      R4660.66

Reduced interest rate   9.0%
Reduced repayment     R4498.63
Saving                         R162.03

If you keep paying the original repayment of R4660.66, you will settle your homeloan in 18 years and 2 months – that’s 22 months early.

Your saving? 22 months x R4498.63 = R98 969.86

What to do if you're facing retrenchment

Retrenchments are rife in SA at the moment, so even if you’re not expecting to be retrenched, it can’t hurt to be prepared to handle the situation. From a financial perspective, preparation means looking at ways to meet your monthly costs, while keeping your long-term financial goals on track.

 

Here is a checklist of some important considerations to make:

• How long would it take to find a job. Check with recruitment agents that specialize in your field of work, and maybe even submit your CV.
• Would you receive a retrenchment package including severance pay and leave pay? How much would it be after tax? Legally, you should receive one week’s pay for every completed year of service and the first R30000 would be exempt from tax – the balance is taxable at your marginal rate of tax.
• Besides your severance package, what cash is available to you from your savings, investments or access facility on your bond?
• Do you qualify for UIF and how would you go about claiming? (In the event that you do not get a job immediately, you will need to prepare to survive on whatever resources you have accumulated to date. The idea would be to first use severance funds and UIF benefits, then your savings, then move on to investments if necessary.)
• Besides taking stock of your resources, you should also look at reducing costs to make your funds stretch further, so go over every item in your budget asking what can be cut, reduced or delayed.
• Look at any agreements for contractual spending (E.g. cell phone contracts) and see what the implications are of terminating or changing these agreements.
• Find out your vehicle settlement and trade-in values and explore what help the financial institution that has financed the vehicle can offer - many allow for you to miss a few payments by arrangement.
• Did you take retrenchment insurance when you financed the vehicle? How does it work?
• Do your personal insurance policies and investments allow for premiums to be suspended, or is there retrenchment cover on the policies? What are the implications for your cover/investment?
• If you should run out of funds, do you have retirement benefits that would be accessible? Should your investment portfolios be restructured with a possible withdrawal I mind?
• Can your medical aid be downgraded for a period to reduce costs?
• Having made all the adjustments that are possible, can you make ends meet? If not, what should be cut from your budget next?
• Consult a qualified financial advisor just to be sure.

Being mentally prepared for a setback like retrenchment gives you the advantage of lower stress levels and clearer thinking, so you can take appropriate action rather than make rash decisions that impact you more negatively than necessary.