Family Finances on Family Day

Family Finances on Family Day 

Spend some time now to avoid the trap of retiring with insufficient funds  

By Mariam Cassim 

As we take a break from our busy work lives on this Family Day weekend, why not spend a few minutes considering one of the most important aspects of modern family life: your finances? Every single family, irrespective of circumstances, age, size and financial status, needs to have a sound financial plan. And the younger the family, the more chance it has to begin its financial journey on the right footing. The statistics around how many people arrive at retirement age with insufficient funds to maintain their lifestyle are truly frightening. Similarly, numerous families are faced with a sudden emergency that, if not prepared for, can lead to ruin. 

I honestly don’t want to take up your holiday time with a long, detailed set of guidelines, so why not just jot down the following 7 points for deeper consideration once the holidays are over. But don’t leave it too long – the sooner you act, the better!  

Here is a checklist to build long-term financial health of your family. 

1.      Understand the numbers 

Finance is pretty much all about numbers and every family should keep track of how its finances work. It needs to be kept simple though – start with “cash in and cash out”. Ask the following questions: 

·      What is my family’s income after tax, both now and in the future? How secure are these incomes? Are both parents going to continue working? Do we have any sources other than salaries?

·      Where do we spend our money? This is a very complex question and needs careful record keeping, so start a simple journal of how you spend your cash. It may be useful – see the next point on budgeting – to categorise expenses under headings such as regular monthly living expenses (groceries, school fees, motor vehicle and travel, insurance premiums, phones, mortgages, donations and so on), fun expenses (restaurants and outings) and large irregular expenses (holidays, capital expenses, home improvements). End up with an average spend per month over a 12-month period. 

The next step is to compare the two: basically, does my family make a profit (spend less than it earns,) a loss (spends more than it earns) or does it break even? 

Ideally, this analysis should end up in the first category, meaning that you have excess money to save and invest for the long-term. Breaking even is sort-of OK, but must be looked at. Making a loss is simply not sustainable and needs urgent attention. 

2.      Build a budget 

Based on the above, every family needs to make a detailed budget and stick to it. But how do you find the balance? What is more and what is less important? There is no such thing as a perfect world, so I suggest you build this budget under the following categories, starting with the most important and going to the “nice-to-have” (but least important). 

·      Essential regular monthly expenses, those that keep the family going.

·      Then you need to build an “emergency fund,” in other words, taking care of unexpected and serious events that may impact your family. In this category are items like life insurance, funeral insurance and medical cover. These budget items should come before anything else.

·      Next comes saving. Yes, saving should come before all the “fun” items like holidays, restaurants and luxuries. There is a large debate about how much a family should save monthly and percentages vary, but most advisors suggest savings should be about twenty percent of a family’s monthly after-tax income, less if you are young, more if you are closer to retirement. That is a scary number for most people, but it needs to be on your radar. Remember, as many as 50% of South Africans don’t have a retirement plan.

·      Finally, budget for luxuries, but only after the above 3 categories are taken care of. 

3.      Pay off debt 

Most South Africans have debt. It’s a part of life, mortgages, loans, credit cards and the rest. An important principle of personal finance is to understand that, generally, you pay more interest on a loan than you would earn interest by investing that money. In other words, it is preferable to reduce debt rather than invest spare cash. Reducing a mortgage is one of the best ways of saving and should be included under the savings category. On the other hand, buying an expensive car on HP is different: a car depreciates in value over time, unlike a property. Paying off a fancy car is a “luxury” not a “saving”. 

4.      Set goals and think long term 

Saving is a life-long exercise. Many people will spend almost as many years retired as they did working, given the life expectancy of young people today. 

5.      Start immediately and never stop. 

That’s an easy one to understand. Enjoy the holidays now (you’ve deserved them!), but get into your family’s financial plan immediately afterwards. 

6.      Get help 

No one knows everything about investments and, certainly, no one can predict the future. My advice to any family determined to save sensibly for retirement is to consult a reputable financial advisor, preferably an independent expert not linked to a particular financial services provider, like a bank or insurance company. 

7.      Teach the kids 

Finally, and this should be fun, bring the children into the discussion. The earlier young people are exposed to budgeting, financial planning and investments, the better.

Always remember that it’s always a good idea to speak to a professional about your finances. While I’ve provided good financial principles, for more detailed financial guidance you should consider the input of a certified financial advisor.