Financial health

Kristia van HeerdenLatest, OUTstanding

dividend rockstarsA One Lapper recently shared his financial concerns around getting married. “I have to buy an engagement ring due to the expectations of my girlfriend. I don’t think it’s the right time to get engaged. I estimated the cost of a ring to be R25,000. I need an emergency fund, and I need to start saving for retirement as well as save for a wedding.”

While not all major life choices can or should be financially motivated, a financial health check-in prior to life-changing decisions is a great way to prepare yourself. In the next few weeks, we’ll be discussing the various elements of financial wellness to help our friend figure out if he’s in a good enough financial position to get married.

Start with what you can’t control

Although saving is an important part of good money management, financial health is about more than having a slush fund. It’s about being in a financial position to weather any storm and still having money left over when you get to the other side. Financial wellness starts with being prepared for unforeseen financial events.

While you are working to accumulate assets, you are your biggest asset. Your ability to earn an income should be protected at all costs. You protect your earning potential using specific insurance products and your emergency fund.

Dread and disability cover is a type of insurance product that pays out an initial lump sum followed by a monthly income should you become sick or disabled. The income you receive is usually up to 75% of the income you listed when you took out the policy. It’s therefore important to update your policies to reflect your current income when you get an increase. Having more than one policy will not increase the amount of income you’ll receive if something bad happens, so multiple policies won’t result in 100% income replacement.

Be careful of salespeople when taking out dread and disability cover. Some will try to add on life insurance, which you only need if others are financially dependent on you. The salesperson will also want you to automatically increase your cover by inflation every year. Most people don’t receive annual inflation-linked increases. Choose instead to update your cover yourself when needed.

As you accumulate more assets throughout your life, you can reduce your dread and disability cover. Once you have enough assets to support yourself, you can cancel this insurance. An independent financial advisor will be able to help you find the right type of dread and disability cover for your circumstances. They can also help you work out when you no longer need it. If you decide to take out this type of cover for yourself, phone different insurance providers for quotes and be sure to familiarise yourself with the terms of your cover before committing to a policy.

If you lose your job

While there are products available that pay you a monthly income should you get retrenched, they tend to be expensive and complex. Having enough cash to cover your expenses for a few months is a much better way to protect yourself if you lose your job. You can put the cost of a retrenchment policy as well as any spare cash into that savings account.

The idea is that you’ll have enough money to see you through until you find another job. How much money you keep in cash will depend on how quickly you can get another job. If you know there’s not much work in your industry, having enough cash on hand for six months to a year is a good idea. If you are one of only a few people who can do your job, three months’ living expenses should be enough.

Your emergency fund is also there to help you pay for big, unexpected expenses like your car breaking down or a broken geyser. These types of financial events never seem like major crises, but a few strung together can render you financially fragile.

The verdict

R25,000 is a decent start to an emergency fund for difficult financial times. Spending that money on a ring should only be an option if this couple has their dread and disability cover and emergency funds sorted.

OUTstanding Money blog

Being outstanding with your money doesn’t have to be hard. This series of articles will give you all the tools you need to get your house in order to start investing.

This series of articles was sponsored by OUTvest, and written by Just One Lap in 2018.  It’s timeless wisdom that needs to be out there – in public spaces where it can feed into ongoing discussions about long term financial wellness.