Essential money lessons for a brighter financial future

Growing up, many of us received sound advice from our parents: study hard, set goals, and take care of your health and money. This advice serves us well, but when it comes to our money, some more detail and some less conventional truths can go a long way towards a brighter financial future.

Here are some insights to help reshape your financial perspective:

 Not all debt is bad. The word debt often carries a negative connotation, but not all debt is ‘bad’. Before borrowing any money, it is critical to understand the difference between ‘good’ and ‘bad’ debt. For instance, taking out a student loan can be an investment in your future, but paying off unnecessary, high-interest credit card debt can hinder your financial progress. How you manage your debt, as well as other financial commitments like your phone and gym contracts, is also important. Making your payments on time and in full every month helps to build a healthy credit history, which in turn will stand you in good stead when you need a loan for something ‘good’ – like a car of your own.

Sales are not the problem – impulse buying is. Sales and discounts can be tempting, but before you splash out, it is essential to differentiate between a ‘need’ and a ‘want’. If you were already planning to buy something you need, and you find it on sale, that is a win. However, buying something you want, solely because it is marked down, could put you in a losing position, especially if you cannot pay cash for it.

 Compound interest is your best friend. Many of us do not understand, or we underestimate, the power of compound interest, and as a result, we do not start saving as early as we should. The reality is that you should start saving money in an interest-bearing account or investment fund as soon as you can, even if you start with a small amount. As an example, imagine that you save R500 per month for two years – a total of R12,000. If the interest rate were a flat 10% over this time, your savings would grow to R13,273. However, if you save R100 per month for 10 years (also R12,000 in total), your savings would grow to R20,146 – a significant gain, thanks solely to compound interest.

 Your most valuable asset is your ability to earn an income. While assets like your home or car are indeed valuable, the reality is that you likely would not be able to pay for them if you were unable to earn an income. So, just like you insure your valuable belongings, you should also insure your income. Income protection can provide up to 100% of your insured income if you are unable to work due to injury or illness, ensuring that you can still meet your financial obligations during this time. It should be every working South African’s top financial priority.

Traditional funeral cover has limitations. Making sure that our own funeral costs are taken care of and even taking out policies to ensure that our loved ones get the send-off they deserve, is something most of us take very seriously. The challenge here is that funeral cover is, on average, eight times more expensive per rand of cover than underwritten life insurance1 - while also offering significantly lower cover amounts.  Underwritten life cover provides significantly more cover, while also allowing you to include your family on a single policy that applies from day one, and at a premium that is tailored around your unique circumstances. 

Earning a salary is not enough – you also need a plan and a partner. It is misguided to think that a steady income is all you need for financial security. If you do not also have a sound financial plan, you may never achieve financial stability.

While traditional wisdom will always have its place, partnering with a qualified financial adviser is the best way to set and achieve financial goals, from your very first paycheck to the day you retire, and all the days thereafter.

* Cloete is a training specialist at Bidvest Life.

PERSONAL FINANCE