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Maintaining your financial health

How healthy are your finances? Is it in good shape to secure your financial well-being and achieve your goals?

Money gives you access to services and products, provides you with choices and opportunities, and can bring you a sense of security and peace of mind. A lack of money has a huge impact on one’s life. Financial health often exists when the money coming in is greater than the money going out, all necessary expenses are paid for, and saving and investments are possible. It means that your financial position is sound in that enough resources are available for realising your financial goals and meeting your financial obligations, which is achieved through proper planning, investment and the efficient use of the resources and money at your disposal. This state of health can be created, maintained and lost, and financial planning plays an important role in this.

Factors that Influence Financial Health

  • Personal characteristics – these are factors such as age or marital status
  • Financial literacy – how well you understand financial concepts, for example credit and affordability
  • Financial behaviour – including financial planning and saving
  • Stressors – such as losing your job or being bankrupt
  • Financial situation – where you are in terms of income, benefits and home ownership
Benefits of financial health Consequences of not being financially healthy
  • Achieving future goals
  • Prepared for retirement
  • Access to credit when you need it
  • Negative economic and social consequences
  • Stress, which can lead to physical health problems
  • Lack of further access to credit

The first step in achieving financial wellness is measuring your cur- rent financial position. After this, you need to take steps to maintain or improve your current situation. This entails setting personal or financial goals for yourself and your family. It also involves changing how you think about and handle money. You need to understand where your money comes from and where it’s going.

You will need to draw up a financial plan or budget, and keep a journal or diary where you track or write down all your expenses. This guide will provide you with all the knowledge and skills needed to assist you on your journey towards financial wellness.

The Truth About Financial Planning

Financial plans are only for people with so much money that they don’t know what to do with it, right? Actually, financial planning can help individuals at any income level. You are also never too young or too old to start financial planning because using a plan will help you to avoid or stop making financial mistakes.

A comprehensive financial plan will include savings and investments, planning for retirement, education, emergencies, major purchases, insurance needs and other financial goals. However, as important as planning for the future is, most South Africans don’t save, and they borrow more than they save and earn. Remember, saving is an important part of financial health and planning, as this is how you deal with emergencies, pay for major purchases or your children’s education, and invest for your retirement. In fact, every year, the Minister of Finance addresses the poor saving habits of South Africans in the annual budget speech.

While it is difficult to save for your future when petrol prices and debt are high, good financial planning will help you to pay your debt off in a manageable way, and then start saving for your financial goals. A quote by American investor Art Williams describes it well: “I’m not telling you it’s going to be easy – I’m telling you it’s going to be worth it”.

The Financial Planning Process

The general financial planning process includes:

  • Having a personal financial health check-up
  • Gathering relevant financial information
  • Setting life goals
  • Assessing your current financial status
  • Coming up with a strategy or plan for how you can meet your goals given your current situation and future plans and reviewing this on an ongoing basis
  • Monitoring your progress or re-evaluating your position, and making changes as necessary

Before you start the financial planning process, ask yourself: Are you ready to accept responsibility for changing your own financial position? Do you really believe you can take the necessary steps to achieve financial wellness and change your attitude to- wards money? Can you see the benefits of financial planning for your future? If your answer is ‘yes’ to all of these questions, you are ready to kick off your journey to financial health.

Remember that this process will involve some sacrifice. For ex- ample, you might need to give up your overseas vacation and rather put the money in your savings fund. It might mean cutting your phone bill or cancelling your satellite television for a year. Make a promise to yourself that you will be committed to this process for at least one year.

Your Financial Health Checkup

Financial Health Checkup Diagram

A financially healthy individual would have almost all the elements listed below:

  • Emergency fund – This is money put aside every month to be available in the event of an emergency. Should there be no emergency, it will be redirected to your savings.
  • Credit report – This should reflect a good credit score and more positive credit information than negative information.
  • Debt eradication – This does not refer to all debt, but to managing your debt wisely and paying more than the required credit installments whenever possible.
  • Insurance cover – This is insurance necessary to cover you in the event of death, illness or disability (credit insurance), and to cover your property (asset insurance).
  • Savings – This is necessary to achieve your financial goals.
  • Investments – This is not necessary for achieving financial health, but can help you to achieve your goals and secure your family’s future.

Now that you understand what is necessary to achieve a good state of financial health, it is time to do an assessment to determine the truth of what your current financial position is.

Read the statements below carefully and give yourself an honest score of 0 to 10 in terms of where you think you are currently. Then add your total score.

Emergency Fund
Red (0-3) No cash reserve available for financial emergencies
Yellow (4-7) 1 to 3 months of income in cash reserves for financial emergencies
Green (8-10) 3 to 8 months of income in cash reserves for financial emergencies emergencies
Credit card debt
Red (0-3) Balance over 15% of income
Yellow (4-7) Balance between 5 and 15% of income
Green (8-10) Balance under 5% of income
Household debt consumption (all other debt, such as loans and store cards)
Red (0-3) Payments over 15% of income
Yellow (4-7) Payments between 5 and 15% of income
Green (8-10) Payments under 5% of income
Household mortgage debt (any loan taken to buy a house)
Red (0-3) Payments over 30% of income
Yellow (4-7) Payments between 15 and 30% of income
Green (8-10) Payments under 15% of income
Credit History
Red (0-3) Frequent delinquencies (default), repossession of property, record of bankruptcy, etc.
Yellow (4-7) Some delinquency on debt (you have often skipped payments)
Green (8-10) Current on all payments, no bankruptcy
Savings and Investments (including stocks, bonds, mutual funds)
Red (0-3) No current investing, some withdrawals taken from long-term investments
Yellow (4-7) Save between 1 and 5% of income
Green (8-10) Save 5% or more of income
Defined retirement plan contributions (can be RA or pension plan)
Red (0-3) No current plan contributions, some withdrawals from long-term investments
Yellow (4-7) Save between 1 and 5% of income for retirement
Green (8-10) Save 5% or more of income for retirement
Defined retirement plan contributions (can be RA or pension plan)
Red (0-3) No insurance or planning has taken place
Yellow (4-7) Some insurance but not a comprehensive plan
Green (8-10) Comprehensive plan including major medical, life, disability, liability, household, and long-term health care, and long term health care
Long-Term estate planning
Red (0-3) No wills, estate plan, or power of attorney
Yellow (4-7) Have a will, but lack of estate and power of attorney
Green (8-10) Have wills for all adults, estate plan, power of attorney, and update done every five years
Written Financial Plan
Red (0-3) No formal plan with goals, objectives and measurements
Yellow (4-7) Partial plan, lacking significant components
Green (8-10) Written plan with goals, objectives and measurements with update done every 5 years

As you can see from your scoring, if you have a total score of below 35 points, this might indicate that you are not financially healthy or there are some areas that require your attention, and you need to take immediate steps to rectify the situation. Even if you have a score higher than 75, it does not mean you cannot do without some improved budgeting skills and learn methods of maintaining your financial health.

Only by going through this process can you really identify which areas you need to target to insure the financial health and well-being of you and your family. The process is shown in the given diagram, and each step of this process will be discussed in detail in this booklet.

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Conclusion

Now that you have a good understanding of your current financial health, you must start gathering all your current financial information, which would be all your income statements, your bills to make a list of your expenses, and statements of accounts to create a list of all your debts as well as their interest rates. You must also get a copy of your free annual credit report from one of the listed credit bureaus.

You should also visit credit providers or a financial planner to get information on savings plans, investment opportunities and retirement annuities. Find out about minimum monthly deposits, how much is required to open the account, ease of access to the account, all costs associated with the plan, and the interest rates offered.

Before you set your financial goals and start drawing up your budget, you also need to get an accurate picture of your current financial position and your current spending behaviour. You have already had a health check-up. Now, for 30 calendar days, you need to track your spending: Keep all your receipts and make a record of all the money you spend on a daily basis. You could do this in a notebook or on an application (app) on your phone. Keep your bank statement for the 30 days so that you can see all amounts that are deducted from your account for that period.

This exercise will not only help you to draw up your budget and list your expenses, it will also give you insight into your spending behaviour, or where your money is going every month. The next step is to clearly define your goals, as this will help direct your actions.

While what you have just learnt may have been difficult to see or to accept, now that you have an honest picture or assessment of your current financial status, you can take the necessary steps towards setting and achieving your financial goals.

Credit Health Tips

The 10 habits of a financially healthy individual are:

  1. Save, save, save.
  2. Curb your impulse spending.
  3. Cut unnecessary expenses.
  4. Have insurance to secure your family’s future and your property.
  5. Avoid taking on more debt than you can afford.
  6. Pay more than the minimum, whenever possible.
  7. Develop strategies to achieve goals.
  8. Have an emergency fund available every month.
  9. Get educated on credit and financial concepts.
  10. Believe you deserve it and make a plan to pay yourself first.

Your aim in financial planning is to be in a position where you will be prepared to face any financial challenges that may arise in the future.

If you have too much debt, it can be very stressful and difficult to find your way back to financial health. But it can be done, and it pays to know how to do it.

Documents that are important for you to have, especially if you have a family, are a will and power of attorney. This will make it easier for your family members to have access to your estate in the event of your death. You should keep copies of these documents as well as copies of all of your policies in a safe place that will be accessible to your family in such an event.

All your legal documents should be well organised, and you should create a filing system of all these documents, including your statements, tax returns, contracts, play slips, and so forth. You should review your policies and contracts periodically to ensure they have not lapsed or to check whether they should be reviewed or updated. Your will and power of attorney should be updated every five years.

Download your expense tracker here:

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Maintaining Your Financial Health: FAQ

What is financial planning?

It is the process of structuring and arranging your financial resources to meet your life goals. These can be short-term goals, such as saving for a new car, or long-term goals for your retirement.

What are the benefits of financial planning?

There are many benefits of financial planning in that it:

  • Helps you decide on your spending priorities for the future
  • Gives you discipline for spending and saving
  • Helps avoid unexpected money shortages
  • Helps you feel less financial stress
  • Makes you realistic in your expectations
  • Helps you set measurable financial goals for your future
  • Assists you in understanding the effect of each financial decision
  • Gives you the opportunity to re-evaluate your position from time to time
  • And most importantly, helps you realise that YOU are in charge of your financial health.