Financial planning for young professionals

Financial planning for young professionals

Presented by: Eugen Lebo MokoenaFinancial management N6 (Pretoria)

Financial planning law degree(UFS)2015Currently: honours Financial planning (UFS)

1. financial planner/advisor Provides advisory regarding the management of

financial resources. Provides analysis of individual client needs. Provide special recommendations for the client action. Assist the client with implementations of the

recommendations

It is therefore the responsibility of the advisor to disclose his or her qualification to the client for them to know that they dealing with a qualified advisor.

What exactly is a financial advisor?

Financial planning involves much more than your money and asset acquisition but also: - wealth preservation - wealth creation - values and objectives - individual lifestyle - provide security for self and descendants. It is therefore important to attend to your financial matters while you still have your health and time, this two happen to be the most important factors that can lead you to plan your finances well.

It should also never be forgotten that financial planning focuses on your dreams , aspiration , and goals once this are identified then a strategy to achieve these is devised such strategies will address the time frame issues , legal implications, taxation issues. Changing circumstances of an individual is also important.

*AT PPS FINANCIAL PLANNING IS STRUCTURED TO ASSIST CLIENTS TO MANAGE THEIR FINANCIAL AFFAIRS EFFECTIVELY RATHER THAN TO FOCUS ON THE SALE OF A FINANCIAL PRODUCT.

What is financial planning and why is it important to an individual?

1. Financial management(persona

l finance, budget, cash flow etc.

2. Risk planning (insurance options)

3. Asset management(investment options)

4. Retirement planning

6. Tax planning and estate planning

Financial Planning Components

- The 1st step of doing financial planning before we can continue with other things is the finances of the individual.- Most people tend to spend more than what they can afford and then they end up being in debts that eventually start to depress them.

- A proper monthly budget plan must be drafted together with a daily diary which will record.

- In a nutshell a proper budget helps you to track all your savings and spending.

- - one has to learn to discipline themselves when it comes to their finances but in reality this is not we always see.

- People would rather spend money knowing that they having credit cards but they forgetting that it has interest charged on it.

- As a young professional is vital to know that a debt is like a hand break merely because to much debts will keep you from making regular savings or investments. CHECK IT OUT***

Financial management: personal finance

- Social addition - Materialistic and greet

- Have now pay later syndrome- Keeping up with the Bakoenas

- The unforeseen job loss

We can fall into debt trap very easy. Consider the following:

Debt (handbrake)

Good debt Bad debt

House purchaseFor example you buy a house for R500 000 you keep the house for 10 years, the interest payment to the bank of R100 000 You then sell the house for R 800 000 – cost of the house R100 000 and you make a profit of R200 000

Clothing accounts, credit cards short term loans and pay day loans, furniture and appliance loans.

The cost of credit: you want that flat TV screen purchase price = R10000 interest is at 20% = R2000New purchase price = R12000

Importance of risk planning

Risk planning is considered the foundation of any financial plan. A risk plan should cater for risk events such as loss of earning ability due to illness , disability premature death , loss of employment and personal loss due to destruction of property e.g. fire theft etc.

Risk planning = this is the process of identification , analysis and prioritisation of risk followed by a process of implementing strategies to minimise , monitor and control the probabilities of unforeseen events.

Risk avoidance - taking action to avoid risky solutions. Risk reduction - the purpose must be to reduce the magnitude of a

possible loss. Risk transference - death or the loss of damage to an asset the

ability to ruin a client financially. This can be avoided by taking out a long or short term insurance.

Probability (death =100%

What is risk planning?

Life of a professional

Importance of a life and a disability cover.- The policy holder can use his or her own policy as a security for a debt but the right of the

cessionary( bank) is limited to the amount of the outstanding debt - An absolute cessionary happens when the owner of the policy transfers all rights to the creditor

and the creditor receives all the benefits.- A disability cover or a sickness cover can be seen as income protector benefit.- I advice professional students to always know what they are getting in return for covering

themselves - A ceded policy can help in case the individual got disabled or died while his house, cars , other

debts has not been paid it also leaves a legacy for the descendants

Risk – in your twenties you are statistically more at risk of being involved an accident that may result in death or disability (20-34 of age. The first risk cover that a student must buy is a disability cover because not only are you at the highest risk of becoming disabled but you also have the most to lose in terms of your earnings= the younger you are when you become disabled the higher lump sum benefit you require to survive financially.

Cheaper premiums – people in their twenties are far less likely to have developed illnesses or conditions that many drive premiums or result in exclusions on their cover. For example at PPS a 23 year old female student can get a life cover( R200 000) cover for only R15 a month and disability(200 000) at R7 a month to which the student is going to enjoy the benefits until the age of 29 (premium stays the same)

now take a someone who join later in life(35) he will pay more premiums because of his age, health condition and the fact that he joined PPS as a working class and not as a student.

Why should I insure myself now?

Debts – since you in your twenties your starting your life, you are unlikely to have saving to cover debts if you die or become disabled, therefore if you die the weight of this debts could fall on your loved once and if you are left disabled you would have added a burden of medical expenses and loss of income.

Family – life and disability cover will start to kick in your life full force when you start a family because it will provide financial support for your partner and you children. Disability places a bigger burden on a family than death because not only does your income fall away but leaving with disability Is also expensive.

Single and no dependents- your priorities will be disability planning, health care planning , investments and savings retirement.

Married –healthcare planning, estate , death and disability, retirement planning, investment planning

Divorced – health care planning , estate death and disability planning , protection of your ex partner and dependents , maintenance and education

Retired – health care planning , income and estate planning.

How much should I insure for my life cover?.

let us use a 24 year old male who just started working as a medical doctor.

The best advice I always give people is to always compare premiums and benefits

PPS Provider Benefits premiumsSickness and permanent incapacity Permanent incapacity

R32 959

R 32 959

R 363.36

145.21

Life cover Occupational disability cover

Professional health provide

R 1 000 000R 1 000 000

R 500 000

R 166.42R 41.10

R 114.90

TOTAL PREMIUM AT PPS R 830.99

Decription % covered Total insured/covered

Monthly premium

Life cover R 1 000 000R 500 000

R 192.60Trauma cover R 134.49Disability cover R 1 000 000 R 64.24Income protector

R 24 718 R 501.53

Partial incapacity

R 8 239 R 67.09

TOTAL PREMIUMS

R 959.97

Other insurance companies

PPS is cheaper than other insurance companies for young professionals.

The younger you start the cheaper its going to be for you.

PPS will cover you for any sport or hazard perused that you participate into automatically but other insurance companies will need you to disclose if you partake in some of the sports e.g. bungee jumping.

It always pays to keep the right company. (profit share account).

Please note:

Investment planning involves factors such as the time horizon of an investor, purpose of the investment, risk profile, risk tolerance.

The main aim of investment planning is to create wealth so that an individual can retire financially independent and will be able to meet those short an long term goal.

Often I say an investment without a goal is not a proper investment therefore you must know why you investing and for how long(set goals).

Once again investing while you still have a bigger debt that you have to settle is not the way to go you need to pay off that debt before you can start investing

Good investors know that the quicker you start the more you will get ,therefore its important to start saving and investing now.

Investment planning

Time (age) Returns (guaranteed or fluctuating once) Risk the client is willing to take Investing for short or long term Growth or income?

Risk associated with investments

The important thing is getting started right now whether you start if wit R50 a month or R200 or R500, for every month that you delay you are losing thousands of Rands.

A little money invested consistently over a long time makes a lot of money

One the next slide lets look at what happen if you invest R100 every month for twenty years with a return of 9%:

You need to start early

240 Months (20years)

360 months (30 years

480 months (40 years

R 100 invested R24 100 R 36 100 R 48 100

Investment pool(what you get at the end)

R67 890.52 R 185 920. 46 R 475 254

Difference R 43 790.52 R 149 820.46 R 427 154

The magic of compound interest

Diversifying your investment portfolio

Diversification means that an investor when planning his portfolio he or she should spread the investment to lower the risk while smoothing and increasing returns.

As an investor you must not invest all you money in one asset class for example shares in a company. What will happen if the company does not perform ? You lose your returns and sometime capital.

When we say spread your wealth we mean do not out all your eggs in one basket. Therefore one must spread investment across different countries, asset type, fund managers

Cash Bonds (corporate and government) Property (retail , industrial or residential Shares (SA(JSE) , international

Asset classes

Savings in a bank Endowment policy Pension and provident funds Retirement annuities Property assets (property unit trusts , residential. Unit trusts (general one which invest in all shares

over a wide spectrum of sectors in the JSE this insures diversification. Stable medium and long term growth obtained.

Income units trust ( bonds- interest is insured.) Direct share market.

Traditional investments

‘’debt is a humiliation by day and worry by night’’ the koran

‘’ if you cannot buy it cash’’ you cannot afford it’’ unknown

‘’let your money work while you sleeping’’ unknown

‘’If you want to make it in life you need to fall in love with hard work’’ E. Mokoena

Quotes

This is the arrangement , management and disposition of a person’s estate so that the descendants that you leave behind will enjoy the maximum benefits from the deceased's worldly possessions that was possessed during life time

The creation of a trust account will be important. Estate planning will become important when the professional

individual starts having kids and is married also owning assets The drafting of a will is off importance so that a person will not

die intestate than confusion starts happening and families start fighting over money

Capital gains tax is also important when it comes to financial planning . A client must know that he will be taxed on any property or capital asset that he sells and makes profit.

Income tax play a huge role in estate planning

Estate planning

Any questions?