In this article, we explore the seven Ds of financial planning and how they apply in the context of one’s financial planning journey.
We all know that delayed gratification is the foundation of wealth building: forgoing the immediate pleasure of spending to put money aside for the future. However, practise is different to theory and it’s not always feasible (nor enjoyable) to spend a life delaying satisfaction in the present in the expectation of some future reward.
If you work hard for your money, it’s only natural to want some form of reward that you can enjoy in the present. As such, as much as there’s a place for delaying gratification, we also know that enjoying some of the fruits of your labour in the here-and-now is important for keeping one encouraged and motivated. Delaying gratification works well if you also acknowledge that time is a valuable and finite resource, and spending quality time with those that you love is not something that should be delayed.
Finding the balance between enjoying experiences and creating memories in the present while at the same time putting aside enough money for the future is critical and takes careful focus. At an annual Berkshire Hathaway shareholder meeting in 2019, Warren Buffett agreed that while delayed gratification is important, it is also important to know when it’s time to spend. He says, “I don’t necessarily think that for all families in all circumstances, that saving money is necessarily the best thing to do. I think there’s a lot to be said for doing things that bring you and your family enjoyment.”
If you’ve been invested in the markets over the past five years, you will no doubt know how important it is to have a diversified portfolio. While cash provides consistent returns, those who remain invested in cash run the risk of missing out on returns generated by local and offshore equities.
Diversification is about recognising that different asset areas react differently to the same event and if you mix up the asset allocation in your portfolio, you can help smooth the effects of market volatility. For example, if you were heavily invested in entertainment, airline and/or non-food retail shares, your portfolio would have taken a major knock as a result of the Covid-19 pandemic. On the other hand, if your portfolio was weighted with telecommunication shares, you would have reaped the benefits of the global work-from-home trend.
However, by combining a spread of investments across various sectors and industries with little correlation to each other, you can protect your portfolio from major markets ups and downs as different asset classes respond to different events in their own way. As such, it is always advisable if you’re investing for the long-term to include a range of asset classes including shares, bonds, property and cash, as well as a range of strategies and investment vehicles.
Having said that, controlling your emotions is just as important as retaining a diversified portfolio. No one can predict the future and markets can be tumultuous especially in times of crisis such as we find ourselves in now. If your portfolio is adequately diversified, you should find it easier to keep composure as markets fluctuate in the short term.
Disability and/or disease
No one is immune to the risk of disease or disability which, if not adequately protected against, can decimate one’s finances. Thankfully, we have access to a range of mechanisms that can provide financial protection in the event of ill-health, disease or disability. Medical aid is often considered the first line of protection against ill-health but, while a good hospital plan will provide you with cover while in hospital, it is important to consider how a serious disease, terminal illness or disability will affect your potential to generate income and build wealth over the longer term. As such, a capital disability benefit (which pays out as a lump sum in the event of a disability) and income protection benefit (which replaces your income or portion thereof if you can no longer work) are powerful tools in your financial planning arsenal.
Dread disease cover also has a place in your portfolio especially if your family has a medical history of cancer or heart disease, for instance, which you would like additional protection against. Dread disease payouts can be useful in covering the costs of treatment not covered by your medical aid, medical appliances and aids, wigs, travel and accommodation costs, and so on. Another mechanism that can be effective in curtailing costs is a gap cover policy to help the difference between the amount charged by doctors and specialists in hospital and the prescribed medical aid tariff.
Crafting a sold financial plan involves undertaking careful scenario planning and then putting mechanisms in place to protect yourself from possible detours. Life’s ‘detours’ include events such as retrenchment or job loss, divorce, terminal illness, significant loss or damage to property, the death of a spouse, business failure or insolvency. These are all unforeseeable life events that, while can’t necessarily be planned for, can be protected against to varying degrees.
Effective scenario planning involves asking a series of ‘what if’ questions: What if I died today? What would happen if we got divorced? What would happen if I was retrenched? What if I went insolvent? An experienced financial advisor should be able to help you prioritise the financial objectives that arise from this form of questioning and source products and/or solutions to fortify your finances against these eventualities.
Options for protection against life’s ‘detours’ might include mechanisms such as retrenchment cover, life insurance, disability protection, short-term insurance on fixed property, emergency funding, a well-structured antenuptial contract, inter vivos trusts, business overheads protection, business and key person assurance, and a host of other tools that can help mitigate the risk of unforeseeable events.
There are very few of us who can get through life without using debt in some form, especially when it comes to purchasing property or buying a vehicle. While debt may be a four-letter word for some, there are times when we need to use it responsibly to achieve our long-term goals. Learning to tell the difference between good and bad debt means taking into account a number of factors, including the interest rate, the period of loan and the reason for borrowing the money in the first place.
Incurring high-interest lifestyle debt can result in you taking too much risk without the ability to pay it back. Similarly, borrowing money to buy a vehicle is expensive because you’ve incurred debt to buy a depreciating asset. That said, most people require a vehicle to hold down a job and that needs to be factored into the decision-making process.
Student loans are generally low-interest and, taking into account the strong correlation between tertiary education and higher earnings, should be considered good debt. Similarly, taking out a home loan to invest in a property means that you’re incurring debt which results in improved living conditions and equity in a home. In addition, using your access bond effectively can have certain tax advantages, while paying off your home loan responsibility can improve your credit score.
Financial and estate planning also involves putting mechanisms in place should you die and includes the drafting of a last will and testament as well as other legacy documents such as a living will and digital will. If you suffer from a terminal illness, you may want to consider appointing a medical proxy who can speak on your behalf when you are no longer able to. You could also consider signing an advance healthcare directive which serves to provide your loved ones and medical doctors with detailed instructions as to how you wish to be cared for at end-of-life. It also involves ensuring that there is enough liquidity in your estate to pay all costs in the event of your death. Importantly, part of planning for your death means ensuring that your loved ones are adequately provided for if you are no longer around by setting objectives in respect of their future income needs, and then quantifying the capital required for such provision.
Another important area of financial planning is determining how your accumulated wealth should be distributed in the event of your passing including assets such as immoveable property, retirement funds, cash and investments, valuable moveable property such as jewellery, artwork and collectibles, trusts, and vehicles. A documented estate plan is the best way to itemise your assets and plot their distribution, whilst simultaneously mapping out the tax, CGT and legal consequences. To give effect to your estate plan, your will should be drafted alongside your plan for the distribution of your assets to ensure that the two documents are fully aligned and that no confusion or contradictions exist.