They say our country is in recession, which basically means the economy is shrinking for the second quarter in a row.  With all the credit rating downgrades and political turmoil it may be a good idea to reassess our financial situation.

I am not a financial adviser, but here are the things I believe we must look at in our journey to financial independence.

Do your budget

The first step is probably to do a budget.  This gives us an opportunity to really see what we spend our money on.  And we won’t get into a situation where we spent so much money on desires that there is now money left for things we really need.  If we have a budget deficit, we need to cut some expenses.  There are often habits that costs us a lot of money.  Now we can see what the habit really costs over a period of a month.  Things like smoking or buying lunch every day at work adds up.  It is like a leaking bucket.

Pay off debt

While we are doing this, we must spend extra time looking at our debt levels.  In an environment where the value of the Rand declines and costs increase, it is likely for the Reserve bank to start increasing interest rates to prevent hyperinflation.  We learned the hard way that a small % increase in interest rates can make a huge difference on something like a home loan or car repayment amount.   It can quickly put you in a situation where you may lose your house or car because you cannot afford the monthly installment.

Build an emergency fund

There is always the possibility of unforeseen expenses.  According to Murphy these will pop out when you are already having a difficult month.

Save up for bigger expenses

There are always those big future expenses we need to prepare for.  It may be a child’s education, a car that needs to be replaced or our aging parents who will need special care.  If we prepare for it now, we will be much better off when the time comes.

Plan for retirement

The sooner you start planning for retirement, the better.  They say it is not about timing the market.  It is about time in the market.  The sooner we start putting money away for retirement, the more we will benefit from compound interest etc… referred to as ‘the time value of money’.  Remember to specify your beneficiaries on your policies.

Save tax where possible

There are some tax incentives available for people who save.  One example is the Tax free investment accounts that was introduced to encourage people to save.  Retirement plans also include some tax benefits.  Get a financial adviser to help you with this if you feel you do not have the necessary knowledge.  It is quite complex.

Get your will in order

Make sure you have a will in place and that the correct beneficiaries are specified.  Keep it up to date.  When you set up your will, don’t get bullied into something that does not make sense.  Don’t leave your beneficiaries with no bargaining power if the financial institution who draw up the will and named themselves executors and trustees on the trust charged exorbitant fees or provide bad service.

Medical aid and insurance

As far as Medical aids are concerned, my suggestion is that you do the maths.  There is no one size fits all.  Look at your average medical expenditure, your chronic conditions, the number of times you visit the doctor per year and work out what plan you must take. When I was young and very healthy with no dependents, I always took the best plan they offered.  It was only later that I realized how dumb it was.  Now that I have kids and medical conditions, I am actually doing the maths and I find that it is still cheaper for me to take the lower plans and just make sure that my own emergency fund is in good condition.

As far as life insurance are concerned, it is also a good idea to do the maths and to work out what the minimum is that your family would need and rather supplement that with additional investments.

Final notes

A financial adviser has a lot of knowledge to share.  But don’t be lazy.  You are paying him for advice, so ask the questions and learn.  Don’t be one of those people that has no clue what their money is invested in or how it works.

As you get older your health risk and financial risk will change.  Your personal circumstances will also change.  You should not change your financial plan every second day, but remember to revisit it when you go through one of those life altering events (career changes, losing loved ones, divorce, buying a house, sending kids to university etc).

The investment horizon is also important.  For example, when you are young and have many years left until retirement, you can include more equity in your investments.  But as you get older, you may want to move to more conservative options.