Financial Planning for Beginners: July 25-26, 2009

Young adults need to save early to make life easier later

And even as an 'older adult' it pays to remind yourself of the 'financial planning for beginners' ground rules. Ultimately everyone needs to come to terms with the need for financial self-reliance.

Risk and rewards

Some youngsters may resist ‘breaking free’ too early, and hang on to their parents' financial apron strings with what seems like a death grip!

However, when they finally reach the stage where they need to break out on their own, the results can be highly rewarding for both first-time job holder and parent alike.

What are the rewards of teaching financial planning for beginners?

There is obvious financial ‘reward’ for the parent - their cash flow should improve in a leap. Less obvious but just as enjoyable is the emotional reward of the parent feeling they have guided their child in to the reality of financial responsibility.

For the young adult thre is the emotional freedom that comes with financial independence, even if they do not realize this immediately.

How do you 'earn' the reward?

As parents, what do you do and say to your children to make the transition as effortless as possible?

Once your children grow beyond their teens, what are the essentials of financial planning for beginners?

There are three essential areas

• cultivating a habit of saving from the very beginning
• understanding the cost of debt; and
• the cost of educating a new generation.
Successful financial planning for beginners requires all three.

Savings and compound interest

With regard to savings, the most important aspect is time. If youngsters allow themselves as much time as possible to realize their financial goals, they also allow compound interest to work for them as long as possible.

Perhaps Einstein was in the business of financial planning for begoinners - allegedly he called compound interest "the most powerful force known to man"! Whoever said it, there is no doubt about its ability to generate long-term wealth.

If you can convince your children about the merits of starting to save early, you will give them an enormous helping hand towards their future financial freedom.

Unfortunately many young adults consider retirement to be so far in the future as to be irrelevant to them. They would rather live for the now than save 10% of their salary.

The problem is that this mindset becomes entrenched, and it becomes difficult to apply financial discipline in later life.

The cost of debt on a mortgage bond

Few of us can afford to pay cash for our homes. The purchase of a first house is often seen as a financial coming of age as the reality of servicing a large debt takes hold.

Although first-time home owners at the moment bewail the deposit requirement* to secure a loan from the major banks, in the long term this requirement will save them money in interest costs.

True, they will to save a little longer before reaching the first rung of the property ladder, but this discipline will stand them in good stead for the years of monthly repayments ahead.

And there are ways of reducing the time spent repaying the bond.

"Son, set your bond repayment higher"

Make sure your youngsters read this!

Monthly bond amounts are split between capital repayments and interest payments, with the payments weighted towards the interest portion for roughly the first half of the repayment term.

By paying an additional amount into the bond each month, over and above the monthly required payment, borrowers will significantly reduce the amount of interest paid, and subsequently your repayment period.

This is because the additional payment reduces the capital portion, and hence the interest charge is reduced as well.

Here's a concrete example

To service a R1m loan over 20 years at paying 11% interest, costs R10,322 a month. This equates to just under R2.5m interest over the life of the loan.

If you opted to increased your installments by 10% to R11,354 you would repay your loan 5 years earlier, and would save R428,000 in interest.

My advice is utilise your maximum tax-efficient savings vehicles (such as pension and retirement annuity contributions), and then put anything else in the bond.

Finally, the cost of a good education

The leading private schools now cost in excess of R60,000 per child per annum, in today’s money, after tax, and for basic education, not including the extras of sports and cultural tours and the like.

University then may seem relatively inexpensive at approximately R30,000 per year, per student.

Undoubtedly quality education comes at a price. If you want your children to follow this route for your grandchildren (!), you need to urge them to consider these amounts early on, and start making the necessary provisions.

Bottom line on financial planning for beginners

Breaking in to the “adult” world is a scary journey when you are first confronted with the reality of providing for your own financial needs.

Having an understanding of what can help to minimize costs, as well as provide for a comfortable retirement, can go a long way to smoothing this journey.

A Certified Financial Planner can assist with planning the route to financial independence.




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deposit requirement* At present, with the average small home (80sq.m. to 140sq.m.) costing R653,000 (according to the Absa House Price Indices of 6 July 2009), a 20% deposit equates to R130,600 making it necessary for the first-time buyer .

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Debbie Netto-Jonker CFP founded Netto Financial Services and was financial planner of the year in 2001.

Her business partner Ian Beere, CA(SA) CFP was the financial planner of the year in 2007.



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