Felix Kagura, Head of Long-Term Insurance Propositions at Standard Bank.
Tough economic conditions and socio-economic challenges are making it harder to save, while also lowering consumer ability to allocate income towards insurance against unexpected events. But, if you plan ahead, you can protect your and your extended family’s wellbeing.
Looking after loved ones is an important factor that is driving the need for improved levels of financial planning, which alleviates many of the risks a modern family faces. In South Africa today, many young professionals choose to financially assist their extended families, while also taking care of their own everyday expenses, such as rent and petrol. Motivated by emotional connections, these young professionals are increasingly expected to take care of their aging parents as well as their own children.
However, in South Africa, this type of responsibility on the breadwinner can start much sooner, often when he or she is still paying tuition fees, says Felix Kagura, Head of Long-Term Insurance Propositions at Standard Bank.“These responsibilities also increase with time and this is placing a lot of strain on many. But a goals-based approach to financial planning can significantly improve outcomes.”
Unfortunately, stress levels are on the rise as many try to meet all these expenses, while also handling the daily pressures of the workplace. According to a 2016 Bloomberg study, which analysed various economic, social and political factors, South Africa is the second most-stressed country in the world. These results are mirrored in the MMI Unisa Consumer Financial Vulnerability Index, which declined from 52.71 in the last quarter of 2016 to 52.32 in the first quarter of 2017. This means South African consumers are feeling more vulnerable to financial pressures (both personal and macroeconomic) based on the index’s scale, with 0 representing “extremely vulnerable” and 100 “extremely secure”.
A quarterly indicator of how consumers feel about their income, expenditure, savings and debt-servicing capabilities, the index is based on responses from 100 informants from several industries. It showed that 34.9% of the respondents felt unemployment was a critical contributor to their financial vulnerability. 32.1% were concerned about the high cost of living, and 27.4% were concerned about low income and insufficient salary increases. 24.5% were stressed about too much debt, and 21.7% about poor financial planning. Income vulnerability increased, as the index score dropped from 53.60 in the previous quarter to 53.02. More than half (56.8%) of the respondents were negative about their ability to earn income, or to acquire income from family or friends during the quarter.
“Given the current economic climate in South Africa, these scores, along with the stress levels in our communities, are unlikely to improve in the short-term. All these responsibilities can, however, be managed if they form part of a goals-based approach to planning. This may also, in turn, reduce stress,” continues Mr Kagura.
“A goals-based plan will make sure that your responsibilities can be met during all life stages, including following a death or disability, as it takes a complete view of your financial situation and matches assets to liabilities as each stage, or potential risk event, unfolds.”Effective strategies can then be added to ensure that family members will be looked after into the future without decreasing the hopes of the breadwinner to achieve financial freedom.
The responsibilities of young professionals of today are seen as a major challenge to the future of young peoples’ financial security and a factor in preventing many from rising above poverty. According to South African Reserve Bank (SARB) figures, there has been a decline in South Africa’s overall savings rate in the last 16 years, reaching a record low of -2.7 in 2013. Stats, although varying, estimate that only 6% of South Africans can afford to retire and only about 25% of people between the ages of 18 and 30 have any sort of formal long-term savings plan.
“If you want to improve outcomes for your family and community, you need to take advantage of all the appropriate financial products at your disposal from an early age,” says Mr Kagura. “These range from funeral and life cover for many of life’s necessities, from housing bonds, education, and death and disability cover, for example, to things like salary protection.
“Affordability patterns need to be worked out, because it’s important that long-term insurance cover matches goals. It’s also important to plan ahead and be flexible by, for instance, making sure insurance premiums suit your salary. You can also readjust premiums if you know your expenses are going to increase with time.”
The only way for individuals to emerge from an insecure financial future is to begin harnessing goals-based financial planning. However, it is equally imperative to ensure goals are not destroyed by an event that affects the financial futures of individuals and families forever.
“The main problems that anyone may face in the future must be covered and tailored to his or her needs,” says Mr Kagura. These solutions would include:
• Ensuring adequate salary protection and life cover is in place
• Cover is monitored and reviewed regularly to ensure it is adequate at any given point
• Critical illness and disability cover
• A key shift in thinking and behaviour
While many people think they do not have enough money to take out adequate coverage, there are numerous ways they can save. Some of the things to consider when building a savings plan include:
• Reducing daily spending where possible. Not buying a daily cappuccino, for example, could save about R6 250 a year (if one cup a day costs R25 with 50 weeks in a year)
• Closing unnecessary accounts
• Reviewing credit card spend
• Cutting down future spending by understanding that “what you need” and “what you want” are two different things
• Setting up accounts for “rainy days” and long-term retirement savings
• Starting a small business to increase income streams.
A financial institution, because of its rounded approach to financial services, can then advise on a number of financial solutions for making investments work to build personal wealth, and can then further advise on how to secure that wealth through risk products.
“The best way of ensuring that family responsibilities do not limit your prospects is to take accountability and build a future by starting to plan against risks immediately. This includes a regular review of your plan to secure your and your family’s goals,” concludes Mr Kagura.
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