The Financial Wellness Coach: Five key money management…
Q: I work as a freelancer and it’s either a festival or a famine when it comes to income. I find it difficult to manage my finances and plan ahead. Some of the recent events were a wake-up call. I worry that as I get older I will get into trouble and my earning potential will decline. Do you have any suggestions for a financial plan?
First published in Daily Maverick 168 weekly newspaper.
Reply: Their situation is common to many South Africans.
In the past, freelance work was reserved for the entertainment industry. It’s now mainstream, with many who were laid off last year now signing their services.
Most of us were in survival mode last year and future financial planning was not a priority.
Now that the dust has settled, it’s time to draw a line in the sand and put your finances in order.
There are five things I look for when it comes to creating a financial plan.
The thing about money is, without financial discipline, you always spend what you make – and often a little more.
Anyone who sporadically earns money runs the risk of spending too much in the good months and holding nothing back in the bad months.
You need to know what it costs you to live each month. You need a budget.
A budget that breaks down your basic cost of living will help you understand how much you need to make each month. You can then transfer any additional money you earn in a month to another account. This account is used to supplement your income during the low-income months.
- Income security
If you are in a car accident and cannot work for six months, how will you and your family survive? What would happen if you couldn’t work anymore?
People who work for companies usually have some form of income protection or disability insurance. Freelancers don’t.
This is usually the first product I recommend to my clients who are working for themselves.
You need to keep yourself on the same financial path by protecting your ability to generate income.
- Medical help
Seek medical help, even if it’s just a hospital plan. There are two main reasons for this – time and money.
Time: Government institutions deal with a lot of people and don’t have the most efficient queuing systems. When you are working for yourself, time is money. These queues can hurt your income.
Money: Many people do not seek medical help at a young age because they believe they do not need the services. This may be true, but it is also true that as they get older, they need the benefits.
If you only start receiving sickness assistance in old age, you will pay a late entry penalty. Your premiums could be up to 75% higher than what you would have paid if you had had basic insurance for your entire life. This is one of the reasons why many freelancers cannot afford health insurance if they join later – the premiums are simply prohibitive, especially when their sources of income dry up.
- Emergency fund
I mentioned that you have a separate bank account into which you deposit all of the excess money you make in a month.
In addition, you need an investment such as an investment plan or an escrow account, in which you invest a sum of money every quarter. This would be your emergency fund, which should eventually build up to six months of income. The fund would protect you from situations like we saw last year.
- retirement provision
There will come a time when you will no longer be able to live sustainably from what you do. Then your old-age provision will secure an income for you.
You need to invest consistently in an old-age pension. My recommendation is that every January you look at how much you’ve made in the last year and invest at least 10% of that in an old-age pension.
What I’ve outlined above are a few principles that you should follow. Each person’s circumstances are unique, so you really should speak to a financial advisor who can help you get the structure right. DM168
This story first appeared in our weekly daily newspaper, Daily Maverick 168, which is available free of charge to Pick n Pay smart shoppers at these Pick n Pay stores.
Kenny Meiring MBA CFP is an independent financial advisor. You can contact him at Financialwellnesscoach.co.za. Please send your questions to [email protected]