A financial plan is all about focusing on income

golden nest eggAs a young person studying while working on becoming an entrepreneur, Shaun needs some advice on how to juggle his finances. Focusing on income and avoiding debt are the golden rules of success.

Shaun is 21 years old and is studying a BComm in accounting science at Unisa and has big plans for his future. While studying part-time he has also started his own company, VICSHO Investment.

“I need advice on how I can manage both my personal finances and my company,” says Shaun who adds that as his mother is funding his studies he does not have a student loan or any other loans.

Shaun’s new business requires cash for operational expenses and on marketing his product.  “Currently I have no income but I do have expenses of making the cards and putting up the website, where my clients can get more information on the product,” says Shaun.

Derick Ferreira, head of product management at Old Mutual says the most important step that Shaun has already taken is to ask the right questions at the start. What Shaun has to focus on right from the beginning is income – how to generate it, how to protect it and how to make it last.

Your personal finances

“Seeing that Shaun is still studying, it is perhaps important to reflect on his greatest asset in life and the importance thereof … his income earning ability,” says Ferreira who adds that once we start working, we need to protect that ability to earn an income.

During our working career we accumulate income and in the final years of our life during retirement we need to ensure we can sustain our income. “So any financial plan is really about income” says Ferreira.

If your starting salary was R15 000 a month and you worked for 35 years with a 6% salary increase each year, over thirty-five years you would have earned over R20 million in income! That is the asset you need to protect.

Ferreira says the best way to protect this incredible resource is to start with planning.  Understand your income, expenses, goals, objectives and timeframe and get help from an adviser if you need to. Make those millions work for you.

“It all starts with a budget. This should be maintained with discipline and rewarded with compounded growth which can only be achieved over time,” says Ferreira who advises that one should always maximize the tax benefit of saving through a retirement fund in order to have income to sustain you in your later years when you retire.

While one is focusing on growing ones income by investing it, you also need to protect it. You can insure your income through disability and critical illness cover and you can insure your finances against an unexpected catastrophe through short-term insurance on your house or car. Your health is also fundamental in being able to generate an income so make sure you have some form of medical cover.

“Realistically, it will be difficult to start all of this at once but that is why it is important to have a financial plan that you review annually so that you can achieve your goals over time,” says Ferreira.

Starting your business

Starting a business is one way to eventually start signing your own pay cheque and generating your own income, but it can also threaten your future income if you take on too much debt or do not do your homework first.

Ferreira says Shaun should consider his personal financial obligation in terms of the business – how and where he would be personally liable for certain financial aspects.

In this case Shaun has started an investment business and this comes with a host of regulations, in fact the financial industry is one of the most regulated industries in South Africa and complying with these regulations comes with significant costs. Not complying is not an option as there are serious financial and legal consequences.

Shaun needs to make sure he fully understands his obligations and that he is fully registered with any regulatory bodies and has the necessary insurances in place. Again this is all about Shaun protecting his income from unexpected events.

Ferreira says for any small business it is vital to ensure that all debt and financial liabilities are fully insured as very few start-up businesses can stomach financial shocks and large expenses. So having credit insurance in place would be important as well as insurance on any vital business tools such as computers.

Borrowing for a business

The question Shaun faces right now is whether he should borrow money to cover the expenses of his start-up business. Shaun is in a privileged position of living at home and having his mother pay for his studies so any income he generates he can put straight into the business.

First of all as Shaun is not earning an income it would be difficult for him to obtain a loan. Rather than borrowing money, Shaun needs to find another way to generate income, even if it is packing boxes at his local supermarket or giving extra lessons in accountancy to some school kids. Money not borrowed is interest saved. His business would be in a far better financial position if he had no debt to repay.

Once the business has grown to a point where it is generating sufficient income and Shaun wants to expand, he could then consider a loan as long as he is able to repay it without putting his business at risk.

TIPS FOR SHAUN’S MOM

  • Children who are studying and living at home should be encouraged to contribute financially to the household. This teaches them a sense of financial responsibility.
  • If you have to take out a loan to help your child study, your child should find a part-time job and help you to repay that loan, at the very least to cover the interest payable. You should also set conditions such as the fact that the child must pass each year before you are prepared to take on further debt.
  • If your child wants to start a business do not co-sign on the loan. If that business fails it could sink you financially. No matter how much you want to help your child, you cannot help them if you put yourself at risk.
  • Do not put your own retirement plans at risk to finance your child’s studies. The best gift you can give your child is to be financially independent in your old age.

This article first appeared in City Press.

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