Vote for Your Financially Fit Future – Know Your Numbers

Sydney Sekese, CFP^® professional and member of the Financial Planning Institute

An election for the president of the United States happens every four years. At the time of writing, the next presidential election would have been on November 3, 2020. Staying informed and up to date with the latest political news is paramount to every US citizen who intends on making their mark on this year’s ballot platform.

It is common human behaviour to be emotional during this voting season. Personal financial matters should not be emotionally approached. Readers are encouraged to know their numbers and vote for their own financially fit future. Listed below are some of the numbers to be considered by anyone who wishes to know their financial position at every point in time.

It all starts with a household or personal budget. It is a practical tool you can adopt to achieve the short, medium and long term financial goals. These goals may include holiday by the sea, part time studies and financial independence at retirement.  A budget assists you in knowing your income and expenses each month, or even each day. Knowing these numbers helps in prioritisation and avoiding impulse spending.

The debt number:

A famous financial writer (Gail Vaz-Oxlade) once said “Money is not a rocket science”.  This is true with debt as well. It is money you have borrowed from a person or business. When you owe money, you need to pay it back. Knowing the debt number will make it easier for you to take charge and make plans and arrangements to reduce and ultimately clear it.

The emergency fund number:

A prudent financial planning strategy is to establish an emergency fund. This should be the ideal starting point once your debt is at acceptable level. Furthermore, at this stage, the household budget should not be in deficit. Most financial experts recommend that you have somewhere between three months and six months of basic living expenses in your emergency fund. This guideline is generally recommended for those who are in receipt of a steady monthly income and have more secure employment.

The retirement number – how much do you need to retire? 

Most of us choose to ignore this topic especially if we still have a good 30 or 40 years to go before retirement. Reality is that we are often back to the future much quicker than we envisage. If you start working at the age of 23, you have a minimum of 444 pay-cheques available during your working life. Many of us do not think of further provisions we need to make for further 348 pay-cheques after retirement. This assumes life expectancy of 29 years after the retirement age of 60.

Several calculations can be used to determine the amount you would need to enjoy a comfortable retirement.  Let’s examine two of these methods:

1. The Income Replacement Ratio (IRR):

A replacement ratio is the ratio of the income you receive from your pension once retired, to the salary you were receiving just before retirement.

For example, if your pensionable salary just before you retire is R10 000 per month and your replacement ratio is 80%, you might expect to receive R8 000 per month in retirement.

It is generally accepted that replacement ratios of 70% or more should be adequate for the average person. This takes into account that your lifestyle and spending patterns change as you get older.

• The rule of 300:

To work out how much you need to retire on, you simply multiply your current monthly cost of living by 300. Remember to remove the bigger expenses as it is assumed you won’t have these big expenses after retirement. These big-ticket items can include your bond repayments and the kids’ tuition fees, as well as your retirement savings.

Final Thoughts

Unlike politics, you can actually exert more direct control over your finances. Readers are encouraged to vote on their feet to create a great platform for their independent financial future. They should not be overwhelmed as there is help out there.  There are credible financial advisors who can help in setting goals, weighing up options, understanding tax implications as well as reviewing and updating a financial plan.