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Wedged between two financially dependent generations, many South Africans in their middle years are feeling that financial squeeze.
According to a press release from Old Mutual, as many as 28% of South Africans who live and work in metros are supporting their own children as well as their parents, siblings and/or other family members. With this statistic growing by 2%, on average, every year, becoming part of what researchers call ‘the sandwich generation’ is a likelihood for many South Africans.
We spoke to Lizl Budhram, head of advice at Old Mutual Personal Finance, about this phenomenon and asked what the first piece of advice is that she would give someone who finds themselves in this situation.
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“The most important consideration is to focus on creating balance between the needs of all our dependents, so that you are not meeting the needs of one to the detriment of the others,” says Lizl.
Lizl also points out that it’s easy to get caught up in immediate expenses, it is important to consider your own long-term financial needs as well as those of your dependents.
“Drawing up a monthly budget and sticking to it is essential,” says Lizl. “Plan ahead as much as possible and remember to allow for big annual expenses such as ‘back to school’ costs at the beginning of the year.”
“It is crucial to make ends meet, so try to avoid taking on debt. Having to pay credit card or other debt repayments each month often lands people in a terrible debt cycle that is hard to break out of.”
So what is the best way to manage being responsible for yourself and others financially?
Lizl says “The most important thing is careful planning. Identify all expenses for the year and make a considered plan to meet them. This could mean making smaller payments for some costs throughout the year, or paying some in advance. For example, you could make use of bonuses or any additional income to cover expenses like school fees for the year.”
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Lizl stresses that being disciplined is important. “Even when you feel like you are already in trouble, it is important to avoid making this worse by spending out of budget,” she says. “Recognise that your financial situation could get worse and if you need help to get back on track – ask for it. Great financial advice is easy to access and isn’t only for the rich, as you can discuss commissions and fees with your adviser.”
Lizl says you should be realistic in your planning. “Don’t pin your hopes on winning the lottery and don’t fall for bogus investments that promise returns that are too good to be true.”
Savings plans are very important in this situation as you want to make sure you and the people who depend on you are covered and that you won’t be left high and dry.
Lizl says there’s in no one-size-fits-all savings solution. Different plans suit different people. “For example, if you are very self-disciplined, you could get a savings solution that does not limit your ability to make withdrawals. If, however, you tend to be impulsive and struggle to stick to a budget, consider a solution that restricts access to your savings.”
You should also consider the tax impacts of certain financial decisions. “For example, taking cash when you leave your employer’s retirement fund results in massive tax payments, while certain vehicles like RAs and TFSAs have great tax benefits. Speak to an adviser to identify the best solution for you. Look at returns and risks attached to specific solutions,” says Lizl.
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Lizl says that the next step is realising that your long term financial dreams don’t need to be put on hold – but you need the right advice and solutions in place to achieve them. Researching the different types of savings options – and how these are taxed - is key.
Tax-free savings accounts (TFSAs) and retirement annuities are two savings vehicles that allow you to maximise your savings through efficient tax benefits, she says.
“TFSAs allow you to save up to R33 000 per year (R500 000 over your lifetime), enabling you to take advantage of the benefits of compound interest over the medium to long term without having to pay tax on interest, dividends or capital gains. It’s also a good way to save for a rainy day or emergency, because you can access your money immediately. Structure your contributions so that they are transferred automatically after pay day each month. It will help to give you peace of mind.
“A retirement annuity (RA) is a longer term investment. While TFSAs are more flexible, RAs provide a more fixed investment, with cash withdrawals only possible after the age of 55. Even then, by law, you may only withdraw one third of the lump sum. The remaining two thirds of your total RA investment must be used to buy a life or living annuity.”
Lizl says to review your immediate expenses and annual expenses, as well as your financial goals, such as retirement, and ensure that your overall savings plan is well-suited to these, and helps you reduce the financial pressure on you.
“Once you have a careful plan in place, one that enables you to make ends meet and save for future goals, you can start factoring in a much-needed break or outing without putting yourself under additional financial stress,” says Lizl.
If you’re married and sharing the responsibility of looking after both your kids and other family members, then your stress may be a bit less and easier to handle, although there could be some additional expenses.
“Pull your resources together and make a plan to meet the expenses of both parties. It is important that both of you understand your individual risk profiles and levels of discipline, and ensure that your plan reflects these,” says Lizl.
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She also advises that “if only one of you has expenses out of the relationship, is important to have an open conversation about these, and negotiate what should be contributed to the partnership, so that the one person’s additional expenses can be met without compromising those of the partnership. Without open conversation, resentment can build up. Keep calm.”
The final step is drawing up a financial plan that takes into account all the information you’ve gathered from your open discussions with family members as well as your research into different types of savings vehicles. “Your holistic financial plan should cover immediate and future expenses like rent for family members, children’s tertiary education, or your parents’ medical or retirement care needs. You also need to include risk cover – to protect your ability to earn an income in case of retrenchment or disability – and funeral cover should a family member pass away.”
Lizl says that the best way forward is to consult a trusted financial adviser. “An adviser will partner with you not only to create the plan – but to track and evaluate it. This constant evaluation is critical to ensure you meet your financial obligations and longer term goals, while also enabling you to adapt the plan to life’s twists and turns.”
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