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Life insurance. Car insurance. Death cover. The list is endless.
And what does it all mean? Let's understand how insurance works.
In general, people tend to be reactive rather than proactive when it comes to money management. We do not have goals or plans for the money we earn. Money comes in on the first of the month and runs out by the 30th (if we are lucky).
But not paying attention to how we spend is why most of us never seem to be able to build wealth.
It's reported that the average South African spends around 80% of their salary on debt repayment, saves less than 2% of their salary, and only 5% will be able to support themselves in retirement.
While debt is a big contributor to the fact that we do not save enough, there are other factors that cause our finances to derail.
Effective money management is a little like a puzzle: if one of the pieces is missing, broken, or in the wrong place, it becomes impossible to form a perfect picture.
Every financial decision has an impact on our financial “cores”. The cores include medical cover, retirement, tax, money management, asset management, life cover, disability, short-term insurance and estate planning. Even seemingly harmless actions in one area can cause a domino effect in others.
For example, let's say your partner is between jobs. You both know it's a short-term thing and you are not too worried. However, times are lean, so to save some cash, you cancel your disability cover and your medical aid. After all, what are the chances of anything happening? You've got this far in your life without any disasters.
Incurring a loss
Then, on Monday morning, when you’re on your way to work, a racing machine skips a stop street. Your car is a write-off, and you have broken bones. You cannot work for six months, and you have R150 000 worth of hospital bills. The family is dealing with added stress and other costs, and your partner may have to take time off work to sort everyone out. So potentially you incur a loss running into hundreds of thousands.
Suddenly, the R1 800 per month you saved on the disability cover seems a tragic mistake. This is the domino effect in action.
So what can we learn from this?
First, a good financial plan is not just about saving; it is also about hedging the risks. Even the best plan can unravel if you don't have the right pieces of the puzzle in the right places. So, rule number one is to have your risk insurance in place. Before you make any kind of financial decision, draw a matrix and see what the potential impact will be.
