There are numerous types of loans, risk and savings products available and they have been designed for specific purposes. It’s important to match the right financial solution to your needs, otherwise you could end up paying more interest or fees than necessary.
From starting out to retirement, Jacques van Heerden, Head of Transactional and Investments, Retail Banking at Standard Bank shares financial products to suit every life stage
Typically, the first loan you take is a student loan. These are popular, because they have a low monthly repayment, and they are lifesavers for families who can’t afford to fund their child’s education, or for students who have to go at it alone.
While a student loan has its merits, it can turn out to be expensive as only the interest portion of the loan is payable each month; the capital can be paid back at the end of the contracted period. If you can’t pay back the capital, you can re-finance it, meaning you will pay for the same loan twice. It is however always a good idea to try and pay off as much capital as possible in the initial period.
At this stage, a debit card is a valuable tool, because it enables you to transact online. You’re probably not eligible for a credit card, so this is the next best thing. The difference between a debit card and a credit card is that, with a debit card, the entire amount is deducted from your transactional/current account immediately, while a credit card is a means by which you pay off only a portion of the amount borrowed each month.
Once you land your first job, you’ll need a car loan to travel to and from work. These come in various forms: a lease, instalment sale or residual lease with a balloon payment option. It is advisable for you to understand the terms of your payment plan when purchasing a car on credit. Consider putting down a large deposit as the bigger the deposit, the lesser your monthly instalment and interest rate you will have to pay back.
In terms of savings, you will need flexibility so a simple savings account will serve you well until you are ready to commit to a long-term savings plan.
In order to encourage South African’s to save for the long-term, government has launched its Tax-Free savings account initiative. Interest paid on these accounts is tax- free, as long as the total contribution remains within the threshold of R30 ,000 a year, and R500 ,000 over a lifetime.
Growing your wealth:
A credit card can be a great financial tool and should be considered as an essential part of a personal budget. Rather than using it to extend your household budget, which may lead to increased debt, a credit card when budgeted for and used responsibly, can actually save you money in terms of interest and consolidated spending. If you are established in a job and have a good credit record, you can qualify for one.
A credit card can be used anywhere. There is a 55 day interest free charge on most credit cards after purchase; however, payment would need to be made as soon as you can within this period, so that it does not accumulate any interest.
As you get more established in your career and have some capital built up, the next loan you need is a home loan. This is the most economical form of financing, because you have a large asset supporting the loan. This is the most important loan in the suite, because it helps you buy an asset that will grow in value and build your wealth.
Personal loans are offered by most banks, and may be used for any expense; from buying a new sound system to paying a bill. Generally, they are unsecured and range anywhere from a few hundred to a few thousand rands. The downside is that the interest rates on these loans can be high. Personal loans are probably the best decision for individuals looking to borrow small amounts of money and who are able to repay the loan within a couple of years.
Investing in the stock market
When you consider broadening your savings, it is natural to look at the stock exchange. One of the easiest ways to enter this market is through unit trusts. There are many unit trusts listed, but they all have one thing in common-they enable you to invest either monthly amounts or a lump sum in leading companies listed on the JSE.
Now is also the right time to set up a retirement annuity. By starting young, you’ll capitalise on the time value of money; the longer you are invested, the more your money grows. You could also consider a fixed deposit or call accounts for money that you may need access to down the road.
Securing the sunset years
As your career progresses, consider products like disability, life cover, and income protection. Another product you’ll need from the start of your working life is a medical aid. All of these products are necessary to protect you in the event that you are injured or can no longer work. A consultant will be able to help you find the correct mix of products.
When you get to the later stages of a career, your monthly retirement savings should equal at least 20 percent of your income after tax. Your reliance on credit should diminish too, so you can free up cash flow. This is also a time when children start making demands on your income, so your funds need to be managed carefully. You may require funding for their education, so an investment like an education policy or unit trusts should be considered.
“It may seem like a tall order to have all of these products in place, but if you get professional help, keep debt at reasonable levels and save consistently, you will be able to build wealth and stability for you and your family,” concludes Mr van Heerden.