Knowing More Part 2: Financial Literacy for Beginners

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Volume 2: Compulsory vs Flexible Money

How many times were you told as a child that you would only receive your pocket money once you had completed all your chores? This meant that you were only paid after slaving away at washing dishes, mowing the lawn, making your bed and removing the garbage bags from the house. One had to work away before reaping the rewards of remuneration. Now compare this scenario to another familiar childhood memory: it’s your 10th birthday and all your family members give you some money. You take all this money and put it in your piggy-bank and whenever you feel like it, you’re able to take some of that money occasionally and use it at the tuck shop. Although overly-simplified, this same principle is applicable in the financial world in terms of compulsory money and flexible money.

As we know from the Volume 1 (https://www.linkedin.com/pulse/knowing-more-financial-literacy-beginners-alex-blumberg/) of Knowing More, there are various types of financial products or vehicles and each one serves a unique purpose. These products can be split into two main categories: compulsory money and flexible money. But what exactly is compulsory and flexible money? Firstly, compulsory money. This is the money that, as when you were a child growing up, you could only have access to once you have finished working (completed your chores). The most common forms of compulsory money are your pension funds, provident funds and retirement annuities. Individuals contribute amounts to these and once you turn 55, are you allowed access to it. So, like the child who has to finish their work before they receive their pocket money, in the financial world, an individual can gain access to their money once they have also “finished” their work. The retirement age in South Africa is seen as 55 in order to access your compulsory money. Compulsory monies are great for retirement planning and investing. They have certain rules and regulations attached to them as well as certain tax benefits that should be communicated with you by a qualified planner.

Flexible money is the more commonly known type of investing. It simply involves putting away money at regular intervals, or whenever you have surplus money available, into products like unit trusts, tax-free savings account or direct shares. Like the child who received birthday money took sums of it for a trip to the tuck shop, an investor can access flexible money whenever he/she need it. An example could be saving for a house. An investor will make contributions to a flexible investment and when the time comes, the investor can withdraw the full amount to buy the house.

It is important to understand the differences between the two and have a balance of both in order to receive the best outcome during life and retirement. The key is to find a balance to ensure that an investor is not only just locking up money for retirement, but that there is liquidity to the investor’s portfolio. The key concept of diversification raises its head and it is important for new-time investors to be aware of the different options available to them.

Consult with a financial planner who will be able to tailor the right Lifestyle Financial Plan to suit each individual client. Each investor is different, and investing should not simply be a “one cap fits all” situation. It is up to the investor or the client to choose a planner who understands their lifestyle in order to tailor the best portfolio possible.

Never be afraid to ask.

An investment in knowledge pays the best interest. --Benjamin Franklin

AN Blumberg

BCom (Hons), PostGrad Diploma: Financial Planning