Financial Needs Analyses

What is a Financial needs analysis?

A Financial Needs Analysis is the cornerstone of your financial plan. Unless you have established your needs and goals, your plan may be unrealistic.

The first step towards getting your finances in order and being able to meet your financial goals is a properly constructed financial plan. This does not mean sitting down and drawing up a wish list. It means properly analysing your current financial position, your financial needs and wants, and how you plan to achieve your financial goals.

The best way to do this is by having your Financial Adviser carry out a Financial Needs Analysis for you. This is not an elementary calculation , but a very thorough investigation of your financial affairs.

Laying the foundation

The key to the success of any financial plan is to know what you need and how much you can afford. The affordability of any plan is essential.

It is unlikely that you will have sufficient money to meet all your needs and wants. A financial plan is all about balancing your needs and wants and prioritising what is really important.

Balancing act

Life is a balancing act of many risks. Financially, the main risk for everyone is not having enough money to meet your needs when they arise. There are some risks that you can manage on your own, such as having sufficient funds to pay for the education of children from your earnings; and some risks that you need to share with others, such as the risk of you dying before you’ve saved enough for the education of your children. You need life assurance to cover your dependants in the event of the unexpected, ie. your death or disability.

There is no one plan that will suit everyone because there are five crucial factors that will independently affect everyone’s financial needs in a different way and to a different extent. These are:

  1. Your Wealth;
  2. Your Income;
  3. Your Health;
  4. Your Dependants; and
  5. Your Goals.

Many people make the mistake of simply guessing at a savings plan and how much life and disability assurance they need – and to make the matter worse, they think they can make the guess only once or twice in a lifetime. The result is that your financial plan can be totally out of line with what you and your dependants need at any given life stage.

For example, you may have too much life assurance, but too little disability assurance, and your savings plans may be nowhere near adequate for important things like paying for the education of your children or your retirement.

The solution to constructing a cohesive and affordable plan lies with a Financial Needs Analysis.

A Financial Needs Analysis, will identify:

  • What you need to achieve
  • What you already have in assets
  • What you can afford and where to use your financial resources to the best advantage
Most people need the following:
  • Income protection or risk assurance against dying or being disabled;
  • Goal savings. This will include all your financial goals, whether short or long term;
  • Retirement savings. This should be treated separately from your other financial goals because of its importance; and
  • Health assurance. Your medical scheme as well as hospital and chronic disease assurance must be measured to see if they meet your needs.

The question is “How much money can you allocate to each of the above; and what will this buy you?”

The best place to start is with how much risk assurance you need against dying or being disabled .

When you decide how much risk assurance you need, you must take the following into account:

  • Disability. What you need if you become disabled;
  • Dependants. Whether you have dependants, how many, and their needs if you die or become disabled;
  • Your assets. The more assets you have, the less you need in assurance. If you are wealthy, you do not need as much risk assurance as someone with low accumulated wealth but a high income;
  • Your liabilities. What happens to your debts if you die or are disabled? The more money you owe, the more risk assurance you will probably need and the greater the necessity for a properly constructed, targeted savings and investment plan;
  • Your income and spending. Your current and future income and spending will determine the design of your financial plan, allowing you to decide on risk and/or investment priorities and what you can leave until later when you are earning more. A computer-based analysis tool will allow you to make changes to your financial plan to see what happens under different scenarios;
  • Your health. If you are healthy, you can take a greater chance of meeting your risks through your income than someone who is unhealthy;
  • Your current risk assurance. Assess your current cover for death and disability to see if you have too much or too little, bearing in mind any benefits you will receive from a retirement saving plan, whether it is employer sponsored or attached to a retirement annuity; and
  • Time period. You need to break your risk assurance into different periods. For example, you do not need life assurance to cover the education of children until you are 70.
    When assessing your life assurance needs, remember that you should aim to leave your dependants an adequate amount of money. Rather than leaving them immensely wealthy, you should use as much as possible to improve your wealth, particularly for your retirement.

Getting your priorities right

Once you have assessed your life assurance and disability needs, the following priorities should follow:

  • Healthcare. Many people forget about healthcare cover until they fall ill or have a major accident. Then it is often too late;
  • Retirement savings. Never under-estimate your retirement savings plans or leave them out of any Financial Needs Analysis. You need to check whether your investments are on track to meet your targets at the retirement age you’ve set for yourself. Owing to variations in inflation and investment performance, you will find your retirement plans will need constant adjustment;
  • Goal savings for needs such as education of children; and
  • Goal savings for wants, such as an overseas holiday

 A Financial Needs Analysis is not something you do once and find all the solutions to your problems.

You need to review it  on a regular basis, particularly when your circumstances change. The following are prime occasions for a Needs Analysis:

  • If you haven’t had one done in the past five years;
  • When you get married;
  • When you have children;
  • If you have been divorced;
  • If you have lost a spouse;
  • When you are about to retire; or
  • When you have started your own business.