Five Financial Regrets You Want To Avoid

Most of us think we are sensible in how we make decisions. We consider our options carefully and make the best possible choice in any given situation. But the reality is that we constantly underestimate the likelihood of something bad happening to us and overestimate the chances of positive events. This belief that things will be better in the future is known as optimism bias. When we think about how things will look in the future, we tend to overemphasize our current actions and desires.

Being overly optimistic about your future can lead you to make bad financial decisions in the present. There are a number of factors that can worsen your financial position, some are more predictable than others are, but having sufficient savings can help you largely soften their impact. Some of the factors are discussed below:

#1: Future cost of living

The prices of goods and services we pay today are likely to be higher tomorrow. The 10-year average annual change in prices (inflation) has been 6% in South Africa. While this figure may seem low, it is important to understand that it grows over time. Furthermore, certain categories, like medical care and education have experienced significantly higher rates of prices increases in the past. Education costs keep increasing at 10% according to Statistics South Africa, for example, one-year private school primary education costs R40 000 today but in 20 years this will increase R269 000 .

#2: The costs of retirement

For most people, retirement is unavoidable and so are the costs that come with it. You may be disappointed if you think you can postpone retirement to work a little longer because you have not saved enough. Currently, the average age at which people expect to retire is 62, while the actual retirement age is 60. Most often, people retire earlier than planned, due to unexpected hardships like health issues or disability, work-related issues, and skill obsolescence. Overconfidence in the ability to delay retirement may lead to underestimating one’s saving needs and lower standard of living during retirement. Despite the large availability of tax-incentivised retirement annuities, only about 6% of South Africans can maintain their standards of living in retirement.

#3: The financial impact of longevity

The average life expectancy in South Africa has been steadily rising for decades and, with advancements in health care and technology, we should expect this to continue. According to estimates, about one of every four 65-year olds today is expected to leave past the age of 80. In addition, for couples at 65 there is a 48% chance that at least one spouse lives to age 90 and beyond. For those planning to retire at 60, spending 25 or 30 years in retirement is possible.

#4: Relying on old age pension

The old age pension program aims to provide some economic stability to the elderly. In South Africa, social assistance is subject to means testing, which implies that Sassa evaluates the income and assets of the person applying for social assistance in order to determine whether that person’s means are below a stipulated amount. If you are unmarried, your income may not exceed R73 800 a year (R6 150 per month) and your assets may not be worth more than R1 056 000. If you are married, your joint income may not exceed R147 600 (R12 300) per month and the joint assets may not be worth more than R2 112 000. However, for most South Africans, the program cannot provide enough to maintain their standard of living during retirement.

#5: Unexpected expenses

As we go through life, there are unexpected expenses that come up. Unfortunately, they come up more often than most of us would like. Many non-monthly expenses can add up to a lot more than you usually think. These expenses might happen every few months, twice a year, or even just once a year. Having savings in an emergency fund can not only reduce the stress of an emergency but also prevent costly borrowing from retirement savings or personal loans.

Investing can help you achieve financial security and make it easier to maintain a stable quality of living in the future. In a way, investing is similar to preventative healthcare. It can help us reduce the chance that our financial status get worse. Having enough money saved can help us meet goals, like buying a house or paying for your children education, and provide for necessities, like medical care. Saving is the first and most important step and investing your savings may help you achieve your goals more easily.