Keep this in mind when taking out new financial products

Adding a product to your personal finance portfolio, such as insurance or an investment, is a big decision. Each month it will take a chunk out of your salary, and you need to ensure you can cover it.

We found out what you should keep in mind before taking out a new product, how you can assess the products you already have, and how you can generally improve your financial position.

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When to consider a new financial product

According to Tessa Verwoerdt, head of department for Money Solutions at Bayport South Africa, you should assess your finances at least once a year.

Before taking out a new financial product, Verwoerdt says, you should first evaluate your assets and liabilities. Ask yourself how much you earn and how much you spend, what your net worth is, and how you can increase it over time.

“Review your borrowing behaviour and your spending patterns. Identify the areas where you overspend and where you could start to save. Pay off debt as quickly as possible,” she advises.

You should consider any movement in your total debt in the previous year. Did it go up, how much have you borrowed, and were you able to save?

“When assessing your finances, make sure you review all your investments and bank accounts, credit cards, assets, and loans,” Verwoerdt says. “Also, look at your insurance products and life cover policies, annuities, and retirement funds. Make sure you have the protection you need for the future.”

As obvious as it may seem, the only way to get out of debt is to stop taking on new debt, Verwoerdt points out. It’s critical for your financial health to manage your debt properly and control your spending.

“It’s also important to know and understand your creditworthiness by looking at your personal credit score and report. This will help you to maintain and improve your finances.”

Deciding when to take out a loan

Verwoerdt notes that you should only take out loans that you really need, and can afford to repay monthly, in line with your financial goals and needs.

“It’s important to make sure you’ll still be able to afford the payments without taking your additional income, such as overtime, bonuses, and incentives, into consideration,” she says.

She recommends doing your budget first and finding out how much the debt will cost you, the term of the debt, and how it fits into your long-term goals.

“After this, shop around to see where you can get the best deal for the products that you need, including insurance and saving products.”

“Don’t borrow debt to pay off debt, unless it’s a consolidation loan that will improve your financial situation,” she adds.

Four keys to financial security

Verwoerdt points out that there are four important actions you need to keep in mind when working with your personal finances. These are detailed in the table below.

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