A year-end bonus, 13th cheque and or any other extra cash that you might be lucky enough to have at this time of the year creates opportunities if you are aware of them.

What does money mean to you?
Wealthy people have an understanding of how money makes money. They look for opportunities to grow their wealth. That’s why they are wealthy.

They tend to:

Delay gratification
Save first and spend the rest
Live within their means.
Earn interest rather than pay it.

The antithesis of this is:

Live for today… so buy now and pay it off
Immediate gratification.
I want it because I want it

A plan for your bonus

Challenge yourself to keep as much of the bonus as possible away from the festive spend which sets you up for the New Year.

Contingency Fund
Allocate some money towards a contingency fund for emergencies and unforeseen expenses. Money market accounts are ideal for this as they offer higher rates of return than retail savings accounts and provide immediate access to your funds when you need them.
Generally, one should have between 3 and 6 months of one’s monthly expenses. So start this fund with a generous allocation from your bonus.

Target your debt
Your debt repayments should ideally be no more than 30% of your income. Every rand allocated to debt effectively earns the rate of the interest being charged. So target your highest interest-bearing debt first as this will earn the most in savings.

Save first and spend the rest
It’s year-end and of course, you have to splurge a bit. However, saving a portion in cash and reducing that debt will go a long way to placing you on the front foot of your financial planning. What is left behind is for your festive spending. Enjoy it with peace of mind that you have some savings.

COVID-19 and the lockdown put many of us under financial stress. If we had had a cash reserve and fewer debt things would have been so much easier. Your bonus is a special opportunity so use it wisely.

Retailers over the decades have used discounts to incentivise sales. R99 sounds so much less than R100. Offering a 30% discount on Black Friday still gets you to spend 70%.

Where did Black Friday start……As the story goes, stores in the US operating at a loss (“in the red”)  would go on sale the day after Thanksgiving, making massive profits which took them (into the black”) Hence, “Black Friday”.

Black Friday creates FOMO..

Because it’s discounted I must buy it….. I really need this……It’s a bargain so I have to buy it……. I’ll buy it now and pay for it later. For whatever reason, the outcome is a transaction based on the perception of value created by a discount only available on the day. This creates a huge fear of missing out.

Not only retailers benefit……..       Black Friday pushes credit limits on credit cards and loans benefiting the banks. Cell phones are used for many online purchases benefiting cell phone providers cashing in on all the data used to transact. Courier services delivering the goods to your door have a huge benefit.

The aftermath silences the season  Black Friday leaves a void with retailers for the remainder of the festive season as it soaks up most of the consumer’s spend. Stores are left with fewer customers as there is less money to spend.

We can assume that the frenzy leaves many consumers in more debt under the guise of saving on goods that they really did not need. It just seemed a great bargain at the time…….

Pink Tax is a phenomenon often attributed as a form of gender-based price discrimination, with the name stemming from the observation that there is a broad tendency for products marketed specifically toward women to be more expensive than those marketed for men.(Wikipedia)

In South Africa a survey conducted by Use Your Voice (UYV), compared prices of daily-use items including, razors, creams and clothing and estimated that women pay 18% more for personal care products. This suggests that the “Pink Tax” is alive and well. Women paid more for the following similar products:

Razor blades – R25    T-shirts R20    Vitamins – R16    Deodorant – R10

This raises some interesting questions for discussion over Pink Tax:

Are Women are less price elastic (sensitive to price increases)? An economic principle which relates to consumer behaviour towards price increases. 

Are Women more vulnerable to marketing tactics falling into the trap of… if it costs more it’s better?

Are governments aware of the phenomenon of the Pink Tax as an extra source of revenue? May seem to be a conspiracy, however, there is an extra tax collected from women than men from certain Pink Tax products. 

What women can do is heighten their awareness of the Pink Tax and work on ways to resist it with their purse strings. 

Gold has always been a storage of wealth. The lustre of gold has attracted investors for centuries. Over the best part of the last decade, however, it seems to have lost its shine. Peaking at levels around $1900 a few years ago down to $1100 and back up to R1900 of late leaves a big question, “Will it be the next best investment when investors take flight from the stock markets and look for what has traditionally been their storage of wealth? Some speculative forecasts are pitching $3 000 for an ounce.

Gold does not provide a yield which takes away the power of compounding which the ultimate way forward to growing your investment.

Many Matriculants will be considering loan options for next year to fund their varsity fees. Student loans come with T’s and C’s which you should be very aware of.

Recently I came across a very disillusioned sponsor of a student loan who had been paying interest and service charges for 18 months and the outstanding loan was still the same as the original amount.

The banks cover themselves from left right and centre with this type of loan. Whilst it is the only way many students can afford to pay for their education the loan is loaded in favour of the bank all the way. The risk is all yours.

You take the loan for the duration of your studies and reapply on an annual basis providing the bank with your marks annually when you reapply. You elect a sponsor on the application who commits to paying the interest and service charges from the beginning of the loan until you finish your studies. This means that the original amount of the loan is still owed when you finish.

This is no loss to the bank as the cost of borrowing has been paid.

You will be granted a grace period for capital repayments after you have completed your studies and have not found employment. The grace period may be extended if you have to complete your articles, internship or community service.

The reality for many students is that there is a huge risk of not being able to find employment after completing your studies. The local and global economy is under huge stress and growth is not happening. This translates into rising unemployment which has a large component of youth.

Starting off in your career with a huge high interest-bearing debt is not ideal especially if you cannot find a job to pay it off. The banks have it covered by either you or your sponsor. A huge obligation on you in the face of tough times ahead.

It will be a very tough festive season this year as many households are struggling through the financial impact of the pandemic.

The ideal plan is to get through to the end of January without going further into debt.

With only three paydays to go before the end of the year time is running out to get a mini plan in place to cope with the financial demands of the festive season. Typically, many of us spend far too much over the period and then take most of the new year to repair the financial damage.

It follows that prevention is better than cure. So why not do something different this time around.

Create a mini-budget – Calculate what you can afford to spend without going further into debt. The total of your expected income for the next three months less your normal living expenses for the period is the amount you can target for the festive season.

Set aside the savings from each pay day into your credit card or access bond so that the money is freely available when you need it.

Get creative with your spend – Spend on gifts that are meaningful rather than expensive. For example, a mall shopping voucher is very practical as you offer a wide variety of options from the various stores in the mall. Furthermore, most stores go on sale after the 25th of December, so your voucher will go a much longer way. Don’t forget the loyalty card/s which may have accumulated some value worthwhile using.

Keep January firmly in mind – Many of us are paid early in December which means that you will need to stretch yourself for a longer period until the January payday. You will need to make sure that you cover debit orders, and all the “must-have” expenses for January.

You will be a super star if you manage to stay away from extra debt by the time you receive your January pay slip. Furthermore, you will start 2021 on the front foot.

The Economic Recovery Plan (ERP) presented this week by our President didn’t land at all with South Africans as, quite frankly, it missed the fundamental basics of sound financial planning.

Financial planning is a process of measuring where you are now relative to where you would like to be somewhere in the future and implementing the necessary steps to get you there.

The ERP lacked in credible, realistic details on how the important areas to recovery would be implemented. Such as the commitment to a sufficient, secure and reliable energy supply within two years?

Peace of Mind – The main outcome of a successful financial plan is peace of mind that you are able to maintain or improve your lifestyle into the future having provisions in place for life changing events.

The  ERP left the nation with very little peace of mind that the leadership has the way forward under control. Again, without details on how jobs are going to be created, how businesses will be saved, how debt will be curtailed.

Proactive not Reactive – A sound financial plan anticipates life changing events and proactively puts provisions in place to cater for them.

The ERP plan is a reactive plan dealing with our devastated economy which we were heading for before the pandemic and COVID19 accelerated it. The warning signs with rating agency downgrades were there long ago. If they were dealt with at the time with urgency and conviction we would not be anywhere near the devastation we have landed in.

 

 

Cut the cloth – Setting up a sound financial plan begins with the personal balance sheet where areas are identified to cut expenses. The main target area is debt reduction through cutting expenses and allocating the new found savings into future investments.                                                                                                                                                                                                   

The ERP bypasses the elephants in the room such as failed SOE’s which are huge liabilities on SA’s balance sheet. The billions poured into these entities could be diverted to many other feasible projects creating investment into our future. Proposals to raise a solidarity tax on an already over taxed country typifies the lack of will to restructure South Africa’s economy.

People first – A sound financial plan is around people and their wants and needs aiming for hopes, dreams and aspirations.

The ERP is flawed as it places government at the heart of economic recovery  instead of reserving that space for the private sector. It is nothing more than a plan to salvage the damage done through incompetency and corruption.

Relevant with the times – Financial Planning moves with the times embracing change to keep the plan relevant. Technology can be  extended to boldly restructure our economy improving efficiencies and standards in areas such as education and health.

It takes courage to change and do something really different which wasn’t found in the ERP.

The short-term solution in the current environment

As our economy is in a deep recession, investment options are very challenging. A useful place to invest in the short term is the money market. Money Market Accounts can be opened at all financial institutions such as your local bank. You can also invest in a money market fund which is a combination of money market accounts with various banks.

It is very difficult at the moment to get a return of around 5% with an extremely low risk of losing your capital. I say low risk because there is a very low possibility that money market funds may be exposed to debt instruments which carry the risk of default. This could in turn lead to a capital loss.

What is it all about?   A money market account trades in bank instruments called “paper”, such as Treasury bills, Banker’s acceptances, certificates of deposit, and bills of exchange which all trade in a period of less than a year.
The money market trades at the so-called ‘interbank’ level where banks lend and borrow to each other. These wholesale rates are higher than the retail rates offered by banks on their savings accounts.

Don’t be lulled into higher yields   If the fund is offering exceptionally high yields it may be riskier than you think. The fund may be invested in low-grade debt (bonds) which often pay a higher return for the risk. The economy is on its knees and corporate debt poses a risk as companies struggle to get back up on their feet.                                

Interpret the rate correctly   The nominal rate is the actual rate of return – normally annual. The effective rate is the rate achieved by reinvesting the interest received and compounding it back into the investment.

Example:
A nominal rate of 7% per annum yields an effective rate of 8.25% over a 5-year period.
If you draw out the interest then you do not get the effective rate. You actually get the nominal rate.
The real rate is the adjusted rate received after subtracting the inflation rate.

These are extraordinary times    In an environment where cash is king, money market accounts are very useful parking bays but be very aware of the possibility of capital loss in the event of the debt exposure defaulting.

The new draft legislation aims to give SARS the power to put you in jail if you make a mistake with your tax return. 

The draft bill seeks to remove the concept of “intent” which in criminal law needs to be proven that you wilfully broke the law. 

Removing this from the Tax Administration Act takes away the need for SARS to prove anything and you could go to jail for a simple mistake with your tax affairs. 

There are so many common errors

Paying VAT and PAYE late  – The payment of these taxes is sometimes due on a weekend and it is quite possible to make the payment on a Saturday which only reflects in SARS’s account on Monday. So off to jail you go for 2 years?

Adjustment to VAT Returns – VAT being a self-assessed tax sometimes is adjusted by the taxpayer for various reasons. This could lead to SARS not being paid correctly in the first instance. So off to jail, you go?

Late returns – Add to this a late income tax return because you were away on holiday or ill in hospital for that matter.?

Lost documents – misplaced supporting documents like a receipt or log book needed to prove a deduction leads to a lower tax payable….oops….off to jail you go?

A misinterpretation of expenses –  could lead to understated taxable income. You thought you could donate some money to a needy family member not realising it was a donation from which SARS wants tax. No room for appeals or corrections…..off to jail you go?

So unfair compared to other crimes…..

This bill has some serious ramifications which quite frankly are grossly unfair to the South African taxpayer. Measure this against the consequences of breaking other laws such as corruption and fraud and theft – make a mistake with your tax return and you will end up in jail far more easily.

• interest on your bond
• rates, lights and water
• insurance on the house
• maintenance costs on the property
• security costs

Other Allowances                                                                                                                                                                                                  You should also explore possible allowances with your employer for your computer and cell phone. Another opportunity for some is to claim reimbursed travel expenses at 464 cents for every kilometre of business travel you do.

There are conditions which apply before SARS will consider these deductions which should be explored with your company and/or a tax consultant.