The traditional approach to sound financial planning is to buy a property as soon as you can instead of renting. The rationale is that you will be better off paying for your property as soon as you can with the rent you are paying to your landlord.

However, the COVID-19 pandemic has pushed economies into deep recession providing strong reasons to rent a property instead of buying.

Cash fund first
If you are starting a new job, or business, or if you are a contractor or freelancer you need to be confident that you can comfortably generate consistent income. Buying a property binds you to a long-term financial commitment which you will need to cover over the long term. You should aim to settle down first and get a good fix on your income over a period of time.
You need the peace of mind that you can cover your monthly expenses for at least 6 months. So step one in your planning is to save into a cash account until you can comfortably cover your living expenses for 6 months before even considering buying.

Property binds you
If you buy a property you immediately bind yourself to a location. If you find a new contract on the other side of the city or country for that matter, you will then be burdened with the extra cost of commuting further or relocating, Renting will allow you to consider options of moving closer to where your work takes you.
Cash is king
Whilst you are a tenant the risk and costs associated with owning a property belong to the owner. Whilst renting you are freed up to save as much cash as possible for the eventuality of buying your own home one day when you are well settled in your career and have saved a comfortable cash fund.
Currently, the property market is pretty flat and there is no compelling reason in the foreseeable future to rush in and buy. Although interest rates have fallen sharply as a result of THE COVID-19 pandemic being tempted into what appears to be an affordable property at this stage is a risk. Property values after the lockdown will probably reset on the downside. Patiently waiting out the bottom of the property market whilst saving your cash will be a smarter strategy than rushing in too quickly. The economy has been severely damaged which will affect all asset classes for a long while, including property.

A trust is a legal entity which controls assets on behalf of its beneficiaries. It is managed by trustees in terms of a trust deed which details how the assets should be distributed. It helps some but not everyone.

Here are 3 reasons why trust is not that beneficial for you:

The size of your estate
All taxpayers receive a deduction of R3 500 000 from the value of their assets in their estate before the estate duty of 20% is applied. If you leave everything to your spouse there is no estate duty payable on your death. It is paid when the surviving spouse passes on. The R3 500 000 passes onto the surviving spouse leaving up to R7 000 000 as a deduction on the value of assets before estate duty is applied. So if your estate is under R7 000 000 the benefit of a trust is limited.

Costs
The running of trust comes with administrative responsibilities. Trusts have to prepare financials and submit tax returns which incur accounting fees and costs. These costs will need to be weighed up against the benefits that the trust provides in the event of your death.

Tax
Trusts are taxed at the highest rate of 45%. If your individual tax rate is lower you should reconsider. A trust does not enjoy any exemptions on interest or capital gains either. For example, if your home is in a trust then you do not enjoy any rebate on the capital gains tax when you sell it. Whereas, if the house was registered in your name you would receive a deduction of up to R2 000 000 before capital gains is applied. Similarly, if you have taxable interest you enjoy an exemption on the first R23 800 if the investment was made in your individual capacity. In a trust, you will pay 45% on the interest without any exemption.

So a trust does not make any sense if you don’t have a sizeable estate to warrant the costs. The tax concessions are often more effective in your personal capacity compared to a trust. The costs and fees too may not be worth it.

If less than 10% of South Africans at 65 end up with sufficient capital to retire, then retirement is an illusion for the remaining most of us. So what are the options?

Depend on your family
The problem is that families are under financial pressure to make ends meet and an extra dependent will add to the pressure. This is probably the last option you will want to take as all members of the family will have to make a financial sacrifice.

Depend on the state
Not much to look forward to from a state pension. The cost of living escalates at a far greater rate than the state pension increases every year.

Carry on working as long as your health permits                                                    This is the only real solution for many people. The ideal space to be in would be a business that you create for yourself by doing something that you are passionate about that generates an income which you can live off. You then rely on your health to keep going for as long as possible. If you are driven by passion then this could be longer than you think.

Don’t give in to the paradigm of 65…                                                                             Just because your pension fund made you retire at age 65 doesn’t mean that you have to adhere. If you are prepared to think outside of conventional thinking and plan and prepare in advance your life can begin at 65. Or even before it…There are many more years ahead that you have to cater for. It’s not only about the money but also about the reason or purpose you have to get out of bed in the morning for the rest of your life.

Retirement isn’t in the frame                                                                                 Getting set in your newfound self, and taking 65 out of the picture will give you the advantage of looking past retirement and into a new chapter in your life.

If you put your mind to it there are many possibilities. It will take courage and hard work which may be a far better result than struggling on a dwindling pension throughout your retirement.

What are Unit Trusts?  

You get to invest for as little as a few hundred rands into a large investment pool which is managed by a fund manager according to a specific objective. The investment is priced in units (hence the name) based on the value of the fund. There are around 1000 to choose from locally and thousands more globally.

They are regulated

They are carefully regulated and the fund is held in a trust and is not owned by the fund manager or service provider which offers protection over your investment.
Unit Trusts are used in most investments such as pension funds, endowment policies and retirement annuities in varying combinations.

They are easily accessible
The main benefit is their liquidity. They can be cashed in at any time and the fund manager has to pay you the unit value at the closing price on the day you sell. This provides easy access to your funds when you need them.

They provide access to different asset classes
Let’s say that you want to invest in property. You can buy a building and manage the project on your own with all the challenges that come with it. Alternatively, you can invest in a unit trust which focuses on property portfolios managed by experts. You can sell this at any time and you don’t have the hassle factor whilst you are investing. Selling is easy as you get the day’s closing price of the unit, whereas, a property takes a lot longer as you wait for a willing buyer and then the long process of changing registration before getting your money.

They are cost-effective
There are no fees applied to selling units, however, you do pay a fee to buy them and while you are invested the fund manager, administrator and advisor (if you used one) will all charge you whilst they are actively involved in the investment. These fees are normally a specific percentage of the value of your fund and are collected monthly from your investment.

They provide for rand cost averaging
Unit trusts are priced per unit which moves up and down relative to the assets that they are invested in. So in a downturn, the units are cheaper and if you are buying on a monthly basis you simply get more units at a cheaper price. If and when the value increases you have more units at a higher value. The converse applies in a bull market where units are more expensive.

Unit trusts provide access to sophisticated investments with ease and protection. However, the choice of funds needs homework and often needs the help of a financial advisor. Equity unit trusts are at the aggressive (high-risk) side of the spectrum whereas bond and money market unit trusts land at the conservative (low-risk) side. Balanced unit trusts which have a combination of these funds offer a moderate-risk investment.

The lock down will give us plenty of time to explore the internet for useful websites which will give you some practical financial insights.  Here are some sites that I have compiled to help you while away the hours.

Investment Planning                                                            www.marriot.co.za

Investment tools for retirement and income preservationEasy to use and very practical in terms of understanding the dynamics of how investments perform over time in relation to income draw downs and fees charged.

Budgeting                                                                               www.22seven.com

All your accounts. All your transactions. All together. Link bank accounts, credit and store cards, investments, loans and rewards. You then get a personalised budget based on your own actual spending.

Debt                                                                                     www.clearscore.co.za

Free credit score which you can compare with others in your area. Let’s you know if you have any judgements, if any accounts are in default, or have overdue payments. It also provides ways to improve you score to put in a better standing with your next credit application.

Information                                                                           www.statssa.gov.za

Explains how CPI is compiled and calculated
History of CPI data to get a better understanding of the price movements of various items and sectors.

Financial Guide for parents                                             www.moneyasyougrow.org

Useful guide for parents to get their children savvy about money

Finding an advisor                                                                          www.fpi.co.za                                                                           www.findanadvisor.co.za

You can view profiles of financial planners and advisors and get a good idea of their practices. How they charge and what areas of expertise they offer.

Direct investing                                                                               www.etfsa.co.za

A platform which offers all the exchange traded funds available in South Africa for as little as R300 per months. Has online functionality where you can transact and view your fund performance. All you need to know about ETF’s is found on the site together with fact sheets on each fund. Needs research to understand but has value if you can go direct.

Enjoy and stay distant………

The government has been on point dealing with the Corona Virus pandemic. They have rallied effectively mobilising South Africans to prepare for the onslaught of this crisis. Social distancing is the plan.

Relief on the way

The government has already unlocked a surplus (R3,6bn) found in the UIF fund and has opened this up to employees of companies who have closed because of the impact of COVID-19. 

More can be done.

There are other more drastic measures which could be implemented to provide immediate relief to South Africans:

• Cutting interest rates –  to help with debt repayments
• Defer interest on the debt – temporary immediate relief  
• Cheaper rates on essential services – electricity, water, rates 
• Provide free data – to everyone during certain times
• Widen the non-VAT items – make more food items cheaper

You will be forced to save 

Social distancing and isolating yourself will lead to less spending:

• Entertainment – restaurants, cinemas and bars
• Grooming – Hair, nails and massages
• Transport costs – petrol, taxies, buses and planes
• Holidays – hotels and lodging
• Bulk buying – cheaper goods items and fewer visits to stores

The resultant cutback on spending by households drastically affects the economy and the damage will only be assessed once the crisis has turned. The big problem is that we do not know how far the Corona Virus pandemic will deepen. Turn this time into an advantage to save as much as possible. 

This week our Minister of Finance laid out his budget proposals for the next fiscal year. It was found wanting in many areas. It clearly left the impression that the most sophisticated economy in Africa is in serious trouble. Expenses exceed income in the face of low growth and rising unemployment. There is nothing in our economy to work and so the poem “The Old Woman who lived in a Shoe” aptly positions us for 2020.

So what is your personal budget proposal?                                                                   

So if you had to write up a budget proposal for your next year what should it contain?       Debt – As South Africa is sinking into debt we should be well aware of the debt we are in. Debt has the punishing outcome of robbing you of improving your wealth. 

Savings –If you are not growing you are dying. Saving is a measurement of your growth. It should be above inflation so that you improve your standard of living.

The formula is simple for both the economy and you.

Production fewer consumption= Savings

Savings compounded over time= Wealth creation

Proactive versus Reactive…

A sound financial plan works on being prepared for future life-changing events. There was very little mentioned in the budget about the next potentially bigger problem than ESKOM and SAA…..WATER…..

We need to radically transform our attitude towards conserving and arriving at solutions to provide a sustainable supply of water in the future. If not, ‘The old woman in the shoe won’t be able to make her broth…

The budget proposal should be driven by a strong focus on balancing the allocations in a way that will improve our standard of living. We should avoid the pitfall of using debt as an answer to our financial problems. At the same time, the budget should anticipate the future and aim to protect and improve the lives of the nation. Not appease the short term in reaction to poor planning. The ‘ Old woman’  should be aware at all times of how to keep enough in the cupboard for the children…

It starts and ends with the bank

The bank will never place itself in a position where the loan favours the lender more than the borrower. Why would it?

So, when lending you the money they will ensure that you securitise it with the property you are buying. They consider the loan relative to their valuation of the property which is normally 80%. Recently, however, they have stretched this in certain circumstances to 100%, in which case, no deposit is required. In rare cases, they offer 105% to some elite clients which covers the transfer costs as well.

Understand their game

They are in the lending business making money out of the interest they charge over the duration of the bond. So, if they lend you R2 million at an interest rate of 9,75% (prime lending rate) over 20 years (duration of a bond) then they make a cool R2 552 881 out of the deal. 

Time value of money

It can be argued that the R18 970 per month is discounted by inflation into the future. So effectively the loan repayment will be worth less and less over the 20 years as a result of the time value of money. Assuming the value halves every 10 years, your repayments in 20 years’ time will effectively be around R5000 in today’s value. 

Always remember, that the bank owns your house and its appreciating value all along the way until the bond is paid up. In the first 10 years, your instalments pay more to interest than the debt leaving you around 90% of the bond still to pay. At this stage, the house could increase in value to around R3 million which belongs to the bank and you still owe around R1,8 million.

Borrow less improves your wealth

The less you borrow the less you pay. The less you pay the more you save for yourself. Saving up for a deposit on an R2 million home, say 20% (R4 00 000), will save you R540 170 over 20 years as you will be lending R1,6 million. 

Paying a little extra every month pays off the bond sooner saving. R1000 extra could reduce the term of the loan by 5 years saving you so much more.

So aim to borrow less over a shorter period of time so that you get to keep more in your pocket rather giving it to the bank. You get to own your home sooner too.

The World Economic Forum holds is an annual event where the “Who’s Who” of the Political and Business elites of the Globe descend on a small city in the Alps called Davos.

It is an opportunity to meet rich and famous key decision makers and exchange ideas and business cards to attract attention towards investment opportunities across the globe as well as align towards global issues in an attempt to make the world a better place.

I wonder how much of what is debated and discussed actually translate into anything. I also get a strong notion that there is a definite rank of importance placed on certain countries and global issues. So what might be important to one country may not be very important to another.

Let’s look at it this way….

If an alien came to earth for the first time with a spaceship full of cash to invest and he hovered over the globe looking at the various continents and countries, “Where do you think he would tend to go?”
In terms of global GDP:
The USA produces 30%
Europe 28%
China and Australia around 10%
When he hovers over Africa he will see our country nestled at the bottom of the continent producing about 0,4% of world GDP. Not very enticing…in spite of our sunny climate and scenic destinations.

So, to convince him that South Africa would be a choice investment destination would be a very hard sell. There are opportunities but at the same time, our image is tarnished in key areas of politics, strikes, crime, corruption, unemployment and electricity.

So I get the idea that the delegations from South Africa have to work very hard in Davos to even get heard. Then once they bend an ear its uphill all the way to try and convince why one should readily invest here for the long term. There are reasons but in today’s, global economic distress investors are looking for solid structures to minimise the current risks.

Perhaps the real benefit in attending is learning how different countries are dealing with their problems and bringing back practical working ideas that we could use here. We also will realise how we can align ourselves to world issues which are currently, world terrorism and global inequality.

Davos Stats:

• 1% of the world’s richest own more than the 6,9 billion poorest.
• If you saved $10 000 a day since the pyramids were built 4 900 years ago, you would only have a fraction of the wealth of one of these richest.
• If one sat on their wealth in $100 notes, most of the world would be on the floor. The middle class would sit at around chair height. The top two richest would be in outer space.

We have many things to get right in our economy and Davos is a place where I suppose we have to be seen in the hope of getting noticed by someone who would consider South Africa as an investment destination.