Damage control for the January Blues…..

It’s that time of year when we have turned the corner into the new year and need to get our finances back in order as soon as possible.

Here are 3 “Don’ts” which will help you to get off to a quick and effective start mindful that it’s always better to put up your sails before a storm than during one.

1 – Don’t ignore the damage

Get down to the details quickly and formulate an action plan for the new year.
Work out the damage before the statements arrive at the end of the month. The earlier you start the more prepared you will be before your next salary.
You are going to need to sacrifice somewhere to make up for the over indulgences of the festive season. You will find them by creating a detailed budget and splitting your expenses into “must haves” and “nice to haves”. The area of “nice to haves” will need to be scrutinised ruthlessly and there you will find the extra cash to pay off the debt. Target the credit card first as this is probably the most expensive debt.
You need to allocate towards interest and the amount owing. You should try to pay off as much of the principal debt as possible.

2 – Don’t borrow any more

Don’t borrow more to get out of debt. It’s like trying to fill up a bath with the plug out.
Put the plugin by shelving your credit card for a while and turn up the taps by squeezing out extra cash from your expenses.
Obviously, this will also mean that no more “nice to have” spending for a while. You can review this only once you are back on your feet.

3 – Don’t dip into your savings and investments as a quick fix

Work out how much you can allocate over time to get rid of your debt. Stick with the program until you are out of the water. Set a realistic time frame realising that debt robs you of potential savings. The sooner it’s behind you the more you will have to compound and create wealth for your financial freedom in the future.

Ideally, you should save towards a contingency fund during this year to ensure that you don’t fall into the same trap of “catching up” in the previous year. A great challenge for the new year…where you will have cash for the next festive season and avoid the stresses of the next year’s January Blues…..

Work off your debt

The more interest you pay the less you have to save and the more opportunity you lose to compound your wealth into the future.

Money lenders make money out of debt through interest and time.
The longer interest is paid over time the more the lender makes.

What you can control is the duration of the loan. The quicker you pay back the loan the more you effectively save.

Credit card debt is the most expensive.

If you are behind the curve – merely servicing the debt and not the principal sum then you are in a classic debt trap.
Credit cards are useful instruments if you understand how they work and
Using your access bond to consolidate your debt – its a great piggy bank.

Park your cash in the right spaces

Your access bond charges interest on the average daily balance throughout the month. The bank allocates a portion of your monthly instalment to interest and the remainder to the capital. The higher your average balance is during the month the less is allocated to interest and therefore more is allocated to the capital.
Effectively, you save interest on the rate of the loan.

Credit cards charge interest on the balance outstanding on the card at the billing date. If you pay up your card in full or as much as possible before the billing date then you save the interest for that billing cycle.

So why not leave as much cash in your access bond during the month using your credit card where possible and then just before the billing date transfer as much cash as you can into your credit card?

You have then saved interest on your bond and then had free money from your credit card during the month. Credit cards also have no transaction fees so can be very efficient payment instruments throughout the month.

Avoid the pitfalls of spending more than you earn. You need to be disciplined to always have enough in your bond to cover your credit card balance.

The year was eventful to say the least testing the South African economy to its absolute limits. Reflecting on the past 12 months the main issues which stand out in my mind are somewhat interrelated: Here is a thread:

Avoiding the downgrade

Moody’s was the last of the rating agencies holding us up from a downgrade to ‘Junk Status’. The outlook is one of “Negative” leaving with our backs against the wall for 2020 as we have the year to turn our ship around and provide positive evidence that our economy is on the mend. A tall order as we have so much to do, especially with our SOEs. 

Keeping the lights on

This leads to the huge crisis we face in bringing  Eskom from out of the dark and into the light. Drastic action has to be taken from every resource we can possibly muster up to keep the lights on for 2020. 

Prescribed assets

The one resource being ‘eyeballed’ by our leaders is a huge pot of cash found in our retirement industry.  One of the largest in the world. Instead of having to borrow money to bail out the failed SOE assets could be directed by regulations to fund them. It is a question of a ‘hand up’ or a ‘hand out?’

Adopt a champion attitude

2020 will be a huge challenge and we will need every bit of resilience and cooperation from all corners to get on top of the economy. The Springboks showed South Africa what can be achieved when we pull together against the odds. Hopefully, we can pick up the ball they passed on to our leaders and turn us into champions. 

Economies globally are struggling with high debt, high unemployment and low growth. This affects your investment returns.

A few seeds make many…                   

In a simplistic way, investing can be likened to farming. Seeds are planted and watered over time to eventually produce a crop which produces many more seeds than were originally planted. When a crop is harvested and the seeds replanted the potential of the next crop yields that much more. A crop struck by drought will result in lower yields. South Africa and most economies around the globe are in a serious drought.

Investment yields come with costs

In the financial universe, we rely on returns (yield) from various investments (assets). The main areas (asset classes)  produce these types of yields:

• Shares – dividends
• Property – rental income
• Bonds – interest
• Cash- interest

Before we reinvest these yields they are reduced by certain costs by as much as the following percentages:

• Fund manager Fees – 2%
• Administrator fees – 0,5%
• Advisor fees – 1%
• Taxes – 45%

These costs result in a reduction in yield. So your returns could be reduced by as much as 50% by the time the taxes and fees are applied.

Tax can be avoided                                                                                      

The main culprit is tax, so yield can be improved significantly if you are savvy with certain structures that are exempt from tax.

• Tax-free savings accounts
• Retirement annuities
• Preservation funds
• Pension funds
• Provident funds

Understanding these structures is important for your financial plan as they have different features and benefits. One thing for sure is your growth on your investment will vastly improve not having any tax applied to your yield.

This a useful strategy in tough times which, in my opinion, are here to stay for a long while as economies try to work their way through the consequences of all the interventions of central banks in the attempt to get out of the damage of the 2008 financial crisis. Another blog for another time…….

The amazing performance of Bitcoin since 2010 has left many investors wishing they had gotten involved and others wondering if they should. The cyber currency has been nothing short of amazing as $1000 dollars invested in 2010 would have returned $90 million in 2017. At the end of 2017, Bitcoin reached a phenomenal record price of just under $20 000 before it came tumbling down. During 2018 it hovered at around the $3000 level and just recently it has shown signs of moving upward sharply.

Have we learned anything from Bitcoin? Are we going to make the same mistakes again?

Here are 3 reasons why you should not get involved with Bitcoin.

If you don’t understand what Bitcoin is
It’s too easy to get lulled into an investment through hype and speculation taking a chance not clearly understanding what you are doing. Bitcoin is very technical and takes a lot to get your head around. As it is a very new concept it needs a lot of research before getting involved.
If you think Bitcoin will increase as it has in the past
The outstanding return in value has no guarantee of continuing to follow the principle that past performance is not an indicator of the future. Sure there are many reasons given as to why it is a no-brainer, however, you need to be astute enough to understand that markets do not go up in straight lines. As more cyber currencies launch (so far there are 876) the market will have more choices and Bitcoin’s dominance could diminish.

If you don’t have funds you can afford to lose
The risks are extremely high. You rely on the speculative bet that all the hype placed on Bitcoin will play out. It defies conventional thinking as there is no tangible asset. Just an amount in a wallet which moves up and down in value in cyberspace. The graph shows how these movements can swing in the short space of one week. So, if you are using must-have money which you can ill afford to lose you are asking for trouble.
Whilst Bitcoin is less conventional, the conventional approach still applies. If it sounds too good to be true then it probably is. So be wary and do your homework and find out as much as you can before getting involved.

There are 3 factors which determine the value of an investment.
Time invested
Amount invested
Return received

Women are on the back foot with all three.

Time
Women live longer
In the 1800s women lived to age 33 and men to 31.
Today women live to 83 years and men to 79 years. In general, women outlive men by about 5%.
So, women need to plan their retirement funding more carefully. Living longer means that more provisions need to be made for those extra years.

Amount
Women earn less
Traditionally women have been left behind in the workplace. Key positions have often been taken by males. I guess the reasoning has been that women break their employment when they have children. Earning less translates into saving less. Until women are on the same financial footing as their male counterparts their ability to invest more will always be a struggle.

Return
Women are more cautious
Women tend to save for a shorter time as they focus on the day-to-day needs of the family. This hinders the effect that compounding has on investing. Saving in a cash account will not yield the returns found in equities over time.

Times are changing
There is strong evidence of women making progress when you see women like Christine Lagarde heading the IMF, Teresa May past Prime Minister of the UK, Angela Merkel leading Germany, Jacinda Ardern prime minister of New Zealand and recently the first woman to be elected as president of European Commission, Ursula von der Leyen.

South Africans are really feeling the heat of the ailing economy. Rising fuel, electricity, rates, taxes, and water….all impact the cost of living. It is easy to sit back and blame the economy, bury your head in the sand hoping that things will sort themselves out.

Time to take charge!

Prevention is always easier than cure. If you are not coping, then drastic and hard measures need to be applied. The sooner you re-act the softer landing will be. Let’s use an analogy of trying to fill a bath – Your income comes from the tap and your costly, excessive expenses leave through the plug.

Put in the plug                                                                                                            

This is where the water that you have or want to keep will pass through. The old adage ‘If you find yourself in a pit – stop digging. definitely applies!

Get into survival mode and shut down your spending in every conceivable way. It is much easier to change your sails before a storm than when you are in one. Target your debt, aiming to pay off the more expensive interest first and then work off the next highest with the savings. Think of ways to save…….

Lift clubs, cell phone usage – SMS is cheaper than WhatsApp. Pay-as-you-go electricity so you can manage actual spending and not react to it.  Micromanage expenses by becoming penny-wise. If you can measure it you can manage it so change the things you can….Whatever you do, borrowing more is not an option.

Open up the current tap                                                                                     

Dependent on the way you bring income into the household look at ways to do more. Over time, working at what you do for longer hours. 

Open up another tap                                                                                                    

Get creative on how to find other forms of income. Buying and selling goods and services are generally more manageable. Think about what people need. You don’t need to find a brand-new idea. Instead, see what is being done and just do it better. Food station, car wash services, childminding, pet services, rent out a room, house sitting……explore what you can.

Be very aware of the causes that lead to debt and prevent them rather than cure them. 

July is National Savings Month. An initiative brought about by The South African Savings Institute -SASI,  creating awareness of the importance of saving for all of us.

The starting point is to create a contingency fund for emergencies. This fund makes provisions for any emergency or unforeseen expenses. It can also be an access point for cash for a deposit on a car or to pay for that well-deserved holiday. Especially deserved because you saved for it and didn’t have to borrow. 

The fund should be built up to cover at least 6 months of your living expenses. This will also provide financial breathing space for you should you face a life-changing event such as –  Death – Disability – Retrenchment – Hospitalisation

Sperate funds for Spouses                                                                                        

With spouses, it is important to set up separate funds that allow each partner access to their own cash should the worst happen to either. This will create financial independence avoiding the risk of not having cash whilst an estate is being wound up.

Money market accounts ideal                                                                                    

The ideal place to save for a contingency fund is a money market account with your local bank. These accounts provide higher rates of interest than normal savings accounts often only needing a minimum balance to keep the account active. The funds are safe and available immediately earning reasonable rates that are keeping up with inflation.

Take advantage of the tax break                                                                              

Each spouse should have their own current account linked to a money market account which will enable them to save and transfer funds easily as and when the need arises. Each taxpayer gets the first R23 800 (R33 500 if over 65) of their interest tax-free. So with the current rates around 7 %, spouses can save around R7 00 000 between them before paying anything to SARS. 

Make savings an attitude                                                                                              Saving is an attitude that aims for financial independence in the future. Life-changing events occur sooner or later and having a fund in place for emergencies will provide an important building block for your plan preparing you for the unforeseen. 

We go back a long way Dad!

The role in the family has always clearly been that of protector and provider. We have evolved from cavemen to hunter, to farmer, to businessman we have progressed through life and still have the basic role to play – look after the family.

So financial planning is your starting point, Dad…This Father’s Day you should update your financial plan, mindful of the essential provisions that need to be in place to protect you and the family.

A successful financial plan makes provision for life-changing events that we will encounter in our lives.

Death – don’t leave the family short

If you don’t have enough capital to ensure that the family can survive financially if you die then you need sufficient life cover to pay off your debts and provide an income for the family into the future. 

Disability – don’t leave yourself and the family short

If you can work for any reason you need an income and a capital amount to pay off all your debts.

Severe Illness – don’t be left short

If you have a dreaded disease such as a heart attack then you need to ensure that you can cover the medical expenses and the cost of recovery.

Retirement – don’t end up short

When you retire you need sufficient funds to maintain your monthly income protected against inflation over the rest of your life.

So, Dad, there’s a lot to plan for as our role still continues to protect and provide for our families.

Happy Father’s Day!

SARS presented its plan this week for the forthcoming tax season. Interestingly, the dates for submission have been changed from the normal deadlines.

The filing season opens for submissions on the 1st of August. If you file online then you can do so from the 1st of July.

According to SARS, you do not have to file a return if your total taxable income is not more than R500 000.

This is subject to receiving income from one employer only and provided you do not receive income from:

• a car allowance
• a business 
• rent
• interest
• capital gains under R40 000

Furthermore, this applies to taxpayers who do not have any deductions such as:

• a retirement annuity
• medical aid
• travel expenses
• expenses incurred with your business

Whilst the new ceiling will free up SARS you may do well to still submit your return. This way you will keep your continuity of submissions and a possible refund if your company overtaxed you in the year. 

There is a cool app that SARS is finalising which lets you submit on your cell phone. The demo of the new app makes your submission very easy as you simply verify and submit. This technology is most welcome as it helps avoid visiting a SARS branch and waiting for hours to be attended to.

I reckon you should submit your return sooner than later even if you are under the new threshold and take full advantage of e-filing and the online options.