With the Rule of 72, you can estimate the future value of your investments with uncanny reliability.

Inflation – the enemy

The inflation rate represents the rising cost of living which devalues your money resulting in a loss of purchasing power over time. To improve the value of your rand in the future you need to make investments which provide returns that are higher than the inflation rate.

Keep it real  

Real rates are important if you want your investment value to grow above the cost of living. The difference between the nominal rate of return and the inflation rate is the real rate which represents your actual value over time.

So let’s use the rule of 72 to compare how various rates of return affect your future values. The rule is……..

Length of time it takes to double your money = 72 divided by the expected return on your investment

If you achieve 12% rate of return then you divide this into 72 and the answer 6 is the number of years it will take for your money to double in value. So, if you invested R10 000 at 12% in 6 years’ time you will have R20 000.

If you expect a 6% return on your money it will take (72/6=12) 12 years for your money to double. So the same R10 000 takes twice as long to get to R20 000.

The rule of 72 is a magical number which easily works out future values with amazing accuracy. We should all be mindful of how it can help to understand the future value of money.

The magical number 72 in the financial world can help you to get a better understanding of the value of your money in the future.

72 can be used in a very easy way to establish values in the future with extraordinary accuracy.

Inflation is a measurement of the value of your money over time. The higher the consumer price index (CPI) the less your rand will be worth. That is the main reason why the Reserve Bank is mandated to keep the rate below 6%.

Let’s get an idea of how damaging a high inflation rate can be by using the rule of 72.

If inflation is 6% then simply divide 6 by 72 and the answer 12 is the number of years your money will take to halve in value.

So inflation at 6% will halve the value of the rand in 12 years.

If inflation was allowed to reach 12% then 12 divided into 72 results in 6 years. So it will take 6 years for your money to halve in value.

The rule of 72 will help to understand why it is so important to keep inflation under control and as low as possible. A little inflation is a good thing for an economy. However, if it is rampant then it will destroy an economy in no time. Just like Zimbabwe a few years ago when it reached a zillion%.

It equated to money halving in value every hour. At the time it made financial sense to pay for a coffee at the local restaurant before having it as it would cost double by the time you finished it.

Just by dividing the expected rate into 72, you get a very accurate picture of how your money is affected.

Filing season opened on the 1st of July 2018 and it’s too late to do anything about last the tax year. You are on top of your tax return when you know before you complete the return what to expect. Tax planning should take full advantage of all options before the end of the tax year in February. Completing the tax return then becomes a formality.

Here are some ideas to work on before February next year.

Medical aid
If your saving account runs out during the year keep on sending the medical bills to your medical aid company. They tally the expenses for you on your tax certificate which are not paid by the scheme. This amount is claimable on your return after certain limits. This will save you from keeping records as proof of SARS.

Retirement contributions
You can deduct up to 27,5% of the contributions made towards your retirement funds against your taxable earnings.
This is a huge opportunity to get more into your retirement savings at less cost. You effectively get back whatever your marginal tax percentage is. So, if you pay 45% tax then you receive 45 cents for every rand you save. You can make a top-up to the maximum limit before the end of February 2019.

Capital gains tax
If you are planning to sell off an investment such as a unit trust or gold coins, then take full advantage of your exemption on capital gains tax by selling off your assets over different tax years. You could sell before the end of the tax year in February 2019 and then in March 2019 at the start of the new tax year. This way the disposal of the assets gets a double deduction. The current inclusion rate on CGT is R40 000 per annum.

You should e-file your return before 31 October 2018.

So what’s BREXIT all about?  

It’s all about economic independence. Britain was able to sustain a standard of living for all citizens on its own without depending on the European Union. It boils down to Britain being able to grow (its GDP) on its own which will enable it to generate enough income (revenue) to cover costs (expenditure) and improve the standard of living of its people.

The big question we should ourselves.
To what extent can you financially stand on your own two feet? How dependent are you on the bank and other money lenders? If there is a financial crisis do you need family and friends to bail you out? Currently, 47% of South Africans at 65 are financially dependent on family.

The way forward to your own financial independence is to have a plan that ensures you have sufficient funds in place to maintain your standard of living no matter what life-changing event comes your way.

The journey to financial independence can be a tough one as you need to compromise at times. If your expenses are too high then you need to adjust your standard of living. The Brits will probably have to do this in the short term as they find out where their economy will eventually settle. From that level they can then make a plan for growth, working on key aspects of their own economy.

What is your vote?                                                                                       We all have a vote in our own lives which we can take. Go it alone and become financially independent or depend on others for the rest of your life.

How to do it is no mystery. Finding the will to do it and then committing yourself is what it takes. The Brits have taken the decision. Good luck to them as they embark on a journey to establishing their own financial independence.

June 16th – Youth Day – presented an opportunity for young people to focus on their futures reflecting on the past as a foundation to build upon. Youth need to be empowered with a strong belief in themselves that they can become whatever they dream and believe they can be. One vital pillar in their journey to success is financial freedom. A stage in the future where savings can support one’s standard of living.

Learn from the 95% of people who at age 65 don’t have enough savings for their retirement. Or from the many that had to borrow money because they didn’t have a nest egg to fall back on when an unexpected financial disaster came their way. If they had a chance to do it all over they would have saved so much more. They realised when it was too late that they needed a much larger nest egg for their twilight years.

Young people can reach financial independence if they make financial commitments to themselves. Here are three which will ensure you get there.

Commit to living under your means instead of above them
Essentially, if you are lending money to make ends meet you are living above your means. This is exacerbated when you are paying off interest to institutions instead of saving for your future. There will be times when you will need to borrow money for a house or a car. However, the repayments of these essentials should be comfortably affordable after you have set aside your savings.

Don’t be lulled into debt
You have been led to believe that debt is a ‘must have’ because banks need a credit history before they can extend a loan to you. This is true but the smart way around this is to open a store card which generally offers interest-free loans for the first six months. Using this free money to purchase something makes good financial sense if you stick to buying something that you really need and you can comfortably afford to pay it off over the period. It’s free cash and requires a disciplined commitment to paying the instalments – on time – every time. You, therefore, build up the credit record without incurring costs.

Save…Save….Save…
If you commit to saving for yourself first at the beginning of every month you begin the gratifying journey towards financial freedom. The more you own and the less you owe the greater your sense of financial independence. Don’t be surprised at how your savings can grow over time through the magic of compounding. By reinvesting the returns on your savings over time you participate in this financial phenomenon where the interest on interest over time boosts your savings into the stratosphere.

Young people have so much to look forward to. If you are wise you will take charge of your finances early in life avoiding the pitfalls experienced by the older generations before you.

It’s crazy how our retirement age of 65 is laid down for us. An outdated concept which dictates to us when we should give up working and be put to pasture. Over the past century, we have improved our life span dramatically making 65 a much younger age than it used to be.

The Queen of England celebrates her 90 birthday this year. Singer Vera Lynn the wartime sweetheart turns 99. Nelson Mandela lived to 95. Harriet Thompson became the oldest woman at 92 to finish a marathon. Think of how many more people you know and hear about that are 90 plus. They say that the first person to reach age 150 is already born!

All these point to the fact that we are living longer and need to take a reality check on our concept of retirement. Over the past decade technologies in the medical field and general awareness of health issues have boosted our longevity. Yet we still have the mentality of retiring at age 65. Why? Because your pension fund says so?

90% of South Africans at age 65 do not have enough savings to see them through retirement. The reality is that they will need to continue to work for as long as possible. This places huge importance on staying healthy to keep on earning an income and intern leaving your investment nest alone for longer.

Working longer has many benefits.
You have longer to save allowing your investments more time to compound their way to a much bigger amount. The amount needed will be that much less to see you through the rest of your life as you access your funds later in life.

Most importantly, you will have a sense of purpose and fulfilment. A reason to get out of bed in the morning. Work tends to define us, so you will have the opportunity to redefine yourself and do something that you really enjoy that generates an income.

So 65 as a retirement age is a fallacy. Don’t let an outdated concept rob you and convince you that you are over the hill.

If you didn’t know when you were born, “ How old would you be?”

Standard and Poors made the decision this week to hold off on the decision to downgrade South Africa to ‘non investment grade speculative’ commonly called ‘Junk Status’. A place every country has to avoid as the consequences are devastating.

Getting out of the dreaded ‘Junk Status’ is much harder than preventing it. It’s like falling into an icy pond and trying to get out on the slippery side. It takes years of struggle and hardship to correct and restore the credibility investors look for. Let alone the damage that it does to the image of a country. Who wants to be a citizen of a country which has a high risk of meeting its investment obligations?

What are the ramifications for South Africa?
Foreigner investors will disinvest from SA Projects, Companies, Bonds and Stock Markets leading to a devaluation of assets. In turn the flight of capital out of the country the divestment leads to a weaker currency.
A weaker rand means that out imports will be more expensive (including oil) which translates into a rise in the cost of living.
High inflation and and a weakening currency will lead to higher interest rates which will means that the cost of debt will increase.

Take advantage of the reprieve.                                                                                   So we have been given a little breathing space by Moody’s last month  us and now Standard and Poors . We have been given a reprieve but there is a third rating agency, Fitch, to come. They will be making a decision this month and as they are the smaller of the three will likely follow their counterparts. This brief period of grace creates a chance for us to turn things around. In the meantime South Africans should be saving as much as they can and paying off debt as quickly as possible. If we don’t we will have a much harder landing should a downgrade takes place. A sound financial plan make provisions for the worst scenario so we should not be complacent.

Hopefully, our key decisions makers can pull off a remarkable turnaround in the meantime.

The Standard Bank Scam is estimated at R300 million involving 14000 transactions at ATMs in just a few hours over at 7-Eleven stores all over Japan.
It was conducted with precision, using  “mules” to make the many withdrawals which were just under the right limits using data accessed from the bank. The criminals found a badly protected ATM network in a low-risk country guessing that the fraud analytic software would not automatically block the transactions.

We don’t know if the information was hacked or if it was an inside job.

What we do know is that cybercrime is very real and all of us are exposed to it. In our high-tech world our personal information is on record. Think of how many establishments hold your ID number and banking details:
SARS, the bank, store accounts, DSTV….and so on.

So what can we do about it?

Very little…..all you can do is manage your own space when it comes to giving out your information.

Perhaps, as a general rule, you should only give out information if you make contact with an establishment and then are asked for verification details. If you, however, are contacted then caution should prevail as you do not know how authentic the caller actually is.

Develop an attitude of ‘someone is always watching you’ and waiting to pounce on every opportunity to steal your money just at the time when you let your guard down.

Report suspicious activities quickly to the fraud department of the relevant provider.

If in doubt push out…….

Ponzi Schemes are directly related to the financial pressures that are induced by our ailing economy. When there are large numbers of people struggling to make ends meet they become easy prey for the vultures circling them who take full advantage of the situation by promising outrageous returns which are nothing but lies and deception.

Robbing Peter to Pay Paul                                                                                              A Ponzi Scheme pays returns to early investors using capital from investors who join the scheme at a later stage. For example, you are promised a return of 20% per month on your investment of R10 000. At the end of the month, you receive R2000 and you are so delighted that you tell family and friends. After all, you made a great investment decision, right? Meanwhile, the scheme used your money to fund other investor returns giving you the idea that your R10 000 was invested for the next return. Now as your friends dive into the scheme their funds are used to pay the R20% due to the existing investors including you. When you do the permutations, the scheme is destined to implode as the number of new investors required to prop up the existing ones simply run out.

Don’t get caught
Don’t get lulled into a ‘get rich quick’ promise. Sure, the higher the return you seek should be relative to the higher risk but there are limits. When a guarantee is thrown in become suspicious. Spectacular guaranteed returns are too good to be true.

Check if the organisation is licensed with the Financial Services Board as a Financial Services Provider. If it is then it will have a Licence Number. This is no guarantee, but at least you have some idea that the company has been approved. Ponzi Schemes can bye-pass the regulatory environment, so if no number then there is a reason to be more careful.

Check out the company. Where is it based? How long has it been in business? What assets, products or services are they in the business of?

Get a second opinion. Ask a reputable financial advisor for advice. An experienced advisor will not be enticed by spectacular promises as he will understand that wealth is created over time. If the offer is extraordinary a good advisor will see the pitfalls.

A trust is a useful entity in some circumstances as the assets it owns do not belong to you and are managed for the benefit of its beneficiaries.

Here are 3 reasons why you should have one:

Long-term planning for your family                                                                                If you want your assets to provide for the long term for you, your children and your grandchildren then a trust may be an appropriate vehicle. In the event of your death, the assets in the trust will not trigger capital gains tax as they will not have to be sold or transferred which is the case in your personal estate. Estate duty is also avoided as the assets are owned by a trust which has perpetuity as it continues after your death. A Trust never dies.

Minor children
If parents die leaving behind minor children this causes huge complications for their financial future. If there is no will the assets will be cashed in and the proceeds invested in the Guardian Fund administered by the Master of the Supreme Court.
A testamentary trust which is set up in terms of your will is ideal in these circumstances as it creates a structured entity which provides for the financial well-being of your children up to an age where they can take over control of the assets for themselves.
Asset protection
When you set up an irrevocable trust you relinquish control and ownership of your assets in the trust. If you fall into a legal problem leading to claimants forcing you to liquidate, your assets in the trust cannot be included as they are not owned by you. This form of asset protection should be considered carefully with expert advice.

A large estate attracts tax and estate duty. A trust can avoid these costs in a very legitimate way. It boils down to costs versus benefits at the end of the day.