In these tough times when households are under pressure to make ends meet, perhaps it is time to have a closer look at loyalty programs to unlock some value to help get through. The more successful loyalty programs help you to change towards lifestyle behaviours which align with their business models and they reward you with useful benefits for doing so.

Don’t forget dependents                                                                                              Whilst you are alive you take into account all that you own and deduct all that you owe. You then embark on a financial journey to own more and owe less. If you die, however, you need to also include a provision for your income which your dependents rely upon.

The sum total is the essential amount of life assurance that you will need to have in place in the event of your death.

Whilst you are alive you should then aim to pay off the things that you owe and then build up a nest egg that you and your dependents can live off into the future.

Life assurance is the way to provide for dying too soon before you have had the time to accumulate enough to pay off debt and leave behind enough to support your dependents.

The way forward                                                                                                               So it stands to reason that you need to take a snapshot of where you are right now in relation to your debt and your monthly lifestyle needs.

You then put in place a life assurance policy to cover yourself in the first instance.

You then embark on a dedicated financial journey to wean yourself off the dependency of the life assurance policy. The more your worth improves the less life cover you will need.

Aim to accumulate enough while you are living which is what financial independence is all about. Work on being less dependent on life assurance.

The most powerful tool in the financial world is compounding. It is a phenomenon which even amazed Albert Einstein who was said to call it the 8th Wonder of the World.

So what is it all about?
Essentially compounding is reinvesting the returns you make on investment back into the investment.

For example:
You invest R500 in a unit trust fund which makes 10% in a year amounting to R50. Buying more units in the investment for the R50 starts the next year with R550. The following year the same 10% return is now made on a larger amount and the result at the end of the year is now R55. By reinvesting the 3rd year starts with R605 which returns R60,50 at the end of the year.

Consistent positive returns
So the way to maximise your savings is to save for the longest time possible in investments that consistently give high positive returns and then reinvest these back into the investments, creating the magical compounding effect over the period.

Time is needed
The longer you save the greater the effect. The same R500 in our example got to R605 over 3 years. If you continue over 10 years you get to R100 728 and over 20 years R361 993.

Be mindful of inflation
You need to beat inflation. The value of money in the future depreciates against the rise of the cost of living. This is called inflation. To keep the value of your investment real you need to achieve returns above the inflation rate. So, investments that achieve more than 6% (which is the current rate) will compound over time to provide real value which improves your wealth.

Endowments are policy contracts which commit you to a minimum investment period of 5 years after which the proceeds are tax-free. They basically provide a so-called “wrapper” around various funds of choice which may be invested in various assets, such as equities, property, bonds and cash. The returns from these assets (other than equities) are taxed inside the endowment at a flat rate of 30%.

Dividends from equities – 20%
Rental income from property – 30%
Interest from bonds – 30%
Interest from cash – 30%

REASON 1 – Tax rate lower than 30%
The first reason why you should not have an endowment is that if your tax rate is less than 30% you will pay more than you should to SARS. You would be better off investing in the same funds directly without the endowment wrapper.

REASON 2 – No cash fund in place
The restrictive period of 5 years ties your money up and if you need to access cash beforehand then you could be penalised. A sound financial plan starts with a cash fund which you can access for unforeseen expenses. The ideal balance in this account should cover your monthly expenses for between 3 to 6 months. If you don’t have access to enough cash for emergencies then you should not have an endowment.

REASON 3 – Debt not under the control
If you have high interest-bearing debts such as credit cards, personal loans, overdrafts and mortgage bonds then these should be tackled before investing in an endowment. The returns after tax, costs and fees from the funds in the endowment are unlikely to achieve the same rate as your credit card, for example, 22%. Paying off your debt is a sure thing, without the risk of losing capital, effectively providing a guaranteed return at the rate the interest is being charged. Therefore, the third reason you should not invest in an endowment is if your debt isn’t under control.

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 just under $1800 an ounce a few years ago in 2012 to around $1100 of in 2014. The big question is, “Will it be the safe haven when investors take flight from the stock market and look for what has traditionally been their storage of wealth?

There are some very good reasons to consider gold as part of your portfolio.

The ups……..                                                                                                             There seems to be an upside on gold. It is has turned the corner from its low to levels in the upper $ 1200s presently. This points to a latent appetite for the precious metal as investors are not being compensated for the high prices they are paying for their shares relative to the returns received.

Rand hedge on offer…….
The rand value of gold improves if our currency weakens. So if you are concerned about our rand sliding further into the abyss with all the political and economic problems we are facing then you will certainly benefit. If the dollar price of gold moves upward and the rand weakens then the rand value will certainly be worthwhile.

The downs……..
The rand tends to surprise. Just when you think it is on a path to nowhere, it turns a corner just like of late when it strengthened from R17,00 to the dollar breaking into the range of R12,00. The recent political events leading to our downgrade weakened the rand back to levels of R13,50. Somewhat surprising, as one would have expected it to free-fall much further. This again shows how unpredictable our currency is.

No compounding…….                                                                                                 Gold on its own does not provide a yield. Therefore, there is no opportunity for compounding returns into the future which is how the growth of your investment is enhanced. If you buy gold in the form of coins or exchange-traded funds, then you rely entirely on the price movement and the currency differential. So it boils down to the rand price of gold over time. You can buy gold shares, however, but then you need the mine to make a profit before it pays you a dividend. There are some unit trusts which invest in gold shares and the yield, if any, in these portfolios can be reinvested and compounded.

Do your homework and take a longer view with gold. It does look attractive at the current levels given the aversion to risk which is taking place in the markets coupled with the downgrade and the possible weakening of the rand over time.

As we are still on the precipice of a downgrade relying on one rating agency – Moody’s to keep us from falling into ‘Junk’ status we should be well aware of the possible outcomes of losing our investment status. This situation is in the hands of our leaders and we have very little we can do about it. We certainly waited far too late to remedy things to avoid our credit status.

Don’t make the same mistake with your personal finances which we can control.. You should be well ahead in your ability to service your debt even in the face of a sharp rise in interest.
Essentially, rating agencies assess countries’ ability to service and repay their loans. This provides investors and lenders with assessments of the associated risks in dealing with that country. Your personal money lenders do the same thing. They stringently assess your ability to afford your debt using key factors which provide a credit rating.

Start with your personal credit rating which you can get for free from various online credit bureaus.
Update your personal balance sheet and quantify your debts taking a hard look at your exposure to debt.
How easily can your income cover the cost of the debt, this is an important question. Taking into account a sharp rise in interest rates.

Work on having more disposable income by living well under your means. Buying a home or car which you can comfortably afford leaves more money behind each month. It is here where you will find the money to build up your savings and cash reserves.

Reducing your dependency on debt and increasing your savings will improve your credit rating and avoid a personal downgrade.

The investment horizon is never really certain. However, the current global economic climate is definitely more uncertain than before. Economies throughout the world are battling to create employment and dig themselves out of the debt. Doubt, fear and worry loom. Yet the markets are performing at all-time highs pointing to hope and expectations which, frankly, do not align with economic fundamentals. This all adds to further uncertainty. So how should you approach your investments in these uncertain times?

Be realistic with your expectations
Past performance is not a prediction of future performance. Yes, looking back through a rearview mirror is pretty accurate. However, predicting the future is pretty well impossible. So, understand how your investment achieves its return and measure this reasonably against future expectations. If the share market. for example, relying on a healthy economy, then it stands to reason that future returns should be better. However, the converse applies. You cannot reasonably expect double-digit returns when the economy is benign.

Time in the market
Firstly, you need to decide how long you intend to invest. The basic principle is that the longer your horizon the more risk you can afford to take. Risk is found in the share markets where historically you receive higher returns than the other asset classes. Shares are bought in expectation of profits made by companies which are passed onto the investor in the form of dividends. If companies make consistently high profits over time then investors are prepared to pay more for the shares. However, there is a problem. The share market is driven by emotion and speculation in the short term and this often defies the fundamental view. Case in point, the current economic condition of our planet and the all-time high performance of our stock markets.

Spread your investment
Once you have your time horizon established then you should consider your options. Look at a balanced fund approach. Take two or three-unit trust funds that offer a flexible balanced objective. These fund managers make the calls for you to decide on where and how much to allocate to various options. If you choose a few funds then you get the advantage of different styles and choices from different points of view. That’s a lot of attention on your money.

Average in
Investing a lump sum in the markets in times like these is very risky as you have a strong possibility of losing capital. If you lose 50% of your money you need 100% to get back to even. Who knows what the new normal returns will be in the future? It could take years to break even.
A safer way is to spread your investment into your new funds over time. The longer the period the less risk. Choose to keep your money in cash and then phase in over 6 to 12 months to avoid any severe loss of capital. If the markets are correct during your phase then you can take a position with the remaining balance at a discount. If you save on a monthly basis then you benefit from a bearish falling market which, if sustained for a long period, will mean that you will be buying discounted shares for a while and benefiting when the valuations pick up again. It’s all about preparation and patience in the end.

A word of caution. Don’t be lulled into the expectations of your investment based on the past few years. Be realistic, understanding that there is a long way to go before the world gets back to normality and the returns in the new normal will probably be more benign than the performances of the past. At the moment cash at 7% is more certain than other assets. So not a bad option for the time being.

Our Minister of Finance announced in the budget proposals this week an increase in withholding tax on dividends from 15% to 20% which further erodes the returns you receive from being invested in shares. This gives you even more reason to be invested in a tax-free savings account (TFSA).

If you move quickly there is still time to get invested before the tax year end on the 28th of February.

If you are invested in unit trusts or exchange-traded funds you should consider the comparative advantage of having the exact funds invested through a tax-free savings account.

Tax is applied to all sources of returns                                                                          

 If you are invested in a balanced unit trust fund, you are probably attracting tax on interest from money markets and bonds, rental income from property investments and tax on dividends from shares. These deductions erode the return on your investment.

Beef up your compounding effect                                                                             Growth on your investment is largely dependent on the compounding of your returns over time. If you reinvest the growth every year you effectively achieve growth on growth into the future. Over time this becomes a mathematical phenomenon rocketing your investment value over time.

So it stands to reason that if you invest in the exact same unit trust through tax-free savings account your return will be that much bigger because no tax is deducted. Compounding on this higher return simply means more for you in the future on the exact same fund. A no-brainer!!!

Capital Gains is neutralised                                                                                                 If you disinvest your current unit trust and reinvest in a tax-free savings account up to the maximum annual allowance of R30 000 (next tax year R33 000) you will significantly beef up the performance of your investment. The potential Capital Gains Tax which will be applied to selling off your unit trust will be offset against your annual exclusion amount of R40 000.

So if you made the investment before the end of February you have taken full advantage of the tax break for the year on CGT and maximised your allowance for investing in the TFSA into the future.

You work hard for your money so use it wisely.

Whether you earn R10 000 or R100 000 per month the basic objective in your financial planning is to be able to maintain the standard of living that you have accustomed yourself to no matter what life-changing event comes your way. It could be a death, disablement, marriage, divorce, retirement….

Allocate 30% of your income to provisions for the maintenance of your lifestyle. This includes medical aid, insurance and investments. These provisions provide safety nets should you face a life-changing event. They should be able to provide sufficient financial support to maintain your monthly needs.

The investments should initially aim for the short term to build up enough to cover your monthly expenses for 6 months. A money market account is ideal for this provision. Once in place, you should then allocate your savings to the medium term (5 years). A super place to invest is a tax-free savings account. You could also consider unit trusts and exchange-traded funds.

Now your plan is developing. You have insured yourself and your assets for any unforeseen expenses and have cash and investments in place for the next 5 years.

You will have funds in place for funds a deposit on cars, holidays, and emergencies….even if you are retrenched you can carry yourself for 6 months.

If you need to buy a house or car you are well positioned financially to afford it. The cost of your debt should ideally be below 30% of your income. So your repayments on your car and house should not exceed 30% of your earnings.

Paying off this debt sooner than later will provide you with more disposable income to either save more of or improve your standard of living. As long as you have set aside your 30% for provisions you can do what you want to with the rest.

Using your income wisely will give you peace of mind which is the ultimate benefit of a sound financial plan.

Institutions make their money by lending money to you at a rate over time. Simply, the longer you take to pay the more it costs you and the banks thrive on it.

Debt is so easy to get into and so very difficult to get out of. Prevention is always better than cure but the reality is that we get enticed into debt over time and soon find ourselves in it way too deep. The cost of debt climbs quickly and robs us of the potential to create wealth.

You can benefit by reversing the formula
Interest + time = profit
You cannot reduce the interest rate but can reduce the time = less profit for the institution
Less interest for an institution means more savings for you
More savings for you compounded over time = more wealth for you

Here are 3 steps to getting ahead of your debt

Coping with debt is like trying to fill up a bath and leaving the plug out.
Step one
Put the plugin by making a conscious decision to get out of debt. The culprits need to be identified and cannot be allowed to increase anymore.
Credit cards, overdrafts, personal loans, store accounts, and even outstanding taxes. All have to stop if you want to reduce the time to pay off your debt.

Step two
Open up the tap with your disposable income. This is the money that is left over after your cost of living during the month.
Focus on living expenses. Split your expenses into ‘nice to haves’ and ‘must haves’. This is hard work. Being honest with yourself in identifying what you need and what you can do without.
Step three
Keep a close eye on the water level. Divert the newfound savings back into the debt instruments.
Targeting the highest interest bearing one first and then working through the next. Patiently keep your living expenses well under control. A new year brings on a wave of price hikes. So your cost of living will is going to increase anyway forcing you to squeeze those living expenses even more.

It is a classic case of ‘no pain no gain’, where the benefits are certainly well worth it!