The beginning of the new year is a great time to update your personal balance sheet.
The exercise is invaluable in your personal financial planning as it creates a snapshot of your actual worth in relation to what you own and what you owe. Your so-called “Net Worth”.

OWN – OWE = NET WORTH

All it takes is a sheet of paper with two columns listing the current value of all your assets on one side and your liabilities (the outstanding loans) on the other side. Subtracting the total liabilities from your total assets leaves you with a current value of what you are actually worth. This net worth provides you with a realistic view of how well you are doing with your financial planning. If the figure is growing year on year then you are on the way to improving your wealth. If it is not growing you are effectively getting poorer.

Bear in mind that your net worth needs to improve above the inflation rate to keep its real value. So if inflation is running at 6% then your net worth should be improving above this rate year on year to keep your net worth value real.

Ways to improve your net worth are found in:

Reducing your liabilities
Targeting your loans and getting rid of them sooner. Interest on debt is often higher than the returns found on investments. Especially, when one considers the risk needed to achieve the return. Paying off debt not only improves your net worth but also frees up more disposable income from the interest charged for you to invest more.

Acquiring growth assets
Investments that grow consistently over time should be targeted. Especially, those which compound your growth. In other words, investments which produce returns which you reinvest, effectively buying up more. Compound interest is a magical phenomenon in the financial world and needs consistent positive returns over the longest possible time to make its magic.

Keep a close eye on your personal balance sheet. It is the starting block towards financial freedom.

What a year it has been! It will certainly be remembered for its uncertainty. It was a year where asset and currency swings were huge exposing the anxiety and risk of the markets.
Paging through various investment data for the year the stats reveal the following three biggest price falls on our markets for the year.

The rand against the dollar – 31,8%
Touching as high as R16 to the dollar this has had a devastating effect on our economy as imports are just so much more expensive. This will in turn translate into price increases on various goods and services increasing the strain on household budgets.

The biggest drop in commodity prices is Oil – 32,4%
Who would have thought that the dollar price of oil would fall to levels in the mid $ 30s? Especially when not too long ago a barrel of oil tipped $140. It’s a pity that our currency has weakened as much. The cost per litre of petrol hovers around the current levels of R12. We are extremely lucky that the oil price has fallen by as much. If it stayed at previous levels we would be riding bicycles, that’s for sure.

The Resource Sector dropped the most on the JSE – 45%.
World demand for resources has fallen dramatically as a result of slow growth. We depend so much on exporting our resources but with demand being at an all-time low the sector has nearly halved in value. The weak rand has cushioned the fall in resources to a large extent as they are generally priced in Dollars.

The burning question for 2016 is, “Can these prices fall even further?” My view is that they possibly could get worse before things turn. Remember that assets move in cycles. Also, watch the rand. It has surprised us many times over the years. Just when you think you know where it’s heading it makes a move in another direction.

So uncertainty still prevails……

At the risk of sounding prophetic and sounding like the Grinch, next year is likely to be tougher than 2023.

This is the last week before Christmas and perhaps there is still a chance to take control of that urge to splurge.

Here are some things to consider:

Put on the brakes
If you haven’t already maxed out the credit card and still have some cash to spare then take stock and think wisely about next year. Who knows what 2024 has in store for us? So, the last thing you need is to chase down expensive debt in the new year. If you are in a hole, stop digging!

Don’t turn a blind eye
The way forward in your financial planning is to live under your means, not above them. If your debt is increasing, things are worsening, especially in the face of rising interest rates. It simply means you are getting poorer. So don’t take a holiday to avoid things. Face them now as things don’t get better by themselves.

Shop wisely
Perhaps a way forward is to consider online shopping where you can. It has the benefit of saving on parking and petrol and queuing for that matter. You also get to choose more wisely as you surf the product catalogues. You can compare prices more logically and avoid getting trapped in the mall experience where everything entices you to spend.
Prevention is better than cure and next year will have a tough start. So change your sails whilst you can… there’s a storm brewing.

It is the final week before many of us set off to have a great holiday and enjoy a well-deserved break. What a year it’s been!

Just before you take off here is a personal finance checklist:

Medical plan for next year
You still have time to consider an appropriate plan for next year.
Ensure that your option has been received and applied ready to cover you from the
1st January 2016.

Short-term insurance valuations adjusted
Contact your insurance broker and ensure that your possessions are accurately covered.
You want peace of mind that should something happen over the festive season, your policy will comfortably replace any loss. You don’t want to get caught in a wrangle with your insurer because your goods are underinsured.

Check and service your alarm system
A probable condition with your insurer is that your alarm system is in working order. So, whilst you are updating your valuations you will do well to service your alarm system ensuring it is working while you are away.

Cover your January expenses
It’s a long way for most to January’s payday as many get paid early in December.
Make sure there are sufficient funds in your account to cover your debit orders which will come off on the 1st of January. If you don’t have enough funds you could have a claim repudiated on your short-term insurance, life assurance and medical aid policies if you miss a premium.

Clean out your Loyalty Rewards
You may have rewards on various loyalty programs which could be bundled together to give you some value over the festive season. You could use these rewards towards paying for your trip or for a few gifts for family and friends. You probably are paying to be on the loyalty program, so use this time of the year to get something back.

Update your will
Before you take off on holiday, ensure that your will is updated and that someone close to you knows where to find it. It is such an important document which many of us ignore. Don’t be complacent and leave it for another day. This time of the year is risky for all South Africans.

A sound financial plan provides peace of mind that your affairs are in order. You will have a much better time over the festive season if you have prepared yourself that much more for the New Year. Happy holidays…..

Last Sunday on the Weekend Breakfast Show (702/CapeTalk), Sam Cowen cornered me to please give her some good news against the backdrop of our ailing economy. I struggled for an answer and left Sam, Africa and our Sunday listeners hanging.

I set out this week digging deep and, with tongue in cheek, managed to find 3 bits of good news which we can revel in compared to other countries.

We pay less for petrol                                                                                              

The price for a litre of petrol differs across many countries in Dollar terms. The highest price is found in Hong Kong where a litre costs $1,74 or R24,88 compared to our current pump price which is less than half. The cheapest price is found in Saudi Arabia at $0,15 or RR2,14.

Source:
http://www.mytravelcost.com/petrol-prices/

We pay less for a Big Mac                                                                                          

The Big Mac index is rated as a simplified indicator of a country’s individual purchasing power. It compares each country’s Big Mac prices. As many countries have different currencies, the standardised Big Mac prices are calculated by converting the average national Big Mac prices with the latest exchange rate to U.S. dollars.

The Big Mac in SA costs the equivalent of $2.09 (R29,89) compared to Switzerland where it will cost you $6.82. (R97,53). The cheapest Big Mac in Dollar terms is found in Venezuela where it costs $0.67 (R9,58).

Source:
http://bit.ly/1ue3caa
We pay less for liquor                                                                                                  

 On a scale representing 313 countries the cheapest alcohol is found in Guinea and the most expensive place in Singapore. South Africa ranks the 86th cheapest country in the world to buy alcohol.

Source:
http://www.mytravelcost.com/alcohol-prices/

These 3 comparisons give us some comfort that South Africa is still a great place to be in spite of our ailing economy. You can drive to get and a Big Mac and a glass of wine cheaper than in most countries. Yes, of course, if you venture abroad be prepared to suffer the cost due to the weak rand. However, solace is found in enjoying our local cost of living which makes our country still one of the more affordable places to be on the planet.

So there you are, Sam. Some good news……

The recent increase in interest rates by the reserve bank of 25 basis points leaves us with a clear direction of where the cycle is heading (1,5% over 2 years). What we are reminded of by this hike is that asset classes move in cycles and not in straight lines. We had an extended cycle of low-interest rates for the longest time until the first hike in 2014. When a cycle is prolonged we lose sight of the fact that it will change direction at some stage.

Interest rates affect the performance of other assets which to move in cycles.

Take shares (equities) as another example. The current record levels of the stock markets leave us thinking they are directional, especially after the longest bull run in our economic history. We could easily be lulled into thinking that the markets can only go up. However, this is clearly not the case.

Take the performance of Satrix 40 which tracks the top 40 shares on the local stock market. The return over the past year is much lower at 4,42% versus a 3-year return of 15,34%

Property too is another asset which has turned after stellar upside performance. The current return forecast on  Proptrax which tracks the top property companies listed on the stock exchange is around 5% against highs in the past of 40%.

So let’s understand that asset classes move in cycles and not in straight lines. Interest rates are the catalyst which has an effect on them.

The old adage of past performance does not predict future performance rings true in the investment arena as markets do not follow the path of the rearview mirror. Therefore, be realistic with your expectations on returns in the future.

What goes up must come down.

What lessons can we take from the current water crisis and apply them to our own personal financial planning?

Don’t wait for it to happen

Do we wait for a life-changing event to find out if the provisions we have made are enough provision to see us through?
If you do, then you are treating water and money in a very similar way.

Right now both money and water are running out. The water crisis is brought on by the devastating drought we are experiencing through the “El Nino” effect. Then there is a devastating financial drought which most South Africans are experiencing brought about by the global economic crisis which has left many with less money.

Anticipate the future
Well, why didn’t we anticipate the need for water in the future and make provisions in advance instead of waiting for the crisis and then reacting? The parallel to this is our lack of saving for the future. We tend to live for now and ignore the fact that someday we will need to rely on our investments to see us through. We react only when there is a crisis instead of planning our needs in advance.

Plan for the “must haves”

Water and money are both “must haves”.You cannot get through life without either and they both are becoming scarce.

Do you have enough set aside for the  “must haves”? Money provisions for death, disability and retirement are “must haves” Just as we should be harvesting our water we should be harvesting our money. Both are vital provisions for now and the future.

The short-term plan
We now have to cut back on our usage of water to make it last for the future. Similarly, we have to cut back on our usage of money to make it last. Our attitude towards water will through necessity have to change, whereby we will learn how to recycle it and use it sparingly. The same applies to our attitude to money. While you can you should look for ways to save it rather than spend it.

The long-term plan

There is no way to get out of it. Both water and money are running scarce they both need careful planning to cater for our needs in the future. Just as the future planning of water needs to cater for an ever-increasing population we have to carefully plan for our financial future as we are living longer.

It’s about saving for a rainy day, which in the case of water we hope comes quickly.

At this time of the year, most medical aid schemes offer choices of plans to their members for the new year. There are many plans in the ranges of the various medical schemes and this makes choosing the appropriate plan that much more difficult. I chose the word ‘appropriate‘ deliberately, as many members want to know what is the best plan for them.
Well, from my point of view, one can only know what is best when you are able to compare with hindsight. Know one knows what medical expenses they will incur in the future so it is difficult to know which plan is best. An appropriate plan is one which is likely to provide benefits relative to your health and your affordability.

You get what you pay for

Essentially, medical aid is insurance. Schemes work on the principle of contributions received covering claims paid out. The variety of plans offered differs in price because of one reason – benefits. So it stands to reason that you get what you pay for. The more the plan costs the more the benefits compared to cheaper plans.

Don’t choose your plan purely on cost

Study the benefits in line with your likely usage and then compare costs. Are you likely to be a high user or low user of medical your medical aid? The higher your likely usage the more comprehensive your plan should be. Conversely, the lower you anticipate claiming the more essential plan your plan could be. Be careful of very cheap plans that promise hospital coverage. You get what you pay for, so you probably will find a limit in your hospital cover. The better plans have unlimited hospital coverage which means you won’t have to leave after a few days. You can stay for as long as the procedure and recuperation require.

Cover the big bills

Especially, if affordability is a problem you should choose a plan that covers you adequately when being admitted to the hospital. The cost of surgery is horrendous in many cases so much so that hospitals won’t even admit you if it does not cover you sufficiently.

Covering the small bills

Many schemes offer medical savings accounts for claims out of the hospital. Doctors, dentists, medicine, glasses/contacts, etc. These bills are smaller than those in hospitals and you won’t have to sell your house if you claim for these. Here is where you can make your plan fit your budget. Low users can have smaller savings accounts than higher users. Lower users can also consider excluding a comprehensive scheme which ensures for claims once the savings account is exhausted. The saving is in the premium through the year which in turn can be used to offset bills if the savings account is depleted.

Manage your wellness

A fact of life is that the more healthier you are the less you will claim. Schemes offer wellness programs which are really worth it if you work with them. They aim at rewarding you for being healthy offering a definite value proposition which could compensate for the cost of your plan. The trick is to get involved and keep up with the program.
Understand your medical aid plan before you make your option. Many members choose a popular plan and only realise what they are actually covered for when they come to use it. If you choose an essential plan for the right reasons you won’t be disappointed when claiming because your expectation will be realistic.

If you are in any doubt consult your financial planner for advice.

Let’s face it. there are some debts that we can’t avoid. Buying a car is one of them.

The car is enticing as there are many deals out there which put you in the driving seat at what seems to be an affordable instalment. However, beware of the total cost that you are in for.

The easiest way to rob yourself of wealth into the future is to spend too much of your hard-earned cash on depreciating assets.

Many people are convinced that their vehicles are assets on the balances sheet when in fact the value diminishes at a far quicker rate than its liability over time.

Cars have no long-term value and yet we get obsessed with buying them, spending fortunes just to be seen in them. The reality is that we soon lose the fuzzy feeling of driving a new car and yet have to contend with paying it off in the years to come.

From the time that you drive your brand-new car off the showroom and onto the street, it is worth less. The value continues to depreciate year on year from then onward. It gets even worse if, at the end of your finance agreement, you have a proverbial balloon or residual to pay off. Don’t be fooled, the financial institution has collected the interest on the whole deal throughout the term and you then have to pay more interest when you refinance the balance owing.

So how should you approach buying a vehicle?

If you have set aside the must-have provisions in your financial plan first and then ensure you have enough to comfortably get through the month for living expenses, then the remainder of your disposable income can be allocated to the debt. In other words, the car you can really afford is the one which can be paid for after your savings have been allocated.

It’s a tough call for most. The car you drive defines you, right? However, if you haven’t set aside enough for your future you will have to redefine yourself in a very harsh way having to drastically scale down your lifestyle to get through.

The money you spend on cars in your life will not feed you in retirement. Only the money you saved and invested from them will.

When investing in property on your own the classic approach is to buy a place and rent it out. You basically use the rental income to pay off the property over time leaving you with an appreciable asset. It sounds easier at the outset but there are many factors which affect the investment:

The price you pay

The rent you receive

The maintenance costs

The costs of buying and selling the property

The tax payable

If you get it wrong you could be stuck with an investment which returns way below what you could have done with your money in a bank account. Add to it the hassle factor of running the project and the legalities which favour the tenant you could be in for a long rough ride.

There is an easier way to invest in the property market. A fund which invests in property companies which are listed on the stock exchange. You can choose either a Property Unit Trust (PUT) which will be managed by a fund manager or an Exchange Traded Fund (ETF) which tracks the property index on the JSE. The advantages of going this route are:

Liquidity 

You can sell your investment at the market price on the day. Unlike a fixed property where you have to find a buyer to pay the price, you are looking for. This could take months, and then even longer to process the transfer and registration of the new buyer before you get your hands on the cash.

Risk

The Unit Trusts and ETFs offer a spread of shares in property companies offering diversification across commercial, residential and industrial properties. This significantly reduces your risk as your investment is spread across companies and sectors in the property market.

Easier to manage

The investment is managed by a range of professional companies. They contend with the purchase issues, maintenance, rental agreements, and legalities of running properties. Their business models are well run to the point that they can forecast their future growth and returns with reasonable confidence allowing you to anticipate your future returns.

Like any shares, there are inherent risks of losing capital. You will need to invest over a longer period to compensate for the risks.

You will need to study the factsheets and do your homework. www.etfsa.co.za is a good starting point.

For the investor who wants exposure to property PUTs and ETFs are worthwhile alternatives.