Youth are between the proverbial rock and hard place. Without an income how can you begin to save. Wealth creation is based on investing over time taking full advantage of the power of compound interest. Most of our youth can barely make ends meet let alone set aside savings for the future.
This should be a lesson in itself for those that do have jobs. The most important thing in your financial life is to decide upon an amount to save every month and then stick to it without compromise.
Save first and spend the rest is about as simple as it gets. If you set aside your savings on the first of the month you can spend these rest on anything as you know that your investment is in place already. Realistically, your income after tax and savings is actually your true income upon which you should create your standard of living.
Our youth seem to get it wrong with idea that financial success stems from debt and they fall prey to easy loans to fund things they really can’t afford. If you borrow to fund your lifestyle you effectively are living about your means. Particularly if you have not saved anything,

The message is simple. Live within your means after saving first. Keep your debt under control. When borrowing for a house or car make sure you can comfortably afford the repayments (after saving). Interests rates move up and down. Ensure that you can keep up even if rates move upwards by a few percentage points.
Your income is hard earned and needs to be managed carefully. If you measure it you can manage it. Our youth must learn to budget effectively managing their expenses carefully against their income. Opportunities to cut back on expenses should be identified which in turn will free up more money to save. Paying off debt as quickly as possible will also free up disposable income for savings. After all, it is better to earn interest on your own savings instead of giving to the bank. Times are tough and debt is not the solution. In fact it has become the problem with most SouthAfricans. Prevention is much better than cure when it comes to falling into the dreaded debt trap.
Delaying your gratification and maintaining financial discipline are key ingredients to attaining financial independence in the future.

Parents want the best for their children and education is top of the list of priorities with many households. Many parents are turning to private schooling over government schools as the trust and confidence and quality of education is found in the former. The question is, where do you find the money to pay for private education.

I spoke to Jenny Crwys-Williams on her show on Radio 702 this afternoon and we uncovered some of the huge costs of Private Schools. The Ridge in Johannesburg was one of the most expensive at a whopping R60 000 per year. The figures extrapolated to over R600 000 to educate a child to grade 7.

I was on Midlands Meander at the time and passed by Michael House so thought I would do some research on the costs. Found the First year to be R206 018 with the “Acceptance fee, and Development Levy” included.

Jenny’s question was, “How does one save for this type of expense?”

My answer was:

Save as madly as you can to build up as much capital as possible to soften the financial blow. Your ally is compound interest which needs as many real returns as possible over time.

Be Realistic

Realistically, parents do not have much time to save. From birth to the first day of school there are only 5 years or so and then education costs cover the next 15 years plus. If you decide to borrow money to fund education you simply pay much more for it, so this is not the ideal solution. The funding should come from your monthly household income which means you will need to balance your budget carefully and honestly giving way to other living expenses the more you allocate to education.

Target a stage of Education

You could consider saving madly from birth to grade 7 using the capital that you mange to accumulate towards affording a better secondary education. With the power of compound interest and saving from birth through primary and secondary school you could accumulate a substantial amount which could help towards a better option for varsity.

Where do you save?

There are many investment vehicles which will help you save towards education costs. Unit trusts, exchange traded funds, endowment policies to name a few. You should seek the advice of qualified financial planner to help you choose an appropriate option.

One of the lessor considered options for providing funding towards your education costs is your access bond. If you saved extra in your bond you immediately earn the same rate of return that your bank is charging you. No costs, no tax, no risk of losing capital and immediate access to funds when you need them.

Careful planning for your children’s education into the future will ensure that you find the right balance of quality and affordability.

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 hind sight. No 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 differ 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 carful of very cheap plans that promise hospital cover. You get what you pay for, so you probably will find a limit in your hospital cover. The better plans have unlimited hospital cover which means you won’t have to leave after a few days. You can stay for as long as the procedure and recuperation requires.

Cover the big bills

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

Covering the small bills

Many schemes offer medical savings accounts for the claims out of hospital. Doctors, dentists, medicine, glasses/contacts, etc. These bills are smaller than those in hospital 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 a smaller savings account than higher users. Lower users can also consider excluding a comprehensive scheme which insures 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.

On its own advice is just advice and probably not that effective.Let’s consider a retirement annuity, for example. In isolation the product has many features and benefits which provide many reasons to invest
In one. A main advantage is the tax deductibility of the premiums from you taxable income. So should every have one? Well, if you are young and just starting out in your working life, perhaps not yet. You see a retirement annuity cannot be accessed until age 55. If you need money for a deposit on your home or a car there is nothing you can do if your savings is in a retirement annuity fund. You may be better off saving in unit trusts which will give you accessibility to your money when you need it.

Good advice comes into its own when total retirement provisions are considered, including pension and provident fund contributions. These place limits on the amount that can be deducted from retirement annuity contributions. Having carefully calculated the maximin deductibility would set up an appropriate contribution and any excess could be diverted to different investments making the overall provisions far more tax effective. You see, it’s not just a a product. It’s really about taking everything relevant into account and making a financial decision on your circumstances.

So good advice boils down to appropriateness. Advice that suites the situation. Different strokes for different folks. This can only be accomplished through a thorough and holistic evaluation. It is not about best but rather suitability.

Good advice is therefore not product focused. It is rather solution focused. Just like visiting a doctor you are taken through a medical evaluation which then leads to a diagnosis and then suitable treatment is prescribed. A competent financial advisor will take you through a financial planning process which will highlight opportunities which will form the basis of his recommendation. This is good advice. It is not premeditated. It is objective and appropriate.

Next time you are given advice be aware of the way the advice is delivered. If it is all about features and benefits, past performance and speculative opinions into the future then be careful.

A qualified financial planner is able to find appropriate solutions through a professional planning process. Make sure that your financial decisions are made through this approach.

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 what’s really happening out there.This all adds to further uncertainty.

So how should you approach your investments in these times?

Time in the market

Firstly, you need to decide on how long you intend to invest for. The basic principle being 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.

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 deciding 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.

Rand cost averaging

Investing a lump sum in the markets in times like these is very risky as you have a strong possibility of loosing 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 into 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 correct during your phase in 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. Phase into your well chosen funds over a period of time and then be patient as you spend time in the market.

A word of caution. Don’t be lulled into the expectations of your investment based on the past two 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.

There are basically 2 types of pensions to consider:

The Life Annuity
This is a structured pension based on the amount of money you have accumulated and your life expectancy. The product provider will offer you a pension for the rest of your life. Should you die sooner than estimated then the balance of your pension capital goes to the pool. You can take out a guarantee on your pension for a period. The longer the period the lessor the pension. If, for example, you choose 10 years, then the pension will be lower, but should you die, say in year 8, then the remaining 2 years of pension will be paid to you nominated beneficiary.
Shop around and compare rates as they vary from company to company.

The Living Annuity
This pension allows you to invest into a wide choice of funds. You decide on your pension by making a choice between 2,5% and 17,5% of the value of your fund. When you die the investment passes onto your beneficiaries. The big risk is drawing down a pension at a higher rate than the investment performance. If you achieve, say, a 10% return and draw down a 12% pension, then you effectively are eating into your capital which will result in your pension drying up a lot sooner. You need to monitor your living annuity carefully, constantly assessing the returns and the percentage drawn down.

If you are convinced that you will live longer than the average, a life annuity is probably the better consideration. The guarantees on the pension need to be studied and understood before committing. Ultimately, the life annuity provides certainty for your retirement around which you can plan more effectively. However, you essentially give the assurance company your money and compete with the statistics of life expectancy.

If you want control of your pension and are prepared to keep involved with the investment during your retirement years, then the living annuity is your better option. The pension drawn should be carefully considered along with the funds chosen. Be realistic about your expectations of returns taking costs into account as it is the net value that matters.

Depending on your total provisions available at retirement you could consider a combination of these options. A useful tool to help you get a better understanding of the dynamic can be found at www.marriot.co.za.

Your choice of pension is a very important financial decision to make and you should seek advice from a professional financial planner to help you find the appropriate solution.

Taking the option to go it alone with your investments takes some work. The financial universe is huge and understanding it needs a lot of research and study. For starters, consider unit trusts. In South Africa alone there are over 900 to choose from.
Which one suits your investment plan?
Do you understand the relationship of returns and risk?
Which combinations do you choose?
What weightings do you consider for local and offshore?

Yes, these questions need to be considered carefully to bring meaning to your investment. If you don’t have the time or inclination to research these areas then perhaps a financial planner is the better route.

However, you may want to simplify your plan by investing in the average of certain asset classes. Exchange Traded Funds offer investments in various sectors and asset classes.
They replicate the indexes in the markets.
For example, The Top 40 shares on the JSE by market capitalization. You can invest in quality shares and get the average of their returns. Without having to trade yourself. You simply invest an amount per month or a lump sum and you now track the performance of the 40 shares. They are managed by competent boards of directors ( that’s why they are in the top 40).

The costs are very low ( around 1% per annum) compared to unit trusts ( 2,5%) and share portfolios ( 2%) and you can start with as little as R300 per month.

You will still need to understand what you are doing. There is a lot of information on the websites that offer theses investment, such www.satrix.co.za
www.etfsa.co.za
where you can invest in assets like gold and property.
Study the fact sheets and understand the nature of these assets.
As a general rule, it’s time in the market that will produce your results.
Shares are for the long term so don’t look for get rich quick results.
Your wealth is created over time with the phenomenal effect of compounding.

If it sounds too good to be true then it probably is.
Returns are made from the yields of assets.
Cash produces interest
Property yields rental income
Bonds produce fixed interest
Equities yield dividends

Property and Equities can also appreciate in value which further enhances yield. Offshore assets can also appreciate in rand terms went the currency weakens.

Synonymous with returns is risk. It follows that the higher the returns you expect the more risk you need to take on your investments.
The investment spectrum relative to risk starts with

Cash 5% Short term
Bonds. 6%. Short medium term
Property 8%. Medium long term
Shares 12%. Long term

Many unit trusts have a mix of these assets in various weighting a according to their mandate. So when we hear that the stock market has reached an all time high your investment probably will not have attained the same returns as it may only have a portion exposed toe the markets. Same applies to the currency changes. If the rand weakens only the assets linked offshore will be affected.

So, when a return is offered by a provider of 30% in the short term then be careful. Check out the assets that make up the investment they will have to take on high risk to attempt this amount of return.

Investing follows a time horizon and is not speculative. Quick returns are found in the casinos and not in your investments. Only compound interest over time will give you realistic returns.

A money market account trades in bank instruments called “paper”, such as Treasury bills, Banker’s acceptances, certificates of deposit, bills of exchange which all trade in a period of less than a year.
The money market is trades at the interbank level where banks lend and borrow to each other. These wholesale rates are higher than the retail rates offer by banks on their savings accounts.

The current rate varies between as the underlying instruments reach their varying maturing rates. These instruments are also dependent on the interest rate cycle. As interest rates rise so too will money market rates.

The nominal rate is the actual rate of return – normally annual. The effective rate is the rate achieved by reinvesting the interest received and compounding it back into the investment.
Example:
Nominal rate of 7% per annum yields and effective 8.25% over a 5 year period.

If you draw out the interest then you do not get the effective rate. You actually get the nominal rate.

Real rate is the adjusted rate received after subtracting the inflation rate.
Example:
Nominal rate 8% less inflation rate of 6% leaves a real rate of return of 2%.

Money market accounts are ideal for short term (up to three years) savings as they are accessible at short notice..
Available at you local bank and offer around 4.5%.

Money market funds are collective investments which offer a fund of money market accounts from different institutions. They cost more as there are annual fees applied to them from the advisor, fund manager and administrator.