Amongst the many questions asked on the Morning Breakfast Show during the year these were the most pressing. The common thread was that people were struggling to make ends meet and needed advice on how to manage their money better.
Are money market accounts safe investments?
After the demise of Africa Bank South African invested in money market funds learned the hard way that these investments were not as safe as they were made out to be. The Reserve Bank in its rescue plan ordered that a 10% “haircut” be applied to investors to help recover some of the losses. Side pockets have been created in some accounts whereby the investor cannot touch the money or earn interest it until the bank is in a better position to pay back. Doesn’t look likely at this stage!
The lesson learned is that the money market is as safe as the banks trading in them. This risk is found where the bank cannot pay back the debt it is trading in.
My view is that Africa Bank took on too much risk in an economy which has been struggling. Most banks are sound and the likelihood of this happening again is quite small. Therefore, money markets are still relatively safe investments.
Should I cash in my pension fund and pay off my debt?
Earlier this year the Minister of Finance tabled a report in parliament concerned over the fact that more and more South Africans were withdrawing from their pension funds. This was probably as a result of being under financial pressure and seeing the funds as a way to get back on their feet.
The problem is not only the tax that is payable on withdrawal ( up to 32% depending on your tax rate), but also in the lost opportunity to compound the returns of the funds into the future. If you work out the amount the funds will be in the future effectively earning interest on the tax payable if you withdraw, then the cost is huge.
In most cases pension funds should be left alone and only cashed in as a measure of last resort. If you really have to.
What is the ideal balance in my budget?
Governments and businesses are governed by detailed budgets which help them navigate through economic cycles. Households should also adopt the approach is creating detailed budgets. It follows the principal of ” If you can measure it, you can manage it” Essentially, a budget is a measurement of expenses against income. What comes into the household and what goes out.
An ideal budget should allocate:
30% towards provisions for your financial plan. i.e. Insurance, pension, medical aid, savings and investments.
30% towards debt on cars, houses and credit
40% towards the cost of living
When compiling you budget you should split the expenses into “Must haves” and “Nice to haves”. This will give you a clearer picture of where you can trim your costs and re-allocate to the the savings.
Difficult to get right but budgeting is an essential element in a successful financial plan.