The 3 most pressing questions in 2014

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.
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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.
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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.

What to do with your bonus…..

imagesIf you are lucky enough to get a year end bonus you should take stock of your finances and look for opportunities where you can best allocate some of the cash.

Save first then spend the rest

It’s year end and of course you have to splurge a bit. However, save a portion. Nudge a bit off that debt. Your debt ratio to income should ideally be 30%. Every rand closer is effectively the same return as the interest rate being applied to your debt.

Challenge yourself to keep as much of the bonus as possible and then spend every cent of the rest. The more you keep the better you will feel in January after the festivities are over and the blues set in.

Target your high interest debt

Debt is the first port of call. Choose your highest interest bearing debt. Effectively, your return will be the rate of interest being charged.
For example,
Your credit card charges around 22% per annum. Every rand that you can knock off this debt will effectively give you the same return.
To get 22% from an investment will take some risk of losing capital.

Store for a rainy day

Do you have a contingency fund for emergencies and unforeseen expenses. Money market accounts are ideal for this as they offer higher rates of return than retail savings accounts and provide immediate access to your funds when you need them.
Gennerally, one should have between 3 and 6 months of one’s monthly expenses.

Focus on saving

Make a commitment to your self to save on a monthly basis using a portion of the bonus as a kick start for your investment. ETF’s and unit trusts are the ideal way to get going. Challenge yourself to save this amount first, every month, and then you can spend the rest. Saving a bit over time has astounding results with the power of compound interest.

Attitude

So much wisdom is found in the old proverb.
A bird in the hand is worth two in the bush…

It really just boils down to attitude. Wealthy people focus on investing their hard earned cash. That’s why they are wealthy. They have the attitude of:
Prepare for tomorrow
Delayed gratification … save first and spend the rest… living within the means…

Less wealthy people focus on spending their cash. Their attitude tends towards:
Live for today
Immediate gratification. I want because I want it…fly now pay later…

The extra cash is an opportunity to improve your financial well being. Don’t let it slip through your fingers.