Inflation can put a significant strain on our finances, forcing many individuals and families to explore ways to save money. However, canceling insurance policies, although tempting, can have severe consequences that outweigh short-term financial relief. This article highlights the risks associated with canceling insurance to meet the rapidly rising cost of living amidst inflation.

Risks of Canceling Insurance 

Insurance serves as a crucial safety net, protecting individuals and families from unforeseen risks and financial burdens. Canceling insurance policies, such as health, auto, or home insurance, exposes individuals to various risks. In the absence of health insurance, even a minor medical emergency can lead to exorbitant healthcare costs. Similarly, forgoing auto insurance increases the likelihood of financial ruin in the event of an accident. Additionally, canceling home insurance leaves homeowners vulnerable to the devastating consequences of natural disasters, theft, or property damage.

Consequences of Canceling Insurance 

The consequences of canceling insurance extend beyond immediate financial implications. Individuals may face legal consequences, fines, or penalties without proper coverage. Canceling health insurance, for instance, can result in limited access to healthcare services, compromising overall well-being. Moreover, being uninsured or underinsured may lead to significant financial setbacks in the future. In the event of an accident, individuals may be held personally liable for damages, leaving them financially crippled for years to come.

Alternatives to Insurance Cancellation

Instead of completely canceling insurance policies, individuals can explore alternative ways to mitigate the impact of inflation. These options may include negotiating lower premiums, adjusting coverage limits, or exploring discounts and bundling options. Additionally, seeking financial advice, budgeting effectively, and exploring cost-saving measures in other areas of life can help navigate the challenges posed by inflation.

Conclusion

While inflation can strain our finances, canceling insurance policies to meet the rising cost of living is a risky decision with severe consequences. Protecting ourselves and our loved ones through insurance coverage is essential, ensuring financial security and peace of mind in the face of unforeseen circumstances.

As interest rates continue to rise, homeowners with mortgage bonds may find themselves facing increased financial pressure. The recent increase this week by another 0,5% takes the prime lending rate generally charged to bondholders to 11,75%. The rate was at an all-time low of 7% in September 2021and now your bond costs you 40% more. 

Putting into perspective, a bond of R1 000 000 in 2021 cost R7 753. Now the same loan costs R10 837 (R3 084 more). The reality is that bonds are paid with after-tax income. So if you are working on extra income like a side hustle to keep up with your new repayments you will need to earn up to 40% more to cover the tax. 

As these high rates are likely to be around for the foreseeable future whilst inflation (CPI 6,8%) is still way out of the band of 3% to 6% we should look at ways to mitigate the high cost of this debt. 

Work with your access bond

If your bond and your current account are linked to your internet banking you have a super effective tool to tackle the debt in the long run. Your current account earns no interest and your home loan is charging you say 11,75%. At the end of each month, the bank calculates the average balance in your bond and takes the applicable interest from your monthly instalment first and then the very little left over is paid towards the loan. So during the month, you should keep as much as possible in your bond and as little as possible in the current account. The higher average monthly balance means that from your next instalment, you will pay less interest and more off on your loan. Over time this will build up extra funds which you can access at any time. If you leave this alone you could find yourself saving fortunes by shaving off years on your bond. 

This plan doesn’t cost you anything. You simply are warehousing as much as you can in the bond through the month and trickle-feeding the minimum into your current account for day-to-day living as and when you need to. 

Example: 

A bond of R1 000 000 @ 11,75% over 20 years has a monthly repayment of R10 837.

If you improve your monthly balance in the bond by only R1 000 you pay up your bond 5 years earlier saving you R468 171 in future repayments. 

A measure of last resort

If you cannot keep up with the repayments having cut back as much as possible on your expenses then sooner than later you should have a meeting with the bank to negotiate and explore ways to reduce the monthly repayments.

The options to consider:

1. A relief period where you pay the interest only for a period
2. Increasing the term of the bond.
3. Negotiate a lower interest rate. 

Be aware that any of these options will help in the short term but will effectively cost you more in the long run. Once you get back on your feet you should pick up the access bond strategy to recover and avoid these extra costs. 

We are in a tough economic period and it is far better to make a plan now around your home loan whilst you can. The consequences of doing nothing will be harsh as creditors narrow down on you to attach your property.

“Sell in May and go away” is an investment adage that suggests that investors should sell their stocks in May and reinvest them in November, as the period between May and November is typically associated with lower returns in the stock market.

Historical data have generally supported the “Sell in May and Go Away” adage over the years and since 1945. The S&P 500 Index has recorded a cumulative six-month average gain of 6.7% in the period between November to April compared to an average gain of around 2% between May and October.21 Mar 2023

Here are three reasons why you might consider following this advice:

1. Historical trends: The adage is based on historical trends in the stock market, which show that the period between May and November tends to be associated with lower returns compared to other times of the year. According to some studies, stocks have historically underperformed during this period compared to the rest of the year.
2. Market volatility: The period between May and November is often associated with greater market volatility, which can make it more difficult for investors to navigate the market. By selling your stocks in May and waiting until November to reinvest, you can potentially avoid some of this volatility and minimize your risk.
3. Seasonal factors: There are several seasonal factors that can impact the stock market during the summer months, including lower trading volumes, vacations, and decreased investor participation. These factors can lead to a slower market, which can contribute to lower returns.

However, it’s worth noting that this adage is not a hard and fast rule, and there is no guarantee that you will see better returns by selling in May and going away. It’s important to consider your individual investment goals, risk tolerance, and investment horizon before making any decisions about buying or selling stocks. It’s always a good idea to consult with a financial advisor or do your own research before making any investment decisions.

Essentially, the financial plan for young people follows the same approach as for everyone. It answers the questions:
Where am I now?
Where do I want to be?
How do I get there?

The difference in the plan for young people is that it should cater for their probabilities of needing provisions in the short and medium term.
The probable life-changing events which occur in the short term such as:
Buying a house
Buying a car
Getting married
Having children

The emphasis in the plan for young people is therefore on accessibility to funds. Which in financial speak is called liquidity.
The investment instruments should therefore allow access.
Unit trusts cater for this and are ideal starting points for young people.
Try to avoid policies as they are restrictive.
A retirement annuity, for example, binds you for too long into the future and if you need cash you won’t be able to access funds until 65.
Unit trusts allow you to stop and start without being penalized on your cash value

The risks that should be addressed in the plan are provisions for
Disability
Medical aid
Short-term cover for the car

Don’t ignore your pension fund benefits
As you may be duplicating on the disability cover

The financial benefits of cohabitation play a role in how people live in the US. About 2/3 of people who have moved in with a romantic partner say finances and logistics contributed to their decision and the share is even higher for younger couples.

And while the decision can help one’s pocketbook 10 of those that moved with a romantic partner later regretted the decision according to a survey of more than 3000 consumers conducted by HarrisX, a polling firm for realtor.com. 

Sharing costs has a huge benefit

In theory, the cost per person is halved as there are many expenses which are shared.

Rent, lights and water, rates and taxes, transport, TV, Kitchen utensils, furniture etc…

Considering that if one were on their own they would have to spend money on these items for themselves only, The survey found that couples saved around $1000 per month. 

It must be more about something other than the money

When analysing the research it is apparent that moving in together is not all about the money. Relationships definitely hold the key to successful cohabitation. As the research shows 48% didn’t work out:

So living together is a challenge which needs to be well thought through. Whilst the financial benefits are very real the relationship will still be tested to the point where the money doesn’t matter anymore.

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The harsh but necessary increase of 0,5% in interest rates by the Reserve Bank this week was harsh and unexpected. It does, however, show how determined the MPC is to bring back inflation into the target range of 3% to 6%. 

Dealing with rising interest rates can be challenging, but some strategies can help individuals manage the impact on their personal finances. 

Refinancing loans

If you are struggling with repayments on your bond or vehicle you may do well to approach the lender and explore the options to refinance the loan/s over a longer period of time. This will result in a lower repayment which could help in coping with your monthly cost of living. 

Debt consolidation

Another option to consider is approaching your bank holding your bond and exploring options to lend more against the value of your house. The additional amount can then be used to settle all of your debts. This amount now sits in your new access bond at a much lower repayment than the combined repayments you used to pay. However, you must be mindful of repaying the loan sooner than later as it will cost you much more in the long run.

Building and emergency fund

Extra cash should be saved in your access bond or a money market account. Aim towards 6 months of your living expenses. If you refinance or consolidate you should have extra to save. Rising interest rates have a positive effect in these spaces and you should capitalise on the window of opportunity as interest rates are likely to rise even further before they come down.

Cut down on spending

Adjusting spending habits and cutting back on discretionary spending can also help reduce the impact of rising interest rates on personal finances. Easier said than done in the face of steep price increases in food, fuel and electricity (the odd times between load-shedding). 

Overall, dealing with rising interest rates needs you to face it head-on by being proactive and making a plan. You can mitigate this by being mindful of the impact of rising interest rates and ways to soften the landing.

The budget proposals delivered this week offered individual taxpayers a so-called tax incentive for solar installations made in the next tax year commencing 1 March 2023. 

When drilling into the detail is it really that much of an incentive considering that we need an urgent response to the current electricity crisis?

The tax refund is limited

Firstly, the deduction of 25% proposed is not against the total cost of the installation as alluded to. The rebate is only applied to the cost of the solar panels to a maximum of R15 000.

For example, a person buys 10 solar PV panels, at a cost of R4000 per panel (so a total cost of R40 000). That person would be able to claim 25% of the cost up to R15 000, so R10 000. 

A different person can buy 20 panels at a cost of R4000 per panel (total cost of R80 000). The calculation of 25% adds up to R20 000, but the claim is limited to R15 000. 

So before you jump into the queue for a solar installation understand the limitations. Your inverter, batteries and labor costs are not included in the rebate. Another real point to consider is that if you decide to install in March this year you will only get your refund when you submit your tax return next year. 

Who is benefitting?

So, you effectively are using your money now to help Eskom out of its crisis and waiting up to 18 months for a partial refund. This effectively turns out to be a nice short-term loan to Treasury. 

A real incentive

A far more meaningful and immediate incentive could have been a zero rating of VAT on solar panels. This would have provided an immediate discount of 15% giving us a really good reason to consider going solar now. This in turn would have had a far more immediate effect on load shedding. 

There are three aspects of a budget:

Income (GDP)

Income into our budget relies on taxes in various forms. VAT( everyone @ 15%) Income tax (only 10% of the population to a maximum of 45%) Customs and excise duties and sin taxes….. All of these pour into a pot to cover expenses…..The budget speech alluded to better than expected revenue collections resulting in a surplus of R94 billion more than a year ago. 

Expenses

To ensure that income is sufficient expenses need to be curtailed…..it’s a case of cutting the cloth to make the suite fit….Another R1 billion to SAA?

Debt 

We are apparently starting to stabilise our debt at 18% of revenue. The cost of debt is ramping at 9% per year and is the budget’s fastest growing spending item. Against a downgraded projection from treasury that our economy will grow to 0,9% there will be pressure to pay off debt. 

Bottom line is that we will be struggling along, trying to sway a probable grey listing, move up the ladder of an existing down grade in the face of load shedding to keep the wheels turning.

We need a miracle.

The State of the Nation Speech which was eventually delivered on Thursday evening presented us with some lessons on what not to do which we should take away to our own households. 

Proactive rather than Reactive

Eskom (and all other SOEs) are in crisis due to an incompetent and severe lack of planning. South Africa is now scrambling in reaction to an electricity disaster which was inevitable years ago and should have been averted with an effective plan. 

Our households face many life-changing events such as death, disability, retirement, divorce and retrenchment which can lead to a financial crisis for which we need a plan. We need to improve and develop a level of competence in understanding financial aspects that affect our households and put in place a plan to provide for to them. 

Debt is not the answer

One glaring concern in our State of The Nation is the souring debt which now amounts to trillions.

With a growth (GDP) projection at nearly zero, we cannot cover the cost of this debt. We will either have to rapidly grow the economy (difficult without electricity), borrow more money or increase taxes. So brace yourself for the budget speech. 

Households which have borrowed too much to keep their heads above water are now facing the crippling outcome of a rising cost of their debt. Options are limited to get out of this trap. Borrowing more is certainly not one of them. It’s either increasing income and/or slashing expenses. 

Don’t play the blame game

SONA pointed to the COVID pandemic, floods and protests as contributors to our crisis. Blaming is a way to divert from responsibility. 

Households which take full accountability

over their financial planning will have their resources well placed to navigate through whatever financial problems come their way. Creditors are not sympathetic to reasons and excuses when households find themselves in a financial crisis. Your precious assets are at stake. 

The sad State of our Nation is a consequence of poor incompetent leadership. We have learned some harsh lessons on what not to do which we should apply to the state of our own households. 

As we enter into the final month of the tax year for 2024 we still have some time to take advantage of some tax opportunities.

Even if you don’t have the resources to take full advantage of these any contribution will make a difference to your tax payable.

Retirement Annuity 

You can deduct up to 27,5% of your taxable earnings on contributions to retirement funding. So if you have a pension fund and you contribute 15% towards it you can invest a up to 12,5% more into a retirement annuity.This can be done with a lump sum adding it to your existing retirement annuity. 

Tax free savings account       

You should consider the opportunity of investing a lump sum into a tax free savings account before the tax year end. You are currently allowed R36 000 per annum. So you can top up to this amount before the end of February taking full advantage of the allowance and then be in a position to invest more in the next tax year from March onwards. 

Capital gains tax                                                                                                             

If you are disposing of any investments you could sell some in  February using your         R40 000 exclusion off the gain in this tax year then sell again in March taking up your R40 000 exclusion for the new tax year.

Donation tax                                                                                                                     

If you are considering donating assets up to R200 000 to someone other than your spouse you should split the donation between February and March. This way you will take full advantage of the R100 000 per annum.

Planning opportunities exist in the month of February for the tax savvy. Work with the various tax breaks and take full advantage while you can.