Saving is silent, consumption is conspicuous
At the most basic level, the only way to grow wealth is to earn more than you spend and save the rest. If you can get that wealth equation to work for you, then you’re not going to have to worry about financial independence at any time in your life, but we all know that life happens, and more importantly – emotions happen. Humans are complicated, add money into the equation and it really becomes a mystery. Money has the power to completely change someone’s character, and let’s face it, it is even one of the major motivations for murder. We all have a ‘money mindset’, and often that is deeply entrenched in how we’ve been brought up, or the challenges we have had to face getting to this place. The past doesn’t always stay there, it lives in your mind and can influence everything you do, positively or negatively. That doesn’t mean to say that that mindset cannot be changed, the brain is a powerful thing, and more importantly it has plasticity, the ability to grow new connections all our life. We might have the most neurons we ever are going to have at birth, but considering we only ever use 5% of that brain, we have billions of ‘spare parts’, so we can make new pathways and those neurons can grow new connections all the time.
Building up a habit is the equivalent of walking a well-worn path in the brain, so deep it can become a rut. When we’re out and about doing our daily thing, we naturally walk down paths, they are easier and more comfortable – the same with our habits. We are often oblivious to our habits – how we dress, eat or talk. We all have money habits that we are probably just as unaware of, and most of those are wrapped up in emotion. Do you get a sinking feeling in your stomach at the beginning of the month when the cacophony of notification after notification signal the decimation of your bank account? There is a very good reason stores have payday specials – it isn’t that we are all looking for a great deal, we’re often looking to get a retail therapy high – because we deserve it.
There is always something that is at a premium – it could be time, space or money – and it is all about making choices so that you can keep all the balls up in the air and your dreams on track. These variables can also be traded off against each other. If time is at a premium, you could pay someone to do that task for you, if you run out of space, you can buy more, if you run out of money, you can use some time or space to make more. It’s all about balance and choice – and because money always enters into the equation somewhere, your wealth is impacted, either by consuming more, or earning less.
Now that we’re coming into the silly season it’s a good time to start getting your priorities right for the year ahead. By all accounts, it could be a tough year, and there certainly is a lot of uncertainty in the economy and politics. Inflation is creeping up, mostly because of the weaker Rand. Treasury is all tapped out of tax-payers funds (we think, but they may not), so Eskom are more likely to be granted their 18% increase than getting a bail-out or told to be more efficient – so keep looking at going off-grid and saving both energy and water. The Medical Aid tax credit is more ‘low hanging fruit’ that could bite the dust on 1/3/2017. Reign in your Medical Aid spending by combining a lower plan with Gap cover and if you’re on a family plan with one person using the lions share of your plan, look at hiving them off into their own plan.
If your priority is to accumulate wealth, there is no magic trick – you have to consume less than you earn. That is it. You can prioritise earning more, or by spending less – and of course looking after that wealth properly.
One important aspect of getting your priorities straight, and having half a chance of making them succeed, is that you and your partner have to have to be aligned, especially when it comes to consumption. Money may not be the source of all evil, but it certainly is at the root of more than half of rocky marriages – with toxic in-laws coming a close second. You might get away with running a dictatorship in the garden or kitchen, but when it comes to retirement, if you are pulling your wealth in opposite directions, it is going to end in tears.
Harmony is not an accident
Abdicate, Delegate or Micromanage – what is your investment style?
There is a good reason Richard Thayler won the Nobel prize for Economics, the academics have woken up to the fact that the only sane explanation for the messed up financial markets is that humans are driven by something called emotion, and until you understand that, you’ll never understand what makes markets tick. (Personally I found Thayer’s book ‘Misbehaving’ boring and indulgent, but those are key ingredients for an academic best seller. ‘Nudge’ was an easier read, but a single (excellent) concept fluffed out into a full book.)
So, how do you manage your wealth, assuming of course that you’ve managed to consume less than you earn so that there is actually something to invest? If all your disposable income is going into debt servicing then I suggest you need to take a step back and address that first. There is no point in investing at CPI plus 3-5% when the interest you’re paying on credit cards or personal loans is running at CPI plus 11-25%. The only ‘good debit’ out there is at prime, or less (10.25% and below) – like your bond. We can look at your investment style three ways, abdication, delegation and micromanagement.
Sorting out your messy investment garden
I am a keen gardener and love having colour and diversity all year round, but because there are plants that hide in summer (the spring flowering bulbs) and others that hide in winter (like my awesome voodoo lilies) it is often a mission to know where everything is and why I put them there – and far too often I used to dig a hole for something new, only to destroy a hibernating bulb. Mercifully, this doesn’t happen anymore since I put a low tech and high tech organizational system in place.
Investments are no different. If you don’t know where all your investments are, the objective of each investment and how they’re doing at least once a year, it’s unrealistic to expect them to flourish. Having said that, just like you don’t have to watch your plants every day, fund changes or portfolio changes don’t have to happen all the time, but only when macroeconomic changes dictate it or there is a significant change in your finances.
Having an ‘objective’ for your different buckets of investment is key. That objective will tell you what asset classes to use, how long the investment is going to run, what portion should be offshore, what tax vehicle is most efficient and what sort of return you can expect. With no objective, it is like buying a plant at a nursery blindfolded and just sticking it anywhere in the garden and hoping it grows into a fabulous strawberry patch – meanwhile it is a slow-growing baobab and is going to be killed off in the first frost.
Your biggest medical risk? The NHI (National Health Insurance)
As if it wasn’t enough that Medical Aid premiums have been consistently increasing well above inflation for years, the National Health Insurance (NHI) government proposals that have been on the backburner for years are now a hot topic. Why now? For a start it is a popular move that will play well to the voting public (with elections less than 2 years away), secondly there is a perception that, with the billions being thrown at SAA or SABC, there is spare cash floating around (especially if they start tapping into the PIC – government pensions.) Of course, the NHI also has its eyes on the R20bn in medical aid tax credits given to us taxpayers, and it is quite possible that this is going to disappear – as soon as the next budget in February 2018. This R20bn is actually a drop in the ocean – in 2010 the cost of the NHI was estimated at R450bn pa (for cover equivalent to the Government Employees Medical aid known as GEMS). It may take another year or two before the NHI becomes compulsory, and it will likely start as a ‘lite’ version but it makes sense to start anticipating it now and aligning your costs accordingly.
Knowledge is power
The Life Insurance industry has tried very hard to shake off the stigma of the past. The products have improved, costs come down and the advice jacked up (thanks in part to much stricter regulation). It has also become highly competitive and diversified, making it almost impossible for the man in the street to make an informed choice, relying on a Trust Advisor to help them with that. The new regulations, the ‘Retail Distribution Review’ (RDR), is going to protect consumers even more, but it is also going to force lower income consumers to do it themselves via Call Centres or direct sellers, as Brokers, Advisors and Planners decline to do ‘small’ policies because the remuneration just doesn’t even cover the costs.
There is another issue, money is tight and everyone is shouting “Pick Me” trying to get their hands on your disposable income, insurance salesmen and investment specialists among them. Cutting through the bull that you’re bombarded with in SMSs, Social media ads and TV commercials that lure you in with statements like “all your premiums back if you don’t claim”, “cut out the middle man and save” or “get R1m life cover for R1 a day”. (All the claims are fundamentally flawed if you read the small print – but that’s another story). Life cover is one of the ultimate grudge purchases, but most of us do it because it is the responsible, grown up thing to do, and we just keep on doing it. This is an important decision, if you make the wrong choice you may not be able to change it if you’ve had any event ( even a relatively minor car accident) that will impact your insurability. Is it money well spent – and should it be for life?