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?
Over time overgrown plants and dead wood will accumulate in your garden, and if ignored can kill off everything around it. It doesn’t matter how carefully things were planned at the start unless that plan is revisited and maintained, you can end up with a weed filled jungle that is almost impossible to get back into shape. Spring cleaning is not about throwing everything out, it’s about pruning, splitting, composting so that it will look better in the future. So… Using this botanical analogy, what can you do about your wealth portfolio?
Pruning: This is the cutting back of plants so that you get a better flush in the next year. Just like you should prune roses and fruit trees every year, so should your wealth portfolio be examined and trimmed every year to maximise its potential. Wealth is what is left when you have consumed your income – the simple Wealth Equation. The Consumption side of the Wealth Equation is where you need to prune. Use your banking software or a free app like 22seven to see where you need to prune. Everyone is going to be different so it is difficult for me to say what is important or not. If you’re not sure, list all your expenses for a month then put a priority rating of 1 to 5 next to them, the order that you’d drop them if you absolutely had to, with 1 being the most important. Put everything there including your mortgage, car payment, medical aid. Some people would rather eat baked beans for a month than drop their DSTV subscription for example.
Pinching out. This is the mini-pruning of shoots so that the plant will bush out and produce many more flowers or fruit – increasing your ‘harvest’. Fuchsias are an excellent example of this. Pinching out effectively delays the flowering or fruiting of the plant – delayed gratification for the greater good. Take a topiary for example, getting a pleasing shape depends on knowing what you want it to eventually look like (an objective), and having the patience to keep controlling it until you get there. If you want to increase your harvest you need to have as many points of diversity as possible, so that if one branch dies, the other branches can pick up the slack. All portfolios should have an objective : What are you going to use the investment for and when? This timeline will dictate how you should treat the investment, and how important it is to preserve the capital. Probably the biggest capital accumulation you’re going to need to make is for your retirement, but how big this pot needs to be will depend on what you want your retirement to look like (in present value terms). This calculation is far too important to ‘wing it’, get professional help.
Compost and Fertilise: Over the year plants deplete nutrients out of the soil to produce leaves, flowers and fruit, if you want them to keep on producing you need to compost and fertilise. Your wealth portfolio is no different. You can compost it ‘organically’ with interest and dividends that are ploughed back into the portfolio – or inorganically by adding to the portfolio with new, man-made (you-made) contributions. Most of you probably already contribute to some sort of investment every month, but what do you do with your bonuses? Why not commit to putting 50% of that bonus into investment. You could also do this with other little windfalls like Insure cash payments or other loyalty program paybacks. The free app Stash# will also make it easy for you to get that money out of your pocket before it burns a hole.
The one thing standing between you and financial security is in your head
Why is it that you find teachers that are financially secure all their lives and retire comfortably but CEOs earning 100 times more aren’t in the same place? It all boils down to one thing, spending less than you earn and investing the rest – for decades. Sounds simple right? Why is it then that so many people just can’t get it right? Essentially it has to with what is going on in our head. Our spending or saving habits are a result of years, often decades, of behaving in a certain way. Every time you behave in that way, the habit is ingrained in your psyche and changing it to get better outcomes very difficult. Difficult, but not impossible.
When you want to change a habit you can do it cold turkey or by taking baby steps, the method you choose is up to you but the problem with ‘cold turkey’ is that, unlike smoking or drinking, you still need to spend money. This is not unlike dieting, you have to eat to live, so you can’t just cut out all food. Crash diets rarely work in the long term, because the basic habit that caused the weight gain hasn’t been changed – changing poor financial habits are very similar. Slow and steady usually wins the race.
So, let’s take the principals of dieting and apply them to changing your spending habits.
- Know what you’re consuming. I hate to use a new-agey buzzword word but by becoming more ‘present and aware’ of what you’re doing with your money you will bring you closer to a better financial outcome. In the (good) old days it is the equivalent of not balancing your cheque book and leaving your envelopes of statements unopened. Today it is not much different, it is just all digital. The good new with that is that you can get the technology to put it in your face so you can’t ignore it. I am sure you’ve tried to have a ‘budget’ many times in the past, but they are time-consuming and depressing. Free apps like 22seven make this dead simple today, but you have to interact with it, set the categories and limits and watch the notifications when you’re going over your target. Make friends with your money. Start watching what is going in and out, and make your own assessment if that is helpful, that change alone will start to change your behaviour.
- Cut out the carbs. These days fat is good, carbs are bad – but either way, when you’re dieting you have to moderate the food-to-mouth disease if you want to lose weight. Once you’ve made friends with your money and put your consumption into categories you’ll soon find your weak spot (if you didn’t know it already). If you’re lucky, by watching your consumption you might also find long forgotten debits that can be killed off. If you’re paying for a loyalty program and not using the benefits, that alone can save you several hundred Rand month. What about bank fees? If the bank’s loyalty program isn’t virtually paying for that every month, look at changing banks. Use loyalty programs to their max, I personally get around R2,500 a month back on mine – and I am not talking about discounts.
- Don’t have the food in the house. In financial terms, having the bank/credit card instantly available – even embedded in your cell phone – makes it much too easy to consume. Show your brain something it can understand – cash. Once you have identified your weak spot, or the place you think you can save money, take the month’s allowance out in cash and stop using the card. Many banks allow you to get ‘cash back’ at the grocery till which costs you a fraction of using an ATM and is way safer. If you have cash left over at the end of the month then spoil yourself with a little treat or take out less next month and move the balance into savings.
Do you recognise this in your budget?
Lifestyle creep a hidden effect, especially in higher inflation environments like ours. Basically, it is the continuous upgrading of one’s lifestyle and increases in consumption in REAL terms as our incomes increase. I have capitalised REAL for a very good reason, it is the actual increase minus inflation. In other words if your increase is 6% and inflation is 6% then the real growth is zero. When it comes to after-tax income though, it may even be negative. This is usually a problem when it comes to the big lifestyle expenses, like houses and cars. I have gone into the wealth implications of both these purchases HERE, so I am not going to repeat myself, but if you ‘upgraded’ your house or car because you’ve received an increase or promotion, then read on…
What has tax got to do with it?
Tax is levied on a sliding scale in groups called “Income brackets”, have a look at the graph below which is for the 2017/2081 tax year.
Let’s look at the middle of the range of income tax bracket, which is where most of the lifestyle creep occurs: In the tax year ending 2016 the range was R393201 – R550100 the marginal rate was 36%, in the year ending 2017 it was R406401 – R550100 and this year ending Feb 2018 it is R410,001 – R556000 tax rate 36%. it’s all 36% so there will be no tax rise? Not so fast…
In 2017 this translates into a 3.35% movement in the bracket when inflation was around 6% and 2018 it was even worse, with a minuscule 0.88% movement when inflation was around 6%. In other words, the government is deliberately pushing your income into a higher tax bracket every year. In effect, therefore, in the 2016/17 tax year, unless you had an increase above 9.35% you had no real increase in take home pay. In 2017/18 it would have to be over 12% to have a REAL increase in take-home pay. If you feel that you’re poorer, that is why.
Before you emigrate, find out how your investments will be impacted
Whenever uncertainty increases, South Africans start looking at how liquid they are if they want to get up and go, and this is one of those times. Noises from the government recently are that they want to ‘document’ emigration to prevent it (a complete non-starter and just more jobs for pals). Emigration of educated youngsters has been happening for decades, and because they have very little in the way of assets so do not have ‘financially emigrate’. Those stats are ‘hidden’ and become part of the brain drain because those youngsters just cannot find the jobs they want here. For older and more established South Africans though, emigration as opposed to a leave of absence to work outside the country, comes with a myriad of investment or disinvestment decisions that need to be made. This is also known as official or financial emigration.
Capital gains tax: One factor many emigrants do not consider is that emigration triggers Capital Gains Tax (CGT), whether or not you leave your investment or property here. If you merely work elsewhere but remain an RSA resident (as many people do if they work in Dubai for example) then this does not apply. Be aware though that the government is itching to bring those ‘tax-free’ earnings into the RSA tax net. Capital Gains Tax was initially introduced to replace Estate Duty, but I am sure it of no surprise that not only do we have both but CGT is creeping up steadily and is now a nasty corroder of any investment.
If you’re thinking of emigrating, and if you have a large property or stock portfolio, I recommend you make yourself familiar with CGT. You can get a simple 15 page brochure on it HERE. There is, of course, the 800+ page brochure available too if you’ve run out of sleeping pills. Working out CGT is not simple and is a multistep calculation, as you will discover if you read the brochure, so I recommend you get your tax advisor or Certified Financial Planner ® to do this for you (your broker probably won’t be able to help you). There are 2 aspects to Capital gains, the ‘inclusion rate’ (the percentage of the capital gain that is used in the calculation) and your marginal tax rate.
Flexible investments: These are relatively easy. Either you leave it or sell out and use your Forex allowance to take it out – either way, you’ll have to pay Capital Gains Tax on Shares or Unit Trusts. If you leave it here, you’ll have to keep submitting returns and paying tax, but if you move to a country that has a tax agreement with RSA, then the tax paid here will be a credit on the other side so double tax is not paid.
Pension and Provident preservers: These are put in place (with the help of a financial advisor) in order to preserve the tax status. If you withdraw from that fund (one withdrawal before retirement (age 55) is allowed – it can be the full amount) but is taxed according to lump sum withdrawal tables. An R22,500 lifetime tax-free amount, and thereafter a sliding scale starting at 18% and going up to 36%. If you officially emigrate, Pension Preservers can also be left and handled at retirement or age 55 –but that involves substantial administrative PT, especially if you do not have an RSA bank account. Hint, keep one in place if you go this route, even if it is a cheapo like Capitec. Depending on the size of the Preserver, Tax could take a sizable chunk out of your investment. You still have the option of never retiring from it, in which case it will go into your estate.
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Hidden traps waiting for unsuspecting entrepreneurs
Entrepreneurs, especially if they haven’t been cursed with climbing the corporate ladder or an MBA, have some unique challenges when navigating the field of personal and small business risk and finance. Perhaps it’s that fearless spirit and boundless confidence that will guarantee your success, but “jump and build your wings on the way down” sometimes ends in a bloody mess at the bottom. A bit of homework on wing design and jumping with the right tools would have prevented that – and the same goes for that entrepreneurial venture you dream about.
Test your idea: Unless you’re buying a franchise, a new venture usually starts with an idea, and with a product (which could be a service of course). It is important to iron out at least some of the bugs before you sink too much money into the venture. Who is your target market? What are their expectations? How much are they prepared to pay for the product? What after sales service do they expect? How often will they buy your product? How can you retain their loyalty? Don’t let a poor product sink your venture before it even starts.
Everyone needs to ‘maak’ a plan: Seat of the pants ventures or bootstrapping your way through the early years probably works a charm in your early twenties when you don’t have obligations, not so much later on. One of the biggest mistakes entrepreneurs make is to buy into the fallacy that business plans, financial plans, marketing plans, business qualifications are all bureaucratic nonsense designed to kill your dreams. Dreams and visions are all very well, but unless you know what your “break-even” is for example – and when you might achieve that dream – then it can become a nightmare. The good news is that all this information is freely available on the net, in books and online courses. Do all that homework and put your plan together before you leave your day job. If you’re ‘between jobs’ then use the time to do this homework, but keep looking for a job, even if it as a temp, Uber driver or from your rented room while you rent out your house. Money to launch your venture is hard enough to come by without spending it doing the homework and learning basic business skills.
Who are your clients going to be and how are you going to get them? This is key to any venture’s success. If you’re starting a business very similar to your ‘day job’ tread carefully, if you cannibalise their clients or copy their products, you might spend a chunk of your change in court. Brushing up on social media marketing and building your potential network takes time and trail and error as you find out what works and what doesn’t. You can also use social media to test your product or use free tools like Survey Monkey