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Debt – Love it or Hate it?

in Debt, Investment Leave a comment
debt

Love it or hate it, just understand it before it kills your wealth

At some time in our lives, (usually early on) debt is unavoidable, especially for high ticket items like houses or cars. Depending on how you were brought up, it was either dead easy or as scary as hell. As time goes by we get used to it, so the next debt we take on is easier, and if we’re too complacent or have a run of bad luck then it can spiral out of control. Debt isn’t just a number on your balance sheet, it often has a physical effect on you. Obviously it is going to depend on your risk appetite, but usually, the more debt the more stress you take on. Some people relish in that stress, but they are in the minority.

We are often sent mixed signals about debt, especially if we are in business. ‘Leveraging’ (which is just a fancy word for debt) is seen as ‘smart’. “Use other people’s money” we’re told over and over, so how do we fix our relationship with debt, get it into perspective and understand ‘good’ and ‘bad’ debt?

For a start, if you’re in business and you have limited liability then leveraging your business is often smart and necessary so you can gain critical massJust be aware that banks have cottoned onto this ‘limited liability’ and directors now have to sign personal surety for any ‘accommodation’ (yet another euphemism for debt) you’re given (read the small print). They prefer it if that surety is backed up by a physical asset too of course so if you don’t pony up when they ask, they can just take your house. Lose/lose much?

Being in debt early on in your life is like being on diet, you can’t eat nothing or you will die, so you have to find a happy balance. Of course, everyone’s balance is going to be different, but again, like weight, there is going to be an ‘acceptable’ zone. If you decide to have zero debt ever (and don’t have a trust fund to live off) then you may wait decades to get onto the property ladder. Owning your own home is not a necessity, far from it, but let’s look at when it is sensible, and when not. A mortgage bond is made up of two components, interest and capital. These days even the banks will split this up on your statement. The interest is rent, the capital is your investment. If you rent, then your payment should not exceed the interest portion of a new bond. Why a new bond? As time goes on, capital is built up in the asset and the interest portion comes down until the last few years when it is almost all capital/investment. As a landlord you usually want the tenant to pay off the entire bond, interest and capital, and more often than not that is what happens. A landlord will justify the rest as ‘risk’, with good reason. Regulations are not landlord friendly and defaulting tenants are on the rise. So, basically, if your rent is more than the interest on bond you could get on that property you should get your own. Having your own rental property is a whole different topic, but you can read about it on my blog HERE (or HERE or HERE - it is a pet topic of mine).

When deciding what is good and bad debt there are two things to take into consideration, the interest you’re paying on that debt and what percentage that debt is of your annual income. It is also important to read the small print in that debt agreement and make sure you’re not tied into something for years with no escape clause (without penalties). If you’re unfamiliar with ‘cheap’ or ‘expensive’ debt it’s time to do a bit of research – it will only take minutes but will save you thousands in the long term , thousands that you could be ploughing into your wealth.
The Reserve bank sets the ‘repo rate’, at the moment it is 7%. Prime interest rate is usually 3.5% above this, i.e. 10.5%. That is the bank’s ‘margin’ aka profit. One can usually get a ‘prime’ interest rate on a mortgage if your deposit or equity is more than 80%. Do you know what yours is? Credit card debt is usually around 18% which is clearly ‘expensive’ and should be avoided at all costs. Personal loan interest rates can get much higher than this – up in the high 20%s, and payday loans as much as 500%.

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The Money-Go-Round

in Asset classes, Economy Leave a comment
tale

A tale of some money

Most of us don’t think twice about opening our wallet and handing over cash or plastic. Perhaps we think this is just a form of barter, you give me something and I will give you something back of equal value – and money is just one of those ‘things’ we can barter with. I suspect we think that all that money is backed by investments in the bank in one shape or form. Not so. In effect banks ‘create’ the money but it is ‘leveraged’ – in other words they don’t lend out R1 for every R1 they have in investment but much more than this. The degree to which they can leverage themselves (lend more than they hold) is controlled by their ‘capital requirements’ – an amount that has increased over recent years following the credit crisis fall-out. You’ve probably heard of QE or quantitative easing. This a monetary policy governments use when ‘normal’ monetary policy (interest rates) fail. Basically, with QE governments buy bonds from financial institutions to increase their liquidity in the hope they will lend out the money and get the ‘Money-Go-Round’ going again. In other words pushing it out of it’s inertia and give it some momentum so it can go around by itself. Unfortunately this has had limited success, mostly because the banks aren’t getting enough of a ‘margin’ (aka profit) because of historically low interest rates. Banks have also been inefficient and are now having to use technology to become more competitive – and have been haemorrhaging jobs as a result.
Let’s illustrate this “Money-Go-Round” with a short tale:
In a small dorp in Limpopo, a German tourist walks into the local B&B and puts R500 on the desk. “I want to look at your room upstairs and maybe I will stay here, Ja?”
“Sure,” answered the owner, Jacob, handing the tourist the key to the room.
The tourist heads upstairs and Jacob looks at the money on the desk. “What if he doesn’t stay?” he thought to himself – fleetingly – before picking up the money and heading to the liquor store next door and settling his long overdue account so his supply would start to flow again.
The Liquor store owner looked at Jacob and the money in surprise, but smiled his thanks and placed it in his pocket. Once Jacob was out of the door the liquor store owner walked across the street to pay the hairdresser’s account that his wife had clocked up on her last visit. She, in turn, closed up the shop, flicked the ‘back in 5’ sign and went to the petrol station and paid her account there.

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Trusted Professional – Another meaningless title?

in Financial Advisory Leave a comment
white-or-yellow

Is a Financial Planner a professional? – you decide.

The adjective ‘Trusted Professional’ is popping up all over the place. I guess people think it adds some sort of gold seal of approval but very often it is nonsense. It is also not helpful to throw the baby out with the bathwater and besmirch every professional who isn’t a doctor or lawyer as neither trustworthy nor a professional. There is some debate as to whether Financial Advisory and Planning is a profession or not, so instead of tearing into the fray, let’s look at the history and description of professions and professionals.
Contrary to popular opinion, the ‘oldest profession’ (prostitution) is not really a profession at all … or is it? But I digress…
Historically (and now we are going back hundreds of years) there were only 3 recognised ‘learned’ professions, Divinity, Medicine and Law – and they persist today, albeit with some novel interpretations including the use of insecticide instead of holy water.
There appears to be a defined route that an occupation needs to take to get to the ‘profession’. According to Wikipedia (HERE) it goes like this:

  1. An occupation becomes a full-time occupation
  2. The establishment of a training school
  3. The establishment of a university school
  4. The establishment of a local association
  5. the establishment of a national association
  6. the introduction of codes of professional ethics
  7. the establishment of state licensing laws

Surveying was the next to join the list, followed by medicine, actuarial science, law, dentistry, civil engineering, logistics, architecture and accounting. By 1900 other professions had been added, most notably: pharmacy, veterinary medicine, psychology, nursing, teaching, librarianship, optometry and social work. As you can see all of these professions have followed the above pathway to professionalism.
Financial Planning and Advisory has followed that path too, so calling it a profession is correct. Of course, unless an individual goes through this process and gets qualified and certified be or she will remain a “Broker”, a noble occupation but not really a profession, just like a Bookkeeper is not considered a professional but a Charted Accountant is.

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Divorce – The Wealth Killer

in Behavioural finance Leave a comment
<divorce
The things to do to protect your wealth in partnerships

We all know the stats on divorce, and how they have exploded over the last 40 years. Today, 50% of all marriages will end in divorce, but perhaps one of the unlikely consequences is the severe impact of this act on the wealth of the individuals.

So let’s look at this in a bit more detail:

Marital regime: Whether you marry in Community of Property or Ante Nuptial Contract ANC (with or without accrual) will impact on your final divorce settlement. Community of Property (COP) is a dated and dangerous concept for your wealth so please take off the rose coloured glasses, don’t be a cheapskate and get some sort of contract in place. If you’ve left it to late to change, you may need to consider a Trust (most importantly if one of the partners has their own business). Remember it isn’t just community of property, but also of loss – in other words, the bankruptcy of one spouse will destroy the assets of both spouses. If you cohabit and live as man and wife but are not ‘married’ in the formal sense then you are barely protected by any law. At the very least, all major assets must be co-owned (at deed level), consumption (true consumption, not savings or investment contributions) be split 50-50.

Abdication: More often than not, one of the partners in a relationship will defer to the other when it comes to finances and let them do what they think is best. This is not delegation, it is abdication and it is not smart. You should be involved in the annual meeting with your financial advisor, and have an understanding of all your entire wealth portfolio. There is no way around it, if it is all Greek to you then upskill by asking questions and doing your own research. It is not cool to be clueless, your wealth is at stake.

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Fixed Income

in Behavioural finance, Financial Advisory, Investment, Retirement funding Leave a comment
fixed

What to do when you’re on a fixed income. Preparing for the eventuality.

The phrase ‘fixed income’ strikes fear into the heart of anyone anticipating retirement. The last thing any of us want is for that income to run out before we do. Making sure that doesn’t happen takes years, and decent investment advice, but irrespective if it is at age 65, 70 or older the chances are new ‘active’ income is going to stop flowing in and you’re going to have to start using ‘passive’ income (from whatever source). Thriving when your income is fixed (in other words just keeping up with inflation) is often a challenge especially when some aspects of your expenses exceed inflation (like medical aid) and force you to cut back. There is a limit to how you can ‘sweat’ those assets without exposing them to significant risk, so often consumption has to give. This is the ‘harvest’ period of your wealth lifecycle that you have been preparing for all your life.

Fifty years ago retirees were not expected to live much beyond 10 years after retirement at age 65, today you can easily live another 30 years, and this brings a whole slew of additional pressures to your fixed income.
The wealth equation goes like this:- Income minus Consumption equals Wealth. At retirement we are probably not adding to the Wealth side of the equation, so it must be managed properly and sustainably because it is going to feed back into the income – a closing of the wealth ecosystem/lifecycle as it were.

Before we get onto the consumption side of the equation, make sure that the fixed income is going to be structured properly. Diversify! Have a number of pots of wealth on the go, flexible investments, stock portfolios producing dividends, pensions/annuities, rental portfolios etc. If the ‘fire’ goes out under one of those pots temporarily, you aren’t going to starve. None of the pots are fireproof, especially not your own company if, like most entrepreneurs, you’ve poured all your investment into that. Every entrepreneur needs to have either an exit strategy that realises the wealth you’ve poured into the asset, or a solid succession plan that can produce an active/ passive income by way of dividends, director’s and consultant fees.
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Wealth Lessons to be learned from the US elections.

in Asset classes, Behavioural finance, Economy, Financial Coach Leave a comment
confused

Expect the unexpected: The polls in the USA got it seriously wrong – why? It is only a sample of the population and people lie! Few (sane?) people will publicly admit to endorsing the racism, bigotry and misogyny espoused by Trump but when it comes to the secrecy of the ballot box, it became obvious that there were millions of closet Trump supporters. This has ushered in a whole new world of uncertainty, just like the Brexit vote did, and just like Nenegate did here. It has taken us nearly a year to recover from Nenegate, and the UK is still shuddering. When it comes to your wealth – protect your risks, diversify every aspect of your wealth.
Populism is here to stay. The protest vote against the status quo in government is turning the tide everywhere, including here. Brexit is a good example (trust the Americans to one-up the Brits! This result is Brexit to the power 10). This outcome is a result of emotion and not reason. “We, the people” are sick to death of lobbyists, special interest groups, bloated government payrolls, erosion of real purchasing power and having to reskill into new jobs. The only voice that growing ‘disaffected’ group has, is to vote for something different, however nauseating that might be. The major threats? If you work for, or supply to, government- diversify and seriously reduce your risk exposure. Opportunities – Small business, the Health industry, Service industries, On Demand, Customisation.
It’s not cool to be clueless: Hillary’s email fiasco hit her hard and should be one of the biggest lessons anyone, of any age, needs to learn. If you refuse to climb on the technology bandwagon, and keep up with it you’re going to get hurt. As a retiree your banking costs will climb, but more onerous than that – you will open yourself up to being conned and taken advantage of. In your working life you will not be able to be as productive as someone who embraces technology – forced early retirement is calling! Most of the growing jobs and professions require a good understanding of technology. This is even more true of ‘passive’ income opportunities. Keep your work and home social media presence separate.

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