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Pay-off Debt, Invest or both?

in Debt, Investment Leave a comment
do it anyway

Do it anyway…

One of the most common questions I am asked is “Should I pay off my debt or Invest?” Logically, the answer is simple, pay off expensive debt before you invest, but this doesn’t take human behaviour into account and in the long term can result in someone ending up with no investments.

 

Why? Debt has a habit of being continually paid down and built up again, despite the best of intentions. So basically, unless you have never built up debt again having paid it down, invest anyway. This blog will give you one way to do that – sensibly.
In this uncertain world, you have to look after number one – you and your family. Keeping yourself ‘liquid’ is a very smart move. We are quick to forget a short nine years ago when the credit crisis really hit and banks stopped lending money – to anyone. Even “access bond” accounts were frozen. Going even further back into the 90s, interest rates went over 20%, doubling and tripling bond repayments. How would you fare if that happened again?
You’ve probably heard the phrase ‘pay yourself first’ numerous times – but what does that really mean? Does it mean you invest and your creditors must wait? No. It’s important to preserve your credit rating (some employers look at this too.) It means that you put yourself in the position that you get rid of the albatrosses around your neck, and gradually take back their share of your pie.

Cleaning up your act so that every month you put something into investment is a phased approach. It’s like all good intentions, if you want the habit to stick, you start to do something PHYSICALLY – but you don’t go all out or you – and your goal – will burn out. This is why I like the step-by-step approach. Putting your money on ‘diet’ is like going on diet to lose weight, you can’t go ‘cold turkey’ – money has to be spent on necessities and food has to be eaten so you don’t die – but you’re not going to die if you stop smoking, drinking or spending on luxuries – even if it feels like you might.
Step 1: You need to know what your present status in broad terms – what your ‘liquidity’ looks like. In other words how much money you have left after all the fixed and regular payments have come off, including your credit card payment (irrespective if it was in full or partial) from the previous months. If there is nothing or you’re going deeper into debt every month, you have little option but to dig deep into those expenses and find out what or who is poking holes in your wealth bucket. The lowest hanging fruit is day-to-day expenses. You have to break the cycle and find the best way to do it – for you. If you’re this far down the hole, you need to stop digging. Take out the cash needed for the bare minimum of day-to-day expenses and don’t touch your bank account or cards for a month or two. This ‘cash diet’ can break unhealthy habits pretty quickly.

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Life Cover Hacks

in Disability, Dread Disease, Financial Advisory, Life cover Leave a comment
arum

Secrets from an insider

‘Life Cover’ is probably one of the major grudge purchases a working age adult will make, and once you start adding other benefits it can become really pricey. Here are some hints and tips so you can make sure you’re getting what you expect, without paying the earth now – or in the future.

‘Life Cover’ insurance is made up of 3 major components – Life, Disability and Dread Disease but is all classified as ‘life’ cover because the insurance company has to have a ‘life license’ to offer them.. There are a few ancillary benefits like funeral cover, retrenchment cover etc., but these are all still classified as ‘Life Cover’. This might sound like semantics but some gap covers have fallen foul of this definition and are having to remove ‘life’ benefits like cancer lump sums.

Actual ‘life cover’ – cover that pays out if you die, need not be for life. If you take it for a defined period (called ‘termed cover’) and not for life you will be able to save money. First prize is if you can increase this without underwriting at a later stage if you still need it.

At the very core Life cover should cover your debts, liabilities plus the cost of getting your children financially independent. If you have agreed to allow your life partner to be a financial dependant on you for life, then his/her costs for the rest of their life needs to be factored in too (and you may need cover ‘for life’.) If you don’t keep on increasing your debt (smart), life cover should decrease and not increase every year.

Life cover is pretty simple, either you’re dead or you aren’t. Dread disease is slightly more difficult but there are now global standards of severity. Disability is a nightmare – be very careful which provider you choose. (Use an Independent Financial advisor who can get you a variety of quotes from different providers).

It is possible, in fact often preferable, to use different providers for the different ‘life’ benefits so that you get the ‘best of breed’.

Life cover can be bought purely on cost, as long as there are no nasty surprises in small print (read the general and specific exclusions paragraph carefully before signing.) When getting comparative quotes ask for projected premium increases on level or age-rated premiums and compare them side by side or graph them. The differences will shock you. By all means get a quote from a call centre life company – their premiums are usually a good 20% above the lowest premium from one of the big providers (and almost always age rated). Someone has to pay for all those TV ads – don’t make it you. Always get a comparative quote if you’ve decided to DIY and read all the small print and graphically plot the premium increases.

If you’re lured by the ‘cash back’ promises of some Life companies be aware that this is not free. Get a quote before and after the ‘cash back’ and compare it to investing the money yourself. Remember, if you cancel the cover or have to claim you lose that benefit, if you’ve invested it you won’t.

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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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