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The Seasons of Wealth – Winter

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Winter
A wintery economy brings chores and opportunities

We are surrounded by cycles, some fast, others so slow we never see a change in our lifetime, but they are there. Climate change, for example, has been happening for millenia – it is nothing new (pollution is though of course). Somehow, every time winter comes round, especially a nasty cold front, we are caught unawares – gas bottles empty, no beanies and only salad in the fridge. The markets also go through cycles, while less predictable in timing than the four seasons, they keep on happening. Right now, for us in the Emerging markets, the winds are decidedly cool and the returns flattening, soon to turn negative for the year-on-year if it keeps up this pace.

Just like the winter season, we can pretend it isn’t happening, climb under the duvet and wait for the thaw, or we can take advantage of the opportunities it will bring.

Review your investment garden for better times in the future
When your garden is looking bleak and all the leaves are gone, it is often a good time to check that your garden plan is on track. Are all your risks covered, are your investments aligned with their objectives and your long-term plan? Many of the shares in our market have been overpriced, and as the market cools you could just pick up some bargains that have the potential to give you really good returns going forward. If you buy equities at the top of the market, it is like buying a ‘ready to eat’ avo, it can turn to expensive brown compost in the wink of an eye.

Keep your perennials alive
Some investments have a short-term objective – emergency fund or a deposit, but most of them are intended to be perennial, be there for many years. Gone are the days of ‘buy and hold’ – even the most robust of perennials have to be kept an eye on – once it is fully mature it is often too late to try and shape it. While your house is considered a ‘lifestyle asset’ and rarely liberates much equity in downsizing – it does do a number of positive things – it pegs your ‘rent’ (no 10% escalation clause – just interest rate changes, up and down) and it replaces paying rent post-retirement, so in effect it is part of your ‘pension’. Let’s put it this way, if you were to retire tomorrow you would need about R5m to generate rent of R20k pm, increasing at inflation for 20 years. Times are tough – but pay the bond first. (Please check that all bond correspondence is going to the right address and not the address on the bond – if you signed the bond before you moved into the house correspondence might be going to the old address – all legal in terms of the small print. Don’t assume because your bank details and statements are going to the right address that this ‘Domicilium citandi et executandi’. If you want to preserve the wealth in your property, buy once and once only. Every time you move you write off hundreds of thousands of Rand of that value.

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Caught in the middle

in Behavioural finance, Financial Advisory, Financial Coach Leave a comment
inthe middle
Surviving financially in the sandwich generation

Change is inevitable, but not always pleasant. Pre-retirees are finding that they are not only supporting adult children (sometimes even grandchildren) but their parents as well, neither of which was planned for. There are some fundamental changes to the norms and values in society that are causing these changes. Youngsters are waiting longer to marry, but cannot necessarily afford to move into their own home – or would rather live ‘rent-free’ and spend their money elsewhere. Marriages are failing at an unprecedented rate, and these split families can often not go it alone on one income. The incidence of ‘single parents’ is at the highest level ever. There is also the demographic issue that retirees are living longer, often much longer than they ever have and their retirement funds often run out, so they have to fall back on their children for support.

Whatever the reasons, at a time those would-be empty nesters should be ‘accumulating’ retirement funds, and have the mortgage bond paid off, they are having to incur expenses both to look after children and parents, both of which can have a devastating effect on their own pensions. There is no doubt that this trend will continue, and as longevity really kicks in, could get even worse.

This pressure of being financially sandwiched between children and parents needs to be planned for – both financially and emotionally. There are also some ‘soft skill’ changes that you can start implementing that don’t usually fall under the ambit of financial advice, but quite frankly they should.
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Savings and Social Media

in Behavioural finance, Debt, Investment Leave a comment
silent saving
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.

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Prioritise without FOMO

in Asset classes, Behavioural finance Leave a comment
priority
Eenie, meenie….

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.

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Financial Security – Do this one thing

in Behavioural finance, Financial Plan Leave a comment
Macaroon

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.
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So you want to be an entrepreneur?

in Behavioural finance, Business Assurance, Financial Advisory, Financial Plan Leave a comment

frame style=”clip” align=”center” full_width=”false”]risk entrepreneur

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

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