The 2018 Budget will impact your disposable income – what can you do?
The Budget 2018 might have looked tame on the surface– a one percentage point increase in VAT, wealth tax for the fat cats, no increase in personal tax and a bit of a fuel levy increase. This is an illusion, the people most affected by this budget are the ordinary middle class – the working class. There are about 1,9m taxpayers who earn more than R350k pa, contributing 80% of the tax. (https://africacheck.org/reports/1-7-million-people-pay-80-sas-income-tax/). If we’re lucky this will just be temporary, and when the economy picks up (and the stolen funds are recouped) the VAT increase will come down again and the real tax rates decreased – but we all know that never happens, so what can you do to survive – or even thrive?
- Take a bit of time to understand your tax, and what allowances and deductions you can be taking advantage of to get a rebate or bring down your average tax rate. You can email me for the 2018 SARS tax booklet (also available on their website) and look at retirement investment allowances, interest and CGT allowances, car allowance, medical aid tax credits. It’s one thing to get help to file your taxes, it is quite another to abdicate the responsibility to someone else. I encourage everyone to at least try and do their own eFiling.
- You cannot build wealth if you consume everything that you produce (and then borrow to consume even more). This gives you two options, produce more income, or consume less – you choose. Cutting back on expenditure will have an immediate positive effect, increasing your income is not so quick or easy – but still possible.
- Investments and savings without defined objectives are almost meaningless. These objectives will dictate timelines and the asset allocation that should be used. Wealth is built slowly over decades, and if you don’t have a strategy from the start then that is time you’re never going to get back. Having an advisor to help is the best option, but if you’re just starting out you may not be able to get a qualified advisor to help you (because you just can’t remunerate them for their time, whether directly by paying for a plan, or indirectly via fees or commissions). Regulations in the financial advisory profession are becoming increasingly onerous, so this is going to become more of a problem, not less. The internet has made it much easier to upskill yourself (following my blogs for instance).
- Because the tax brackets have not increased in line with inflation, if you get a salary increase you are going to lose more to tax, and your take-home pay will be less in real terms. (real is the actual increase minus inflation). If you’re offered an increase or promotion with an increase, use the tax tables and your payslip to do the math. Perhaps you could negotiate more leave instead (there are 260 working days in the year, about 10 of which are public holidays, perhaps another 15 are annual leave.) This is a real problem on income above R555,601pa (R46,300 a month – guess what – if you’re in this tax bracket you’re considered a wealthy by SARS.) This tax bracket increased a whopping 1%, so any salary increase above this is going to be taxed at 39%. Even if you’re in the R423k range (R35k pm) the shift was only 3%. Inflation is currently at 4.5% – roughly equivalent to one day’s extra leave. These are the current tax brackets: Read more
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.
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.
The personal financial implications of the ‘Gig’ and ‘On demand’ economy
The “gig” and on “demand economy” – typified by Uber and AirBnB is not a new fad that is going to fade into history, it is the birth of a new economic era, part of the wider technological revolution that has been slowly getting momentum since the eighties. You can ignore it, and be swallowed up by it, or embrace it and ride the wave and use it to increase your wealth – the choice is yours. This new era is going to impact every facet of your wealth ecosystem, from income through to retirement. The good news that you can ride the wave, take the good and ignore the bad, and you don’t have to be swallowed up by it.
This new era coincides with the rise in personal consumption and services as a proportion of our economy. In the USA consumption makes up 60% or more of the GDP, even in the New SA it is as high as 50% – especially when resources are as lacklustre as they are now. In order to consume, citizens need to be remunerated. For the last 40 years technology has helped us increase our productivity, without taking out too many jobs in the gross sense, but that is coming to an end. This isn’t the first time in history that this has happened – The Industrial Revolution changed occupations forever, but new occupations grew out of the change to fill in the gap. In the States, unemployment is almost at the ‘goldilocks’ full employment level. Anyone who doesn’t have a job doesn’t want one or is ‘unemployable’. There was an interesting and ground-breaking development in Switzerland that could well become the new normal in decades to come – the idea that every citizen of working age be paid a ‘guaranteed income’ by the government, whether or not they worked – so if you have the ambition to improve yourself not just ‘survive’, then you go out to work. Basically it will obliterate poverty but will not necessarily decrease inequality. That inequality will be required to produce the ‘guaranteed income’ of course.
Petrol Price – why you need to understand it
Unless you’re in the financial services industry understanding basic economics is either as boring as hell or irrelevant. What control do you have over it anyway? Most of the time this exactly so, information overload is as dangerous as being clueless (it can lead to overconfidence and poor decisions). Occasionally though there are macroeconomic changes that you need to understand the basics of so that you can make better investment and long term decisions. While we might be a commodity and resource producing nation here in the good old RSA, one resource we don’t have in any meaningful quantity is oil and gas. It all has to be imported.
Problem 1 – for us in RSA – oil/petrol etc has to be imported in dollars. That has 2 implications. Firstly on our balance of payments – the equivalent of government’s credit card. Here’s a shocker – we are in debt, rather badly. To add insult to injury that isn’t good debt but has been spent on the equivalent of the groceries. Secondly our plummeting rand depreciation makes every barrel of oil we import more expensive.
Problem 2: Oil/petrol/diesel/gas is used in every industry, every home, every vehicle in the country. The price of oil impacts the ‘cost of doing business’ right across the board. Taxi rides or commutes for workers. Cost of delivering food. Cost of processing food. Cost of running stores, businesses, government departments. Keeping the lights on, pumping water. This impacts on inflation.
Problem 3: Inflation hurts our investments and puts pressure on the Reserve Bank to increase our interest rates. Higher interest rates hits the disposable income of middle class South Africans – the engine of the 60% of our GDP that comes from consumer expenditure. It also results in a rise in credit defaults, hurting business. In the past inflation was a result of excessive demand (by us, the consumer) – spend, spend, spend. This usually happened at the top of an economic recovery. Raising interest rates ‘cooled’ the economy.
Problem 4: Recovery? What recovery? What happens when you increase interest rates when you aren’t at the top of a recovery, but just shy of a recession? It ‘cools’ the already chilly economy to freezing point. That is the not-so-pretty picture we are looking at right now. Just before Nenegate the SARB (Reserve Bank) tried a little experiment – they thought they could ‘frontrun’ the American FED by increasing our rates before they did and so prevent Rand depreciation. Did it work? Resoundingly – for 48 hours.
There is absolutely no doubt about it, if the oil price wasn’t at 11 year lows in dollar terms we would be in a whole pile of pain and well into a recession. Will it last? The only way to answer that is to look at the dynamics of the international oil price and producers.
Get some perspective
When markets wobble badly, it is natural for fear to kick in. When it’s combined with a Rand in free-fall it isn’t easy to be an optimist, but before you bail out of all your investments and put your cash under the mattress, take a step back. Markets breathe in and out, sometimes more forcefully than others. The market has been correcting since mid April, in fact it is only a couple of percentage points off an official ‘correction” (20%). Is it the start of a massive bull-market? Probably not. The 2008 ‘great recession’ was caused by a very fundamental problem in credit markets in a market that was already contracting. That is not so now. Most non-commodity economies are pretty solid, and this correction is probably in response to the second biggest economy in the world (China) slowing down. There is very little doubt that the Chinese stock market was in a bubble with triple digit growth. Bubbles burst and some people get wet. Here are some things to take into consideration before making a rash decision with your investments:
No pain, no gain. The only asset class that will give you inflation beating returns in the long term is equity, and if your long term investment isn’t exposed, at least to some extent, to the stock exchange – directly or indirectly – you are just not going to get that growth. Investments that are high in equity are called ‘aggressive’ and when markets turn down sharply, the only aggressive investors you’re going to find are the ones on the phone to their stockbrokers who didn’t anticipate the sell-off . It is exactly this ‘risk’ that comes from volatility that demands the higher return from stocks. The most common long term investment of course is retirement funding, and while it is restricted to a 75% equity holding, that is more than enough for the investment to grow and meet retirement expectations. As soon as you start making the long term investment more conservative then you have to put more away or dial back on your retirement income expectations. Unless you’re about to retire and can’t afford a hole in your capital – don’t try and catch a falling knife. Look at the long term trend, not short term correction.
The Time in the market: This is the key to all your asset allocation in investment. How long is the investment going to be in place until you need it? If it is a long term investment, like retirement then 75% equity makes sense. If it’s for an emergency fund however then cash is far more sensible. Long term is more than 8 years, short term is less than 2 – what about somewhere in the middle? Your asset allocation is going to depend on the objective of the investment for the medium term. Can you afford to lose capital? If the answer is no, then make the investment more conservative.