Author Archive: anthonyb@timslatter.com

Different money personalities

Dealing with money matters can feel like negotiating a minefield for many couples, which is highlighted in this article by Maya on Money.

Money has been cited to be the biggest reason for divorce, and differing attitudes towards money in any relationship can cause friction. So let’s take a look at some basic ‘money personalities’ and you can decide with which you most identify. This may not only help you to manage your relationships, but also how to go about managing your wealth creation.

1. The Spendthrift
A spendthrift tends to be extravagant and spontaneous with regards to money matters. However, sometimes they can be irresponsible and need protection from making financial mistakes and getting into debt that they can’t afford.

2. The Saver
Someone who saves may have quite modest tastes and needs, and long-term they may well reap the rewards of their cautious approach. However, their financial prudence and love for budgeting could be a turn-off for someone who is not that way inclined.

3. The Cinderella
Maya Fisher-French refers to the ‘Cinderella Complex’ in her article when she considers a woman’s unconscious (or conscious) desire to be cared for. Some people are simply looking for a partner who can spoil them, which Fisher-French refers to as a Blesser.

4. The Financially Independent
Other people make it their main focus to become financially independent so that they can manage their money and responsibilities on their own. They pride themselves on working hard to become financially organised and not needing to rely on anyone else. This type of person may fret about being pulled down by someone who is less financially astute.

5. The Power Hungry
Power plays can arise if someone uses money to wield power over their partner. The adage, “he who holds the gold, makes the rules,” may be true in some relationships – especially if there is a big difference in earnings. Money can create a shift in power that can be easily abused if both parties are not careful.

According to the article, sometimes “different money personalities can be compatible” as a balance can be achieved so long as each partner recognises the strengths they are bringing to the relationship. For example, a Saver can help a Spendthrift to avoid some financial miscalculations, while a Spendthrift can teach a Saver to loosen up and enjoy splashing a bit of cash sometimes. Likewise, someone who enjoys spending money on their partner could be compatible with someone who enjoys money being spent on them.

However, at other times, opposing attitudes can create contempt or power struggles. According to the article, difficulties sometimes arise when it is the woman who is the main breadwinner, as some men find this emasculating. This is a challenge that is increasingly being faced by high earning women. When the shoe is on the other foot, however, many women do not mind having a strong, financially successful partner.

The key is knowing what type of money personality you and your partner have, and to find synergy in your relationships. It’s not necessarily a question of having the same attitude and approach to money issues, but rather finding compatibility and compromise.

Should we trust in trusts?

We live in uncertain times, so it is natural for many parents to want their children to have financial security, without money worries on top of everything else. Many parents also wish to build their wealth to such an extent that it will be passed down for generations to come, and a recent article published in Maya on Money examines the use of trusts to create intergenerational wealth and ensure a financial legacy.

No matter how much money you wish to leave for your offspring, here are eight basic points to consider if you’re thinking about setting up a trust.

  1. Due to the high investment tax paid by trusts, they are only efficient if you definitely intend to leave the assets in the trust for future generations. If you plan to sell the assets during your own lifetime, then setting up a trust isn’t necessarily the best move for you.
  2. There is no minimum amount to set up a trust, but it needs to be registered at the Masters’ Office in the region where the majority of assets will be held.
  3. A trust can be set up on death, so long as you make this provision in your will.
  4. It is only possible to donate ZAR100,000 a year to a trust without incurring donations tax.
  5. It is important to be adequately insured, and the proceeds of a life insurance policy can be paid to the Trust.
  6. It is also important to note that a South African Trust cannot hold offshore assets.
  7. A trust cannot own a tax-free savings account so these would have to remain separate to the trust.
  8. A trust must have an independent trustee – such as a trust company, auditor or lawyer – to deal with legal requirements and administration. This comes with additional costs to bear in mind.

A new section of the Taxation Laws Amendment Act, 2016 came into effect in March 2017, with the intention of preventing people from using trusts to avoid or reduce donations tax and estate duty.

In an article published on MoneyWeb, a certified financial planner clearly emphasises that “if a trust was created simply to save taxes, it may not serve that purpose any longer. Depending on the reasons for establishing a trust and the value it offers, it may be worthwhile considering more cost- and tax-effective alternatives to hold your shares or any other asset(s) in a trust.”

It is important to understand the consequences of these tax changes if you have an existing trust, and to be aware of the implications of new trust structures if you’re considering whether it is the appropriate choice for you.

5 key financial terms explained

Do you nod along blankly when someone talks about unit trusts, or do your eyes glaze when you hear the word ‘annuity’? Do you wish investment terms weren’t so complicated or full of abbreviations?

It’s easy to get confounded by the use of financial jargon if you haven’t been trained in the financial services industry or been exposed to the world of investments before. But don’t let that put you off.

It’s just a question of learning the language, as you would try to speak German if you went to Berlin. No one is born with an innate knowledge of how to order in a Bavarian restaurant if you’re not from Germany; first you have to learn the vocabulary and then you need to experience it firsthand to cement your understanding.

So, to simplify matters and avoid any confusion, here is a quick explanation of five key terms that you’ll hear crop up again and again if you take an interest in your wealth management.

1. Dividend
A dividend is a portion of a company’s earnings that are distributed to shareholders. The dividends can take various forms but is most commonly a distribution in cash or as a portion of a share of the company. Furthermore, companies have their own policies as to when and how much of earnings are distributed in the form of dividends.

2. Bonds
There are many types of bonds, but in simple terms, a bond is a way of borrowing a sum of money – to be repaid by a fixed date in the future, with interest in the meantime. The buyers of bonds are essentially lenders, which means that if you buy a government savings bond, you become a lender to the federal government.

The interest rate received is often referred to as the bond’s yield, and is the compensation that the investor receives for ‘lending’ their hard-earned money. According to an article published by Investopedia, “bonds are often referred to as fixed-income securities because the borrower can anticipate the exact amount of cash they will have received if a bond is held until maturity.“

3. Annuity
An annuity is a type of investment account that uses retirement savings to generate a regular income stream after you retire.

There are two types of annuities – fixed and variable.

The key feature of a fixed annuity is that you enter into a contract with an insurer who subsequently guarantees a set income for life. This income is dependent on a number of factors such as your age, gender or whether the payment will be level or increasing. The annuity payment is guaranteed by the insurance company, so it is a good option for those who are risk averse (don’t like risk).

With a variable annuity, the risk of the investment is transferred to the annuitant in that his capital and subsequent annuity is dependent on market performance.

4. Unit Trusts (called Mutual Funds in the US and UK)
According to an article published by The Balance, a “mutual fund (unit trust) is a pooled portfolio. Investors buy shares or units in a trust and the money is invested by a professional portfolio manager” who invests the capital in an attempt to produce an income and capital gains (profit) for the investors. The pool of funds is collected from many investors who wish to invest in stocks, bonds and similar assets.

One of the main advantages of unit trusts is that it offers investment vehicles where small investors have access to diversified, professionally managed portfolios in which each shareholder participates (wins or loses) proportionally in the gain or loss of the fund.

5. Asset Allocation
In order to invest your money, you essentially need to give it to someone who will in theory use it to make a profit by working with your assets (invested money), and you then enjoy the profits from that. If they make a loss, you make a loss too. That’s the risk you take.

Asset allocation is therefore the process of deciding how much money, based on your appetite for risk and objectives, is invested in the different available asset classes – such as equities (stocks), real estate (land and property) or commodities (eg. gold and silver).

These are just five key terms in a lengthy glossary, but this summary serves to emphasise that if you’re ever unsure of anything, don’t continue with just a vague understanding. There’s nothing to be embarrassed about, so please do not hesitate to ask for clarification to ensure that you completely understand any terminology used and how it applies to your financial situation.

Don’t cancel your life cover

Many South Africans are currently feeling the financial pinch and, as belts tighten, it’s natural for households to review where they can cut back on expenses. It may be tempting during such times to send life cover payments to the bottom of the priority list, but this could have dire financial consequences for your loved ones.

It’s a question of weighing up what is worse – the current burden of paying your monthly premiums or the potential effect on your family if they were to lose your income entirely in the event of a disaster.

Actuarial modelling indicates that about 380 families in South Africa lose a breadwinner every day. However, Hennie de Villiers, the deputy chairman of the life and risk board committee at the Association for Savings & Investment South Africa, notes that “over two million risk policies, covering events such as death, disability and dread disease, were lapsed within their first year in 2016.”

This means that South Africans are critically underinsured, as is highlighted in this article published on Personal Finance.

The problem with cancelling your life cover isn’t just that it is a massive risk, but that it also may be impossible to replace it as you grow older.

Many people may assume that you can simply cancel your life assurance then reinstate it when it’s easier to afford. However, premiums are likely to be substantially higher when you’re older (cover is said to cost double at the age of 45 what it costs at age 25). Health conditions may also be excluded from the cover and, in the worst case, you may even be uninsurable if you are diagnosed with certain illnesses.

Even missing the payment of a few premiums can have a negative effect. Not only may you need to undergo the underwriting procedure again, but any deterioration in your health would be taken into account when considering policy reinstatement and premiums.

So what are the alternatives?

4 possible alternatives to cancelling life cover (this is not financial advice)

  1. Reduce your monthly expenses
    Cut back on items that aren’t essential, such as your television subscription. Critically evaluate your budget and examine what is imperative versus what you just would like.
  2. Re-negotiate your debts
    Try approaching creditors or your bank to negotiate terms of any repayments. They may be willing to accept smaller sums over a longer period.
  3. Press pause on your savings
    Consider taking a ‘payment holiday’ on your contributions to an investment portfolio.
  4. Negotiate your premium payment pattern
    Request to change to an escalating-premium pattern for your life cover, which means that your initial premiums will be lower and increase over time.

Please note that the above four points are suggested options, if you would like to review your plan inside of your changing situation – please arrange a meeting for us to objectively make the best decisions according to your individual needs. It is important to stay educated about life cover and informed about affordable solutions, so please discuss this if it is a concern.

Inflation Illusion

Old Mutual Balanced Fund manager, Graham Tucker, explains in an article published on Fin24 how many investors suffer from something he calls ‘inflation illusion’. This essentially means that many people aren’t completely aware about the effects of inflation or how much it will impact their savings over time.

For example, the average inflation rate of vehicles since 1990 has been 5.8%. This means that a medium-sized sedan that cost ZAR260,000 in 2016 will likely cost ZAR1.05m in 2041. At the same time, the cost of sending your child to a top private school is increasing at an inflation rate of 9.2%, which means that a year’s tuition and board can be expected to cost about R1.81m by 2041.

High increases in the price of private health care and food will also occur as a result of high inflation rates. To give you an idea, a report by Old Mutual Investment Group’s MacroSolutions boutique highlights how a Spur burger that only cost 30 cents in the 1970s was priced at ZAR72.90 in 2016.

It is, therefore, important to take into account the impact of inflation on your investment returns. Tucker emphasises that “if your retirement income does not at least grow in line with inflation, you will either experience a decline in your standard of living or you will run out of money.”

If you budget for a fixed monthly retirement income of ZAR10,000 a month, this will only actually be worth about ZAR1,700 a month in 30 years’ time – taking into consideration an annual inflation rate of roughly 6%.

It is, therefore, important to be aware of the long-term compound effects of inflation. If you’re feeling uncertain about anything, arrange a meeting soon to ensure that you have planned carefully and invested to achieve inflation-beating returns that will secure your future goals.

A woman’s will

Happy Women’s Day for tomorrow!

In celebration of Women’s Month I wanted to share an article that focuses specifically on a financial planning aspect that is often overlooked for women. Recently, the Fiduciary Institute of Southern Africa (Fisa) discussed some important financial planning considerations for women that highlighted the need for an up-to-date will.

It is estimated that at least half of the estates reported at the Master’s Office each year are of people who died intestate (without a will). This is largely due to the fact that South Africans often don’t see the need to draft a will, especially when they are relatively young or don’t have a significant asset base.

It is important to note that men and women living together are not automatically treated as ‘married’ under the law in case of intestacy. Couples who live together without getting married often assume that the law treats them as married, this is not necessarily the case.

The bottom line? You need your own will and have to understand the implications of your partner’s estate planning.

Fisa often finds that where a woman does not have a lot of assets, or leads a busy life, proper estate planning is neglected. Where estate planning is done, it is important to not only consider current circumstances, but to plan for the future.

The Intestate Succession Act applies to every South African who dies without a will and stipulates that the estate should be divided according to a specific formula. If the person was involved in a relationship other than marriage, the type of relationship will determine whether the partner will be allowed to inherit.

In terms of the Act partners need to be regarded as a “spouse” in order to inherit in the case of intestacy, but the term is not defined in the Act. As a result, other legislation and court cases have to be consulted for an explanation.

Historically, a marriage entered into in terms of the Marriage Act was the only recognised spousal relationship, but with the introduction of the Constitution, the legal system acknowledged that people in other types of relationships were entitled to protection.

Williams says as a start, legislation was passed in the form of the Customary Law of Succession Act and parties to traditional marriages under black customary law are now regarded as spouses when dealing with an intestate estate.

Court cases have also extended the definition of a spouse in this context to include monogamous Muslim and Hindu marriages and polygamous Muslim marriages.

In terms of a Constitutional court ruling, same-sex partners are also regarded as spouses for purposes of intestate succession.

The law allows parties to have a joint will, but Fisa usually advises against it. There have been isolated instances where the surviving spouse dies and the Master’s Office battles to trace the original will that also applies to the surviving spouse.

It is crucial for partners in a relationship to ensure that they draft wills to protect one another.

If you would like some advice on how to go about setting up your will, I’d be happy to advise you on this.

* This content was sponsored by the Fiduciary Institute of Southern Africa.

Source: moneyweb

The power of positivity and a good plan

Have you ever told yourself, “When I have more money, I’ll be happier”? How about, “I’ll never be able to pay off this debt”? These sort of toxic money thoughts are holding you back from financial success – and happiness! A good financial plan needs to be attainable and measurable, those expressions are neither.

The first step to a financial plan is both the hardest and the easiest – it’s the starting point. The point where you measure how deep you are so that you can calculate what you need to do to get where you want to be. Measuring your budget is usually a huge relief for most people, your finances are no longer a mystical figure floating in the ether, you have defined an attainable and measurable goal.

You need to rescript your brain into thinking positive and actionable thoughts. Here are some tips to help you along your way:

Get good advice
Getting good advice and being reminded that what we want to achieve IS attainable does wonders for an attitude of success. However, you will also need to keep your end-goal in mind.

A good way to do this is to pick out a positive phrase that acts as a sort of rule-of-thumb. For example, “Is this [potential purchase] better than a family vacation / new car / bigger apartment?”

Don’t Rush
One study showed that the farther away a goal seems, and the less sure we are about when it will happen, the more likely we are to give up. Consistency is key.

Use numbers and dates to measure WHEN you want to achieve your goals by. And work out some smaller, short-term goals along the way that will reap quicker results. Paying off debts or saving a certain amount, for example, can leave you with a great feeling of pride and accomplishment. This increases the likelihood of you keeping up your good financial habits.

Dig in your heels
Not next week. Not when you get a raise. Not next year. Get started today – and don’t let up!

Need some good advice? That’s why I’m here. Let’s get in touch!

Cancer claims reveal risk trends

Recent statistics made available by Liberty Life reveal that cancer is the leading cause of claims paid by the assurer in 2015. One in four claims paid by Liberty were for cancer, and the proportion of claims for cancer is increasing, even at younger ages.

Motor vehicle accidents are typically cited as the reason that young people need disability or income protection cover, but cancer was a greater cause accounting for 12.3% of claims (motor vehicles accounted for 11.9%). Even more worrying is the fact that in young parents, cancer was the cause for claim for 22.5%.

These statistics are for claims on policies that provide cover for death, disability or dread disease (illnesses such as cancer, strokes and heart attacks). The fact that many people now survive cancer means that most of the claims were paid as a result of severe illness and not as a result of the life assured dying.

Liberty’s claims-payments for severe illness cover increased by 50% from 2014 to 2015. This was not only due to the fact that more people are taking out this cover, but also because of the growth of awareness and early detection of cancer.

Liberty was not alone in their findings. Sanlam’s claims-statistics for 2015 show that 60% of its dread-disease claims were for cancer. At Momentum, 34% of its dread-disease claims were for cancer. At Discovery they were 38%. And at Old Mutual, 57%

An interesting statistic put out by Old Mutual with its claims figures is that 60% of all claims were for people under 45.

You may ask yourself why, if you already have medical scheme cover and loss-of-income cover, do you also need severe illness cover for cancer?

A medical scheme offers crucial cover that you shouldn’t be without. The problem is that cancer treatments are expensive and schemes have rules about what they do and do not pay for. Sometimes a doctor will recommend the best treatment available but a scheme only pays for a more modest treatment or there is a diagnosis of a rare form of cancer that requires specialised treatment.

These statistics show that cancer is still a widespread affliction, even at younger ages. While cancer claims are obviously higher among older age groups, even 20- and 30- somethings should be prudent when it comes to taking out risk policies.

If you have any questions or want to review your policies then give me a call and let’s meet up.

Source: iol

What happens after a market downgrade?

There has been much murmuring in the financial field as of late regarding queries with respect to investing locally, or shifting all portfolios offshore, specifically in the light of the widespread media coverage and speculation regarding South Africa’s credit rating and the likelihood of a downgrade to “junk status” – which could happen as soon as the third quarter.

While there is some speculation about when it might happen the general consensus seems to be that it is no longer a question of “if”, but “when”. It is thought that South Africa’s sovereign debt rating will be cut below investment grade in either June or December.

Why is this happening and what does it mean?

As I have been following, South Africa is facing a downgrade for two reasons:

  1. Slow growth – along with the rest of the world, SA faces lower levels of growth than forecast (and these forecasts continue to fall). There are a multitude of reasons for the slowdown including depressed commodity prices and reduced global demand for commodities, but also a lack of willingness to invest with all the current uncertainty around government policy.
  2. Fiscal outlook – effectively this relates to the ability of the country to control spending given the tax base so that excess spending does not need to be covered by issuing more debt. With low growth and high unemployment, tax revenue is under pressure and spending on benefits is rising. The government’s target to limit gross debt to 50% of GDP is going to be very difficult to achieve.

Many experts have suggested that the immediate impact of a credit downgrade would be a flight of capital, a spike in bond yields, rapid currency depreciation and a fall in equity markets. However, looking at a historical analysis of emerging markets who suffered a similar downgrade returns a somewhat unexpected trend (based on a group of emerging markets that had all been downgraded from investment to sub-investment grade and their performance in the 12 months before and after the move).

Markets are very good at anticipating what is going to happen, in the period preceding the downgrade they tend to perform poorly, but after the fact they gradually perform better – generally speaking.

The trend is clearly that yields expand leading up to a downgrade, but generally recover afterwards. The average currency on a real effective exchange rate basis tells a similar story, increasing relative to where it was at the time of the downgrade.

Countries that are downgraded to sub-investment grade go into recession, almost without exception. It takes years to earn back their credit rating. This is the real challenge that South Africa faces, the policy response will be critical.

Investors should not be overly influenced by the short-term commotion, but rather set their sights further on their investment horizons. There is a tough road ahead, but it is a difficult year for local and international economies alike.

I realize that this blog contains a large amount of technical terms and concepts – if you’re concerned about your investments or would like to discuss off-shore options – then let’s get in touch!

Source: moneyweb

Investing in your fifties

Many young people neglect to plan for their retirement during their early working lives, arguing that they will take care of it later in life when they are earning a bigger salary. However, on the flip side of the coin, as people get older they assume that they must rebalance their portfolios into more conservative investments.

Luckily, most people are choosing to retire later in life.

If you have left investing in your retirement until later in life, there may be a risk in investing too conservatively (not enough exposure to growth assets like shares and listed property) as your investments need to continue to outperform inflation in retirement. Alternatively, you may be tempted to invest in very risky investment schemes. It is really important to construct portfolios which have clearly set out objectives that will be able to meet the targeted return before and after retirement.

How much income do you need per month? Will you need to buy a new car or fund a holiday? You need to know exactly what your retirement goals and dreams are. This will give you an accurate indication of how your assets have to be invested to cover these expenses. You need to be comfortable and knowledgeable about your retirement. You should know exactly how much money you can safely draw to enjoy your retirement without eroding your capital base.

One of the most important things to try and achieve by the time you retire is to be free of debt. You don’t want to be in the position where you have to settle a mortgage or other debt with retirement capital.

Just because you are retired it doesn’t mean you should stop working. Instead, you should re-focus your sights on a pursuit of happiness. People often still make money during retirement. With a lifetime of experience behind you it wouldn’t make sense to not stay busy. View this as the time you have been waiting for to do something you have always wanted to do, but felt like you never had the time to do. Who know, it may turn out to be a successful business venture.

If you need some help working out a retirement plan or would like to revise your current plan give me a call and we can work something out.