The festive season is a time to switch off from work, recharge the batteries and spend quality time with friends and loved ones. It is also a time when many people throw caution to the wind, and sometimes, their budgets as well.
You can avoid a financial hangover in the new year by considering the following tips: Create a spending plan. Draw up a financial plan that accounts for your wants and needs between the end of November to January. As many people get paid early in December, the goal should be to stretch the November salary as far as possible into December, so as not to dip into their year-end paycheck too soon. Prioritise debt and savings. If you are fortunate enough to receive a bonus, maximise the windfall by allocating a portion to your savings and investment accounts. Provisions should also be made for paying off outstanding debt. Hide the credit card. If you are ill-disciplined, remove your credit cards from your wallets to avoid unnecessary and costly spending. Beware of festive season scams. Phishing attacks are prevalent at this time of the year. Be sure to examine emails and SMS messages very carefully, and be cautious of clicking on links. Always hover over links before clicking on them and take note of the URLS they direct you to.
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Research indicates that women tend to dedicate more time to researching their investment options and are twice as likely as men to rely on financial advisers for guidance in their financial planning decisions. Numerous studies also suggest that women approach investing with a longer-term perspective and are more inclined to hold investments for extended periods rather than attempting to time the market. These characteristics can be leveraged to achieve financial independence and close the investment gap.
As we commemorate Women's Month, here are four tips to empower women to take control of their financial well-being: 1. Establish a budget and define financial goals. Avoid vague objectives and strive for specificity. For example, rather than setting a general goal like "save money for the future," define specific objectives such as "save R10,000 per month for retirement by contributing R5,000 to a retirement fund and R5,000 to a long-term investment portfolio." This level of specificity provides clarity and direction, making it easier for you to track your progress and stay committed to your financial goals. 2. Develop a comprehensive plan. This should encompass both a savings strategy (including an emergency fund) and an investment plan. 3. Automate the process. Set up debit orders for your investments and consider scheduling annual escalations in advance. This will help you invest more every year on autopilot. 4. Allow decisions time and space. Recognise your biases and external influences, and be thoughtful in your decision-making. Here are three common examples of biases: 1. Confirmation Bias: This is the tendency to search for, interpret, favour, and recall information in a way that confirms one's preexisting beliefs or hypotheses. For example, you might be more likely to remember and focus on information that supports your investment decisions while ignoring or downplaying contradictory information. 2. Overconfidence Bias: This bias involves overestimating one's own abilities, knowledge, or judgments. It can lead to taking excessive risks in investments or being overly confident in the success of certain strategies without considering potential downsides. 3. Loss Aversion Bias: Loss aversion refers to the tendency to strongly prefer avoiding losses over acquiring gains of the same or similar value. It can lead to overly conservative investment decisions, such as holding onto losing investments for too long in the hope that they will recover, rather than cutting losses and reallocating funds to more promising opportunities. Local statistics reveal that only 6% of South Africans can comfortably afford retirement. Conflicting priorities often make it difficult for investors to balance immediate needs with long-term savings goals. Despite stretched household budgets, there are strategies to enhance your retirement savings.
In the spirit of Savings Month, here are three levers you can utilise to maximise your finances: Lever #1: Prioritise Retirement Savings: Allocate any additional income received, such as tax returns, bonuses, or supplementary earnings, towards retirement savings. Lever #2: Preserve Retirement Savings: Early withdrawals significantly impact South Africa's low retirement savings rate. Preserve your retirement funds when changing jobs to maintain long-term financial security. Lever #3: Delay Retirement: Consider extending your working years to allow your investments more time to mature. This extra time can significantly enhance your retirement nest egg. In partnership with Morningstar: There is certainly no shortage of things to worry about at the moment. As with all things unknown and uncertain, it is human nature to speculate how things will pan out. Although we have no actual control over the outcome, being mentally prepared for a certain outcome brings some sort of comfort – especially when it comes to our investments. Forecasting outcomes for life is one thing but humans are notoriously bad at correctly forecasting the markets and the subsequent impact events might have on their money. In partnership with Morningstar: Naspers has for long been one of the biggest drivers of investors returns as it was the largest company on the index and one of the best performing. We have seen the Naspers share price go from an initial listing price of R47.50 to gaining momentum and being priced over R3 500 per share at its peak in February 2021. It therefore comes as no surprise that Naspers/Prosus frequently tends to feature in the top 10 holdings of numerous local funds and even a few international funds. Last month we talked about setting long-term goals. This month we focus on the next step: Focus on building assets. This is a topic I am very passionate about, and I have helped many clients do this. The accounting definition of an asset is this: Things that are resources owned by a company and which have future economic value that can be measured and can be expressed in Rands. Examples include cash, investments, accounts receivable, inventory, supplies, land, buildings, equipment, and vehicles. I prefer Robert Kiyosaki's definition of an asset: An asset is something that puts money in your pocket. Examples are buy-to-let property, cash-generating businesses, shares, unit trusts, investments that pay you interest, gold, silver. You should spend your lifetime accumulating assets that put money in your pocket. Understanding assets and investing in good assets are a lifetime journey. Let’s unpack in some detail the type of assets that put money in your pocket. Bank deposits: This is an asset that is familiar to most people. The common types of bank deposits are call deposit, notice deposit, fixed deposit and money market account. Bank deposits quote an interest rate and pay you a monthly interest, as your money stays invested. The interest rate is linked to the Reserve Bank’s Repo rate. When the Repo rate goes up, the interest you receive increases. When the Repo rate goes down, the interest you receive decreases. Click here to watch the episode on bank savings and investment products RSA Retail Savings Bond: This is a type of government bond offered to the general public, the term is 2-, 3-, 5- and 10 years. The interest rate is between 7.25% and 9.5%. Participation bond: Fedgroup is famous for offering this type of investment. A participation bond is a regulated collective investment scheme, it offers you an attractive fixed interest rate in a five-year term investment. Click here to watch the episode on Fedgroup Participation Bond Unit trusts: This is popular among retail investors and institutional investors alike. Unit trusts are also known as collective investment schemes in South Africa. They are registered, approved and regulated by the financial conduct regulatory FSCA. There are over 2,000 unit trusts in South Africa and over 120,000 funds in the world. In North America and other parts of the world, unit trusts are known as mutual funds. Unit trusts are a convenient way to invest, offering investors many choices, ranging from local equities, offshore equities, property, bonds, income, money market, regions, industries such as technology, single country. Exchanged traded funds (ETFs): It has gained huge popularity and attracted a lot of money around the world over the last twenty years. It is also growing fast in South Africa. Exchanged traded funds are like unit trusts, the main differences are they are listed on a stock exchange, so it is freely traded throughout the day, its price fluctuates during the day, and it generally follows some type of benchmark. These funds are rules based, or passively managed, and they have lower fund management fees compared to actively managed unit trust funds. Shares: You can buy shares using a stockbroking account. When you buy shares in a company, you become a shareholder of that company, even if you only own one share. You are entitled to receive dividends declared and paid by the company. If the company does well and it share price rises, you benefit from the capital gain. Pension fund/provident fund: If your company or business has a pension/provident fund, your contributions and your employer’s contributions are invested in Regulation 28 compliant funds, to grow your retirement savings. Preservation fund: When you leave an employer, it is advisable to preserve your pension/provident fund money in a preservation fund, to preserve tax benefits and continue to invest your money, instead of cashing money out. Most product providers now require a minimum sum of R50,000. You can transfer your money from your pension/provident fund to a preservation fund. Tax-free investment: This is an investment vehicle that allows you to invest tax-free. You may invest up to R36,000 in a tax-free investment account in a tax year, all your growth within the account is tax free for life. This is what I recommend to most clients as their first investment building blocks. Click here to watch the episode on tax-free investment Retirement annuity: Retirement annuity allows you to contribute to a fund pre-retirement and enjoys tax deductions, to build up your retirement capital. All your investment growth before retirement age is tax free. Your contributions are invested in Regulation 28 compliant funds. Cick here to watch the episode on retirement annuity Endowment: This is an investment product with an initial five-year term. You take out an endowment with a life insurance company. Your investment growth is taxed within the product, the life insurance company will calculate the tax applicable and deduct the tax from your growth. When you withdraw or surrender your policy, you will receive the money tax free. Endowments have certain tax advantages for high-income individuals. It also offers protection against creditors. Click here to watch the episode on endowment Living annuity: When a member's pension fund, provident fund or retirement annuity fund reaches retirement age, he is obliged to use part of the proceeds (a minimum of two thirds) to invest in an annuity, to receive a monthly income. In a living annuity, an investor essentially has a retirement investment account. He can invest in a portfolio of unit trusts, and he can determine the level of drawdown to provide him with an income. The annual drawdown rate can be between 2.5% and 17.5%. Life annuity: With life annuity, a person enters into a contract with a life insurance company. In return for a lump sum paid to the life insurance company, the life insurance company pays the person (life assured) a monthly income. The life insurance company guarantees that income until the life assured's death. Certain options can be effected at the outset, to prolong the payment period to the beneficiary. Alternative investment: An alternative investment is a financial asset that does not fall into one of the conventional investment categories. Conventional categories include stocks, bonds, and cash. Alternative investments include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Hedge funds: A hedge fund is an investment vehicle that caters to high-net-worth individuals, institutional investors, and other accredited investors. The term “hedge” is used because these funds historically focused on hedging risk by simultaneously buying and shorting assets in a long-short equity strategy. Section 12J investment: Section 12J of the Income Tax Act was introduced in 2009 by the South African Government to encourage South African taxpayers to invest in local companies and receive a 100% tax deduction of the value of their investment. The investor receives a share certificate and a tax certificate, allowing the invested amount to be deducted from the investor’s taxable income, in the year the investment is made. Gold and silver: Precious metals have been the store of value since the ancient of days. While it does not give you interest or pay you dividends, it protects you against inflation, or central banks unlimited money printing. You can buy gold and silver coins from reputable precious metals dealers online. Cash-generating business: Starting your own business can be scary, but also exciting. Businesses have proven a sure way for many people to generate wealth, for some generational wealth. By having your own business, working on it with your sweat, tears and grit, you benefit from the fruit of your Labour. There is no guarantee for success. In fact, statistics show that 95% of businesses fail within the first five years. With the right mindset, goal setting, planning, the right mentors and advisors, you can greatly improve your chance of success. REITS: REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors. Buy-to-let property: Buy-to-let refers to the purchase of a property specifically to let out, that is to rent it out. A buy-to-let mortgage is a mortgage loan specifically designed for this purpose. Buy-to-let properties are usually residential but the term also encompasses student property investments and hotel room investments. Cryptocurrency: In this day and age, we have to consider cryptocurrency as a viable asset. While it is highly speculative, it is backed by a very useful Techonology called Blockchain. Given people’s suspicion of governments and central banks, there has been a move to decentralize currencies and financial transactions. There are thousands of crypto currencies in the world, while many of them are just scams, the main ones like Bitcoin, Etherium, Binance Coin, Ripple and USD Coin look like they are here to stay. As you can see, there are a plethora of asset choices and investment options. Take time to do you research to properly understand an asset class. Work with a qualified financial advisor as your financial coach, to decide on which assets may be best for you to accumulate. It is not one size fits all. it is not one asset class fits all. For all clients, I advise them to diversify across a few asset classes. Last month we talked about Set Up Short-term Goals. This month we focus on Step 9 - Set Up Long-term Goals. I define long-term goals as something you would like to achieve in the long term, generally in more than 10 years' time, but can also be anything in more than two years. Have your notebook and pen ready at your desk. Think about the things your plan for after the next two years, in five years, ten year or longer. It can be related to your age, for example age 45, 60, 65, important anniversaries, for example 20th wedding anniversary, or milestones for your children, for example age 7 going to primary school, age 18 going to university. Jot them down in your notebook. Speak to your spouse, partner, children, families and friends that you would like to plan things together with, jot down the additional things that are going to happen after the next two years. Be specific in your goals. Visualise what you would like to happen, write down the details of your goals. The more specific your goals are, the more you will be driven to achieve them. So instead of saying "living in a retirement home at the coast", make it more specific by saying "living in a two-bedroom retirement home in a secure estate in Hermanus, Western Cape by age 65". Make your goals more specific by applying the 5W2H method, asking these questions: What? Why? Where? When? Who? How? How much? Examples or ideas are:
You can now develop the list of long-term goals into a spreadsheet in your notebook, or use a spreadsheet such as Excel or Google Sheets, with the following columns: Column 1: Description of the goal Column 2: With whom (you will be doing this with) Column 3: Date (and age) Column 4: Amount required (this is the amount of money required for that goal) Column 5: Bank/investment account for this purpose Column 6: Notes/Comment (this is where you expand, to explain who will contribute, whether you will contribute for someone else, someone else will contribute for you, how you are going to build up the fund, monthly or an ad-hoc lump sum) Column 7: People/skills/resources required Column 8: Status - Not started, in progress, completed For some of these goals, in particular investment or business goals, you should develop a business plan with the necessary details. Access the required skills, such as business, financial, bankers, legal, engineering, investment professionals, to help you develop a proper business plan. Write your goals on colour stickers or magnets, stick them on your wall so they are visible, acting as reminders to you. Work out your monthly and annual plans to attain these goals. Revisit your long-term goals spreadsheet quarterly, or at least annually, to check whether you are on track, or anything you still need to do. Certified Financial Planners are trained to help people develop a holistic financial plan, focused on your long-term financial wellbeing. It is advisable to use the services of a qualified financial planner to develop your financial plan, to identify areas you may have not considered. |
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