In partnership with Morningstar: Did you know, that if you start saving only a small amount, early in life, it can lead to a larger savings pot than if you were to save a large amount much later in life? Sounds too good to be true? That’s exactly why compound interest is known as the eighth wonder of the world.
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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. In partnership with Morningstar: The future is unknowable, so the best we can do is to address it in terms of probability and preparation. In assessing probability, however, people are often driven by bias and emotion, emphasizing the positive at one moment and the negative at another. That narrow emphasis is likely to be reflected in the rapid changes in price of investments. Over-emphasis on optimism or pessimism leads to price volatility, which is part of being an investor, and enduring volatility is a price we pay for reaching our goals. In partnership with Morningstar: In the words of David Bergmann, “the tax tail should never wag the investment dog”. With that being said, it definitely won’t hurt to know and understand how a Retirement Annuity (RA) can minimise the amount of tax you pay and keep more of your hard-earned cash in your own pocket. In partnership with Morningstar: This document has been created to highlight the most important issues facing investors, share insights from our current research, and help you make better investment decisions as we enter 2022. It has been compiled by our investment leaders and draws on the work of our global team. ![]() Last month we talked about Focus on Building Assets. This month is our 12th and final instalment on the series, we focus on Regularly Review Your Progress. Congratulations on make it this far! Let's recap the first 10 steps: Step 1 - Make as much money as you can Step 2 - Do not spend more than you earn Step 3 - Do not take on credit Step 4 - Keep record of your spend Step 5 - Invest 15% of your earnings Step 6 - Set up an emergency fund Step 7 - Money is a means to an end Step 8 - Set up short-term goals Step 9 - Step up long-term goals Step 10 - Focus on building assets So what have you learnt so far? What have you written down and implemented? The last step of Regularly Review Your Progress completes the cycle. Review your actual progress against your budget, short-term goals and long-term goals, to check whether you are on track. In terms of your monthly budget, you should check monthly. In terms of your short-term and long-term goals, you should review your progress at least annually. Typically the good time to review would be the end of a calendar year, the beginning of a year, or the middle of a year (June/July). They tend to coincide with the school holidays. Regular reviews can check whether you are on track, ahead of your schedule or behind your schedule. Are you moving forward, or backward? What were the unexpected things that happened, good or bad? It will help you identify what has worked, what has not worked, whether you have developed good financial habits, whether you are disciplined in implementing the plan. It is like looking yourself in the mirror and detect any blemishes to get rid of. You want to have a close look, be honest with yourself. Monthly budget On a monthly basis, typically at the end of the month or the beginning of the following month, check whether you are within your monthly budget. Did you overspend or underspend? What categories did you overspend, and the reasons? Were are able to save money at the end of the money? If you use a budgeting app on your smartphone, you probably can figure these out quickly. Jot down your thoughts in your (digital) diary or notes app. Think about how you can improve your spending, and write it down. Are there credit card instalments or personal loan instalments coming off your bank account? These typically have high interest rates that suck money out of you. Prioritise to pay off the full balances quickly. Are there monthly debits going off you bank account that you don't even know what they are? Check with you banker. Small debits add up, chewing your money away. Do you subscribe to DSTV, Showmax, Netflix and Amazon Prime Video? Do you need all these? Can you cut down to two, or even one? Do you have all these small policies debiting a few hundred rands from your bank account? Is it better to consolidate? Are you paying multiple funeral policies? Speak to a qualified Financial Planner to review all your policies, to see whether you should consolidate and save some money. Short-term and Long-term goals You should review your progress, at least annually. If you work with a financial advisor, schedule a time that is convenient for both of you. The review session is normally one to two hours, depending on how complex your financial affairs are. Otherwise, I have found the good time to review would be the end of a calendar year, the beginning of a year, or the middle of a year (June/July). They tend to coincide with the school holidays, when you may have some breathing space, some downtime, to relax, to refocus and strategise. Go through your short-term goals, your "quick wins" one by one. Tick off the ones you have achieved, pat yourself on the back. For the ones in progress, are they on track? For the goals you didn't achieve, what are the reasons? Some things may be within your control, some may be out of your control. For example, you might have planned a year-end holiday in Mauritius, and you have saved up for it. However due to the COVID-19 pandemic, and the latest new Omicron variant, Mauritius has re-introduced travel bans, and you could no longer take the family to Mauritius for a holiday. Instead, you had to change to local destinations such as Cape Town or Kruger National Park, or worse still, because of the increasing number of infections, you decided to stay put and stay home. We plan, and plan for the best to happen. But we must also be aware of the environment we are in, and there are many things outside of our control. Recognise them, be pragmatic. Focus on the things we can control. Write down your thoughts in your (digital) diary. Go through your long-term goals, one by one. Goals like long-term savings, child education fund, retirement, emigration, financial freedom. What progress did you make? Was it good, little or no progress? What caused you not to progress as planned? Changing jobs, poor business environment, load shedding, financial markets, your own behaviour and habits? What can you do to improve? What help do you need? What type of people can help you, e.g. life coach, business coach, financial advisor, accountant, IT specialist, mentor? How do you go about building the team around you, to support you? Write down your thoughts and action items in your (digital) diary. Implement the action items. If you do the reviews month-in, month-out, year-in, year-out, I am sure you will count your progress, achievements big and small, and be thankful of blessings received, and the advisors that have helped you along the way. Epilogue Twelve months, twelve articles on 11 Steps to Financial Freedom! Thank you for walking this journey with me, as we go through another tough year during the COVID-19 pandemic. Importantly, these are the steps I have followed to realise my financial freedom, and I have advised all my clients to follow. I hope you have found some of these insights helpful. If you have any testimonial, if you have any comments, questions or suggestions, please write to me on [email protected]. I don't proclaim to have all the answers, your comments and suggestions help us all improve on the process. Do follow us on Facebook, our company's Daberistic Financial Services page, and Instagram @daberisticw, for regular ideas and inspirations on personal finance, wealth and journey to financial freedom. May you be blessed with life, health and wealth. Here's to a Merry Christmas and a prosperous 2022! Kevin Yeh, CFP® ![]() 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. |
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