![]() Last month we talked about setting up an emergency fund. Now let's talk about Step 7 - Money is a means to an end. Money itself has no meaning. Wealth has no meaning if it is not used for the good of people. People have the natural desire to grow, to help, to have a good life, to look after our family, to help our friends, to be happy. Money should be used to enable, to realise all these good things. A miser is a person who is reluctant to spend, sometimes to the point of forgoing even basic comforts and some necessities, in order to hoard money or other possessions. Don't be a miser. Many years ago I learnt from Kim Potgieter, a well-known financial planner in South Africa, six money questions. Since then I have incorporated these in my first meeting with new financial planning clients. These questions probe people's relations with money. You may want to go through them, to reveal your relationship with money. 1. What is the money for? 2. What lessons about money did you learn while growing up? 3. Who are the people in your life that are affected by the financial decisions you make? 4. What past experiences with your advisers stand out in your mind and how had these experiences impacted how you work with your advisers now? 5. If you had all the money that you would ever need, what would you do differently with your life? 6. What does money truly represent to you? Answer these questions truthfully. Then reflect on your answers. Is there anything you would like to change on how you relate to money? How can money make you more secure or happier? There are no right or wrong answers. Every individual is unique. What is right for someone else is not necessarily right for you. The first question is to understand what the money is for. For some, it's about to provide for oneself, or her loved ones. For others, it's about acquiring material things, such as providing food on the table, renting an apartment, buying furniture, a house or a car. Yes for some, it's about achieving certain goals, for example an overseas holiday, to complete tertiary education. Question 2 is about your life lessons about money. It speaks about your upbringing, and the people and things around you that have shaped your ideas about money. Typically people are influenced by adults that raised them: Parents, guardians, grandparents. You cannot choose your parents, but you can learn from the lessons and ideas they shared with you, whether good or bad. Question 3 is about your responsibility. Most of us care for at least one person, in South Africa where unemployment and poverty is rife, you may provide for many people. Your financial decisions will have an impact on those that depend on you for support. Question 4 is about your experience and expectations of a financial advisor. Many people need a financial advisor to guide them through their financial journey. Poor past experience may influence how you want to work with a financial advisor. It is also important to find a financial advisor with the right fit, a person you can trust and relate to, apart from his/her qualifications and experience. Question 5 is a million-dollar question. Maybe you are lucky to win the lotto, and your life is completely changed financially (and you will need a good financial advisor more than ever!). This question also reveals your character, personality and your priorities. Question 6 is such a deep, philosophical question. Answers I have heard from clients include: to have; flexibility; to afford; options; comfort; to make things happen. Once we understand that money is just a medium of transaction, that money is a means to an end (objective), then we will not accumulate money for the sake of it. "Wealth gained hastily will dwindle, but whoever gathers little by little will increase it." - Proverbs 13:11
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In partnership with Morningstar: The Bucket Approach” for post-retirement-portfolio planning has gained a lot of traction over the past several years, and for good reason. It is an easy to understand and easy to follow method and it provides cushioning in volatile periods. To learn more about the bucket approach: www.morningstar.com/articles/330323/the-bucket-approach-for-retirement-income
If you as a retiree or someone approaching retirement would like to review your investment strategy, email [email protected], or schedule a meeting with Kevin the Financial Advisor here https://calendly.com/daberistic In partnership with Morningstar: In 2020, the South African Reserve Bank (SARB) dramatically cut the country’s interest rate by 3%, lowering the repo rate to a historic low of 3.5%. The SARB initially started to cut interest rates in response to declining inflation, which was sitting towards the bottom- end of the inflation target band (of between 3% and 6%). In mid-2020, the SARB cut the repo rate even further, in response to the COVID-19 crisis, to provide relief to consumers and businesses and promote economic growth. By cutting the interest rate, the SARB intends to provide a helping hand to the economy, by freeing up more capital for lending (by financial institutions) to households and businesses. In partnership with Morningstar: Fight or flight refers to the instinctive physiological response to a threatening situation, which readies one either to resist forcibly or to run away. When markets are turbulent, we often see investors struggle with the same physiological response. They are left to choose between staying invested amid the volatility (i.e. fight) or fleeing (i.e. flight) to safe-haven assets and cashing out their investments. More often than not, the latter path is taken. If you would like a Financial Advisor to review your investments, please email to [email protected].
![]() Last month I talked about Step 5 - Invest 15% of your earnings. Let's continue with Step 6 - Set up an emergency fund. You should prepare for a rainy day. Things can happen and will happen. A death in the family, sickness, accident, a punctured tyre, someone in the family comes to borrow money, the phone is stolen ... unforeseen expenses, the list goes on. Or you lose your job. Or your business is negatively impacted by COVID. Having an emergency fund can help deal with these instances, cushion the blow. You should use a bank savings account, separate from your daily transactional account, to set up an emergency fund. You should have a minimum of 6 months' pay in that emergency fund, to be safe. For example, your monthly take-home pay is R40,000. Then you should have R40,000 x 6 = R240,000 in your emergency fund. If you ever lose your job or your income, then you can sustain yourself and your family for six months, while you look for another job or find the next source of income. If your business has a monthly expenses of R200,000, then you should have R200,000 x 6 = R1,2 million in the company's emergency fund. If you have not reached the ideal emergency fund amount, create a plan to top up the emergency fund every month. Maybe you have more income or receive a bonus in a month, use part of that money to top up your emergency fund. Continue with this process until you have reached the target of having 6 months' worth of income in your emergency fund. From time to time, you may have to access the emergency fund as emergencies come up. That's exactly what it's for. After you have taken money out of the emergency fund, top it up again, until you reach the ideal emergency fund amount. So what vehicle should you use to keep your emergency fund? I would recommend the following three options: 1. Bank savings account: This is an ideal vehicle for keeping your emergency fund. It is safe and liquid. You can withdraw money at any time. A savings account, call account or money market account will work. What is not recommended is fixed deposit account and notice accounts. These type of bank savings accounts tie you up for a period of time, maybe 7 days, one month or even longer. The emergency fund is there when you need it. You don't want to put the emergency fund in an account where you cannot access immediately, or with penalties if you want to access it. 2. Home loan with access bond facility. If you have a home loan, make sure you have the access bond facility. I always make sure my home loans have access bond facility. It is an excellent financial management tool for personal finance. This allows me to pay more into the home loan when I have extra money, to reduce the capital amount and interest payment. I can take out the extra money I put in at any time. Watch this to know the 7 things you should know about home loan. The segment on Access Bond starts at 20:10. The beauty of this solution is it reduces the interest and capital amount outstanding as you pay the extra money into the home loan account, but when you need it, you can take it out.
So imagine you put in extra money every month, over some time you have put in extra R240,000 in total. So you have R240,000 you can access in your Access Bond facility. There is your emergency fund! 3. Income funds. These are unit trusts, or collective investment schemes, that invest in a wide variety of assets, such as cash, credit, government and corporate bonds, inflation-linked bonds and listed property, both in South Africa and internationally. These funds focus on investing in income generating assets. In the current low-interest rate environment, they offer an attractive yield of 6% to 7%. In the short term an investor may experience temporary capital value fluctuation, but you can expect positive return over any 12 month period. Examples of good income funds are: Coronation Strategic Income Fund, Ninety One Diversified Income Fund, Nedgroup Flexible Income Fund. Any questions on emergency fund for Uncle Kevin? Email to [email protected]. ![]() Last month I talked about Step 4 - Keep a record of your spend. Let's continue with Step 5 - Invest 15% of your earnings. Robert Kiyosaki, a leading personal finance and business coach of our time, advocates "Pay yourself first". People who choose to pay themselves first allocate money to the asset column of their balance sheet before they’ve paid their monthly expenses. Essentially, you set aside a specific amount of money right off the bat, and then live off what’s leftover. And that’s how wealth grows. In South Africa, this means putting 15% of your monthly pay into a retirement annuity, a tax-free investment, an offshore investment, or getting a business education or subscription. Let's unpack this. When I have my first meeting with new financial planning clients, one of the areas we cover is Personal Balance Sheet. Personal Balance Sheet essentially is a list of a person's assets and liabilities. At the end we calculate a person's Net Asset Value (NAV) by subtracting liabilities from assets. Many people have no ideas of what are assets, what are liabilities, and the differences between the two. They work hard, they try to get a better income. After many years, they wonder why they have little to show for it, and where money has gone to. They are busy paying everyone else, the taxman, banks, credit card companies, municipality, Eskom, DSTV, cellular providers. Then they have no money to pay themselves. So they go through their life, by the time they get to 40s or 50s, then realise they don't have enough saved up for retirement. It is important for us to instill in our teenage children, young adults the importance of savings, that they should start saving 15% of their income when they start their first job or business venture. Don't rely on what your employer would do for you. In the past, many corporates in South Africa would provide generous employee benefits, including a pension after retirement. Due to changes in accounting standards, increased competition and tougher economic environment, many corporates have cut back on employee benefits. Just about all have moved to Defined-Contribution arrangements, they no longer guarantee employees a pension after retirement. We need to educate our children (and ourselves) to create that financial nest egg ourselves. No one else is going to do it for us. Not the employer, not the government, not your parents. Starting early is key. If a young person in their twenties start their first job, and save 15% of their income every month, invest wisely, then by the time she gets to 65, she should have built up a retirement capital, a sum of money to draw an income from. What we call "comfortable retirement." Below is a chart illustrating a 25-year old earning R40,000 a month, saving 15% of her income per month (i.e. R6,000). Assume her income increases at 5% per annum, and she keeps her savings rate at 15%. Also assume she gets 8% return on her investments. At 65, the projected capital she will built up is R37 million. If she delays the decision to invest until age 35, i.e. she only starts saving 10 years later, then at 65, the projected capital she will build up is R23.4 million. See the chart below. While still significant, it is 37% less than if she had started at age 25. So a 10-year delay will cause her wealth at age 65 to reduce by 37%! Investment products for long-term investmentYou may consider using the following products for investing for long-term: Tax-free investment account: while limited to R3,000 per month or R36,000 per year contribution, you invest tax-free, and you can invest up to 100% offshore. Watch this video to get the basics of a Tax-Free Investment account: Retirement annuity: This is designed for saving for retirement, offers great tax benefits. Watch this video to understand the basics of a Retirement Annuity: Offshore investment: This allows you to invest in hard currencies such as the US Dollar, Euros and Pounds, by converting your Rands into these currencies and investing offshore. This is great for diversification, and accessing investment opportunities not available in South Africa. Unit trusts: This allows you to invest in a wide range of collective investment schemes. You should invest in a number of funds for diversification, and your portfolio should be suitable for your risk profile. Endowment policy: This forces you to invest for a minimum period of five years, investment growth is taxed within the policy, so when it pays out you receive the proceeds tax free. Watch this video to understand the basics of an endowment policy: Contact us today at [email protected] if you would like to speak to a Financial Advisor, on how best you can invest 15% of your money, to create your wealth.
![]() Dear client, I thought it would be useful to explain the way we think about inflation and your investments as I’m not sure I’ve fully elaborated on this before. So, to start, let’s talk about inflation. Inflation is a relatively simple concept, used to describe the gradual rise in the cost of goods and services. For example, a loaf of bread or the cost of petrol. Inflation is generally healthy if it’s in the 2-3% per year range, but it is considered to be unhealthy if it falls too low or rises too high (the idea is that we make steady progress over time). For this reason, the central bank will adjust interest rates to control it. Inflation is important today because it is currently rising from a very low base, but it’s perhaps rising too quickly. This is understandable, given the reopening of the economy, yet is garnering headlines and has caused some volatility among certain assets. We should also keep in mind that the job of your total portfolio is to increase your purchasing power over time. Some assets we hold will do better in a period of higher inflation and some will do better in a period of lower inflation. The key is to strike the right balance for your long-term goals and risk tolerance, which is a core part of your financial plan. On this, the return on cash (interest) typically fails to keep pace with the rising prices of goods (inflation). Therefore, as a long-term pursuit, cash is actually a very bad investment. Hence, unless we have absolute certainty that the markets are nearing the peak, which is extremely difficult, putting everything in cash is rarely a good idea. We therefore use cash selectively as an investment tool. This is already done within your portfolio, where cash is treated as any other asset class available for allocation. This means that as the attractiveness of other available assets rises relative to cash, cash allocations should fall and vice versa. Therefore, cash plays both offense and defense, by being used as ‘dry powder’ for adding undervalued assets to the portfolio and by buffering against rich valuations. This brings us to a crucial aspect of wealth creation and preservation – we need to be a step ahead of our own emotions as well as other participants emotions. So yes, cash may feel like the best place in the darkest moments (so-called “cash is king”), but it is a poor choice when considered as a long-term pursuit and only tends to work if we increase it before the market decline occurs. At heart, we remain confident that your portfolio is well positioned to navigate different inflation environments. We can’t rule out the odd setback (whether due to inflation, covid, or otherwise), but wealth creation is often about avoiding the biggest mistakes, which is why we’re diversified across different assets. We want to “be greedy when others are fearful and fearful when others are greedy”, but we also want to manage risks along the way. Bringing this together, we want to reiterate that we are aware of the current inflation discussions and your portfolio has been thoughtfully considered in this light. If you would like me to elaborate further on this, or any other matter, I’d be delighted to chat. Regards Kevin Yeh, CFP® |
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