How to teaching your children about money

For many parents, money is an uncomfortable subject. Discussing finances with your children is either too scary or too personal for many people.

However, a panel of experts at The 2016 Money Expo agreed that this is one of the most important subjects any parent has to manage. Preparing your children for their financial futures is one of the greatest gifts you can give them.

Nikki Taylor from Taylored Financial Solutions said that the earlier parents start on this journey, the easier and more effective the lessons will be.

“For me, it’s about starting them early,” said Taylor. “How do you teach children manners? You don’t wait until they are 15. You start when they are really young.”

Brand manager at Emperor Asset Management, Lungile Msibi, said that even two- and three-year olds can appreciate the lessons of delayed gratification and working towards a goal.

“Start kids when they are young with goal-based savings,” she advised. “If they want a Barbie doll, for instance, show how they can save towards that goal. That’s important because later in life they will understand that you can’t invest if you don’t have a goal.”

As they grow older, you will have therefore prepared them for conversations about investing for the long term. It’s particularly helpful if family members support you.

“When my kids were born I gave their grandparents bank account details for both of them and said instead of filling my house with toys at birthdays and Christmas, please put money in these bank accounts,” said Taylor. “My children still get toys and presents, but they also see the money in their accounts and how it is earning interest. They now get excited at every birthday and Christmas to see who has put money in for them and how much they now have.”

The next ratings decision before investing

In this advice column Mikayla Collins from NFB Private Wealth answers a question from a reader who wants to know whether his advisor should have held back on making any investment decisions until the ratings agencies make a decision on South Africa.

Q: I just a made an investment of R400 000 via a financial planner who placed these funds within a unit trust portfolio.

My question is twofold:

Firstly, if we are downgraded to “junk” status, is there any possibility of me losing my investment or the investment not yielding the promised dividends?

And, secondly, should I have waited or should the financial planner have advised me to hold on with the investment, pending the outcome of the ratings decision later this year?

The first likely result of a downgrade would be further depreciation of the rand. This would be brought on by foreign investors selling their local assets and taking their money out of South Africa.

To understand how this would affect your personal portfolio, you need to look at the breakdown of the underlying assets and how the portfolio is split between local and foreign assets. A weaker rand means that the foreign holdings would look better, as they would be worth more in local currency terms. In addition, since many of our locally-listed shares are also rand hedges (around 70% of the market cap of the JSE), it’s likely that a large portion of your local holdings would also be protected.

On the other hand, some local assets would suffer as a result of rand weakness. However, since a downgrade would be a well anticipated event, it is most likely that the fund managers with whom your advisor has placed you have adjusted their portfolios accordingly.

Secondly, it is important is that you understand the difference between the long-term and short-term impacts a downgrade might have. Depending on your particular plans and requirements for this investment, your advisor should have selected funds that suit you for the time period you are looking to invest.

Financial services companies

July is savings month in South Africa. This is an initiative that is meant to encourage us all to be more serious about putting away money for our futures.

The premise is obvious. South Africa’s savings rate is abysmal and we need to do something to fix that.

However, many of the messages coming from financial services companies this year have not focused on the country’s savings habits. They have rather been about our spending habits.

Sanlam, for instance, has collaborated with rapper Cassper Nyovest and actress Pearl Thusi on a project called #ConspicuousSaving. The two, who are usually known for their big spending, have been posting on social media about doing things like home facials, clothes swapping or a haircut at a roadside barber to save money.

At a media luncheon in Cape Town on Thursday, Liberty also looked at ways in which South Africans might try to moderate their spending. Based on the findings of a survey conducted by Alltold, Liberty showed where consumers look to cut back to make their money go further.

The primary lesson from the study, entitled The Frugality Report, was that South Africans don’t like to compromise on their lifestyles. Even when they are spending less, they don’t want to cut anything out. They just look for more cost-effective ways of doing the same things.

This suggests that South Africans are probably too attached to the kinds of lifestyles they want to lead. They aren’t willing to seriously assess what they spend their money on and how much of it is really necessary.

In isolation, there is nothing wrong with highlighting these issues and questioning our spending habits. The first step towards financial freedom is always spending less than you earn.

However, it is only that – a first step. Only encouraging South Africans not to spend so much doesn’t really address the key issue of savings month, which is how to get more people to save more of their income.

Even if one of Thusi’s Twitter followers does heed the message and saves money by doing her own nails, buying second-hand clothes and turning down the temptation to buy a new handbag, what then? What does she do with the extra money that she now has?

This is where the financial services industry itself needs to do some serious introspection. It is simply not doing enough to make it easy and cost-effective for South Africans to save and invest.

Even acknowledging that this is not a simple thing to do, it doesn’t feel like too many companies are really trying very hard. The level of innovation in building simple, appropriate and appealing products is poor.

Even some firms that already have options that could be used to attract first time investors don’t market them as such. For instance, the Stanlib Equity Fund may be the only unit trust in the country that accepts debit orders of just R50 per month, yet I am not aware of any advertising from the company that has ever centred on this fact.

Easy Equities is a rare exception trying to make investing exciting and accessible, but why has it remained an outlier? Why aren’t more companies looking at ways to do similar things?

Many of them will say that it’s not easy when faced with the amount of regulation involved, and there is truth to that. However, this is not insurmountable. There are already online platforms that allow an investor to complete, sign and submit all the documentation they need for an investmentment online and simply upload their Fica documentation. It’s a process that needn’t be burdensome on the consumer.

The Facts versus fiction

I was appalled after reading the lead article on Moneyweb today, ‘Why an index fund in South Africa is not always the best option’ by Magnus Heystek. The article displayed a complete lack of understanding of basic investment principles. Sadly, many unsuspecting readers may actually believe that what is written is correct.

This article provides the facts about actively-managed funds.

Let’s face reality. Everyone in the financial services industry is conflicted

This is our business and we all want to grow our business. Every advisor, investment company and product provider says the same thing: “we really care about you our client and we want to do what’s best for you”.

Sadly these are empty promises, as demonstrated by the industry’s dismal track record littered with poor practices, heavy fines and clients with far less money than they should have. In most cases, investors suffer and the industry prospers.

How do you overcome these conflicts?

You must distinguish facts from fiction (opinions). All experienced, intellectually honest investment professionals know the facts about active investing, even if their day jobs don’t support the facts. We learn this in the first year of the internationally-recognised CFA (chartered financial analyst) designation. These facts are remarkably simple. William Sharpe (Nobel Laurette), published this truth in The Financial Analyst Journal in 1991:

“If ‘active’ and ‘passive’ management styles are defined in sensible ways, it must be the case that

(1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and

(2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar

These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required.”

Tips for parents and their child

With the start of 2017 looming, many parents may have started to consider the cost of their children’s school and tuition fees for the next school year. While families have a number of financial commitments to attend to every month, this is the time of year where school funds are often moved to the top priority to ensure that the family is financially prepared for the expenses that accompany a new school year.

Saving for a child’s education requires careful consideration and proper planning.

Here are some tips below for parents to ensure that they have planned appropriately for their children’s education costs:

Start early

Parents should start saving for their children’s education as soon as they possibly can. Many people do not consider, or are not aware of, the great advantages of compound interest, and how accumulated savings grow over several years when invested properly. By investing from an early age, parents will eliminate the financial worry of not having sufficient funds to give their children the best education possible, as the funds in their investment will grow every year.

Automate savings

The best way for parents to ensure they are regularly contributing towards their children’s education is to open a dedicated savings account and set up a monthly debit order. This way the parents will automatically save money every month towards this cause. However, they must have a strict rule in place to never withdraw any money from this account if it is not related to the child’s education.

Explore ways to get discounts

It is advisable to do some research and contact schools to find out whether they offer financial incentives that could result in long-term savings. Many schools offer a discount if the fees are paid as a once-off amount in advance. Some also offer a reduction when there is more than one child attending the school. These types of savings can make a big difference over an 18-year period.

Include education funding in the financial plan

It is important that parents include education funding in their overall financial plan. These expenses have to be accounted for as part of the monthly household expenses to determine how it will affect the family’s overall financial position. When it comes to developing financial plans, it is usually a good idea to consult a reputable financial planner who will be able to develop a solution for the client to ensure that they have provided sufficiently for their children’s tuition fees and related education expenses.

Planning is as easy as having a beer

Since interviewing Alta Odendaal a few weeks back I have become intrigued by this subject of behavioural finance and how small tweaks to your behaviour can make significant changes to your financial well-being.

On Sunday I sat down with one of my good friends over a beer and we ended up having a long chat about retirement and where we would both end up based on our current habits.

For background information, my friend is 10 years older than me, a teacher, earns 45% of my basic salary, has never owned property, has no children and carries no debt. In contrast I earn more, have a kid in a special needs school, have an active share portfolio, carry debt and more years on him to retirement.

We plugged our respective savings numbers into the 10X retirement calculator and we tried to work out who would come out better off based on current habits. Interestingly I will come in at half of my retirement goal and he will come in nearly 30% higher than his monthly requirements. For the purposes of our breakfast, we assumed a 60% income replacement ratio.

The irony is that I come in at nearly 50% below my required replacement revenue, despite sticking to the industry ‘rule of thumb’ of saving 10% of my monthly salary. Well this is a problem …

More scary for me was when I started playing with the investment assumption side of the equation.

Market commentators and financial planners have been warning us for a while, that we are in for a period of sustained lower returns. Booming local equity and property markets which have driven retirement plans for the last 20 years in South Africa are unlikely to repeat themselves in the near-term. If my average investment return dropped by 3% over the period to retirement, I knock nearly R800 000 off this particular Retirement Annuity (RA).

On its own, none of the above is new or news.

What it highlighted for me is that if you have a financial plan – and it might just be ‘be comfortable for retirement’ – you need to sit down and interrogate your financial plan on a regular basis. A simple example, but sitting down for a beer on a Sunday afternoon, lead to me interrogating my retirement. Yeah yeah I probably need a life – but I realised that I hadn’t set my one Retirement Annuity (RA) to increase annually. That small omission cost  me R150 000 in the long run.

Financial kick in the pants

  • Prepare an itemised list of all your expenses and divide the expenses into Group A, being fixed expenses, such as car repayments, other debts and payments you are contractually bound to pay monthly. Other discretionary expenses you are able to reduce or even cancel without suffering any negative legal or financial consequences such as entertainment, clothing, cable TV should be included in a Group B.Select certain Group B expenses you wish to reduce or stop [that gym subscription?), do so and allocate extra payments to shorten the outstanding payment periods (and reduce the interest payable) of Group A expenses or start a small rainy day account for those unexpected financial surprises. Which expenses should be reduced and in what order of priority will depend upon circumstances such as interest rates, tax deductibility, outstanding payment periods and so on. Always a good idea to consult a professional to assist you in making the correct decision.
  • Make an appointment with your financial planner to verify whether your life, disability, dread disease and accident benefits are adequate or surplus to your needs and whether recent product developments have resulted in more cost efficient and/or comprehensive cover being available at the same or at a cheaper cost to you. Planners are, today, required to provide you with comprehensive comparative information to provide you with the peace of mind that you are making a decision that is in your best interest.
  • Create a filing system (whether it be a lever arch file or a folder on your desktop for emailed documentation) for all your financial records such bank or credit card statements, accounts and invoices. This will save an enormous amount of time when a payment is in dispute. If you have other important legal documents, why not also save these using a similar format?
  • Request your short term broker to review your insurance to ensure that your house, car and other property is sufficiently insured against damage or loss.

Stay in shares after retirement

In this advice column Jamey Lipschitz from Sanlam Private Wealth answers a question from a reader who wants to know what to do with his share portfolio when he retires.

Q: I have a portfolio of blue chip shares worth around R7 million. I am 63 years old and will have to start using some of my savings to sustain me and my wife in three years time.

My concern is whether I should stay in shares or should I sell and invest in something else? I am worried about what the markets are doing, and need some peace of mind.

I will need around R700 000 a year, and I have some annuities as backup.

There are a number of important issues that someone in this position would need to consider.

Firstly, South Africa and most of the world is in a low-yield environment at the moment. Some countries are actually providing a negative yield on cash investments for the first time in history.

This has forced investors into higher risk asset classes like equities and property for the relatively higher yield they provide. At the same time, however, this has pushed up the valuations of these asset classes and many are now considered expensive. In turn, the relative yield on these asset classes have come under pressure as the prices have increased.

Secondly, even the current situation notwithstanding, equities are considered high risk compared to other asset classes. It is therefore important to establish what percentage exposure to equities is appropriate based on an investor’s risk profile and income requirements.

There are periods when equities do not perform and one must be able to stay invested for the long term and not be a forced seller for income purposes. This will ensure that one derives the full upside and value.

Thirdly, the dividend yield on South African equities is currently approximately 3%. That means that a R7 million equity portfolio would yield around R210 000 per annum. That is a shortfall of R490 000 every year on the R700 000 income required.

Are you need property and bonds

Old Mutual Investment Group sees domestic equities, property and bonds delivering higher returns in 2017, on the back of improving economic prospects.

It expects peaking interest rates and inflation in South Africa to create a positive environment for interest rate sensitive assets such as domestic property and bonds.  It sees inflation averaging at 5.4% in 2017 compared with 6.3% in 2016 and the benchmark repurchase rates falling to 6.5% by the end of 2017, down from 7% currently.

According to Peter Brooke, head of Old Mutual Investment Group’s MacroSolutions Boutique the 13.5% return on domestic bonds year-to-date as at November 24 2016 is artificially high due to an oversold bond market.

Instead, he said SA cash – with a 6.8% return in rand terms – is the best performing local asset class thus far. SA listed property delivered returns of 4% and the FTSE-JSE Share Weighted Index (SWIX) returned 2.5% over the same period.

After starting the year with the highest level of cash in its fund ever, the group is seeing more opportunities in equities as the domestic equity market de-rates.

“We’re not at the stage where the JSE is cheap yet. It is on a 13x forward but it does offer a real return in the region of 5%. We’re not back to levels that we have enjoyed for the last 100 years of around 6.5% but value is starting to incrementally rebuild,” he said.

“When we look at a balanced portfolio and we just use our static benchmark, in other words a passive offering, the expected real return on a balanced fund has picked up to 4%. It is the first time it has been at the 4% level in two and a half years, so we are starting to see a little bit of a better return coming through,” he said.

The group also warned against “excessive pessimism” over the South African economy as its prospects start to look up.

“Load shedding is long past, commodity prices have stabilised and have actually recovered a bit, rainfall is improving, the food inflation shock will reverse in the months to come and the labour environment has stabilised notably this year,” said Rian le Roux, chief economist at Old Mutual Investment Group.

He added that the National Treasury’s commitment to fiscal consolidation is expected to reduce pressure on monetary policy and lead to a lower interest rate from mid-2017.

The group has forecast GDP growth of 1.3% for 2017 but warned that improvements are likely to be slow due to the strained consumer environment, depressed business confidence, low levels of private investment and an expected rise in taxes.

Multiple bond applications affect on financial

In South Africa’s somewhat peculiar banking system, monthly charges for transactional accounts are a given. But is the few hundred rand you’re paying per month (if you’re lucky!) the best possible deal?

The first question you need to answer is whether you value having a ‘platinum’ or ‘private clients’ account with all the “value-adds” these offer?

Things like lounge access, bundled credit cards and a ‘personal’ banker are must-haves for some in the upper middle market. On the other end of the scale are basic, no-frills bank accounts (like Capitec’s Global One (and the clones from the other major banks)), but the truth is that most people need something a little more comprehensive than that. There’s likely a home loan, almost certainly vehicle finance and definitely a credit card.

So, do you need a ‘platinum’ (Premier/Prestige/Savvy Bundle)-type account? Do you actually use or need those value-adds? Or, do you enjoy the ‘status’ of having a platinum or black credit card? (Here, emotion – and ego – comes into the equation….)

This is an important question to answer, because the difference in bank charges between a more vanilla bundle account and ‘platinum’ is easily 50%!

While banks try to shoehorn you into product categories based on your salary or profession, there’s nothing stopping you from moving to another product (or refusing those ‘upgrades’). From a personal perspective, the only reason I have an FNB Premier (i.e. platinum) account (not gold) is because I do actually make use of the ‘free’, albeit diminishing, Slow Lounge access. And, the eBucks rewards I earn on this account are the most lucrative of the lot, based on the products I use, my transaction habits and spending patterns. (‘Upgrading’ to Private Clients is a mugs game because the thresholds for ‘earning’ rewards are significantly higher, to match one’s status and earnings, of course!)

Once you’ve answered this question – which is more important than most people realise – the next step is to figure out whether a bundled account or pay-as-you-transact one makes the most sense. Most of us enjoy not having to ‘worry’, so we readily sign up for the all-in-one package without actually understanding the differences in pricing.