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Don’t Underestimate your Will Power

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Avoid the heartache and headache!

This year, National Wills Week is from 17th to 21st September, and is a time when participating attorneys in South Africa will draft basic wills for free. If you haven’t already written a will, this presents the perfect opportunity to do so before it’s too late.

Writing a will could make an enormous difference to your family in the future, and it is an easily achievable goal that will give you the peace of mind that you can take care of your loved ones after you’re gone.

Lots of people put off writing a will because they mistakenly believe that it is a difficult task. However, the process doesn’t have to be complicated if you work with a professional who has the expertise to ensure that your will covers all key factors and complies with all your wishes; then is correctly drafted, witnessed and signed with no room for misinterpretation.

It is important that the person who drafts your will also has the necessary knowledge to ensure that it meets all legal requirements, so that your will is valid. A practising attorney is a qualified law professional who can also advise you on any problem that may arise.

Will I, won’t I?

If you have made a valid will, once you pass away, your assets will be disposed of in line with your wishes. This division of your estate is called “freedom of testation”.

On the other hand, if you depart without leaving a will, you could cause a lot of unnecessary heartache and headaches to the people you leave behind. If you don’t leave a valid will, your assets will be distributed according to the provisions of the Intestate Succession Act. This generally ensures that your possessions are transferred to your spouse and offspring, but certain problems can easily arise if you die intestate.

The intestacy laws in South Africa at the time of your death will dictate what happens to your estate and, given the nation’s instability, there is no guarantee that they will be as fair as the provisions in place now. In a country where corruption, poor governance and deficient administrative systems are order of the day, would you be happy knowing your hard-earned money could easily end up lining the wrong pockets?

Without clear directions as to distribution, it is likely that at least some of your assets will not go where you would like them to. Not only may they not be left to the people of your choice, but a lack of instructions could also cause conflict amongst your loved ones at an emotionally vulnerable time. Without a will, it may take a long time for an executor to be appointed, and it can result in additional and unnecessary costs. A failure to do any estate planning also means that your estate may be subject to a hefty tax bill, which you have the power to lessen considerably if you seek professional advice and make sufficient preparations before you pass.

Never underestimate the importance of drafting a will. And, once you have made one, you should be sure to review and update it at least once a decade, as well as after any significant life changes, such as having a child or getting married/divorced.

Don’t hesitate to arrange a meeting if you require more information, or wish to discuss your financial situation before taking advantage of this year’s National Will Week by drafting a basic will with the help of a participating attorney. Just be sure to contact your local provincial law society beforehand to check whether an attorney is reputable.

(Information gathered from lssa.org.za and infinitysolutions.com.)

6 Estate Planning Tips

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In the wake of the 2018 budget, there are recent changes that could affect your estate, especially with regards to paying VAT, Master’s fees and estate duty.

Here’s a quick snapshot!

The good news is that executor’s fees remain at 3.5% of your total assets, plus VAT. However, as you’re likely all too aware by now, VAT has increased from 14% to 15%, which means that if your executor has registered for VAT, you will feel the effect of this hike.

The Master’s office has also changed their fee to work on a sliding-scale structure. Whereas previously, the maximum fee was ZAR600, you could now pay up to ZAR7,000.

If your total estate is valued at over ZAR30 million, you will be affected by a 5% increase in estate duty and are now liable to pay 25%. However, if your estate is less than this amount, you will still only be subject to pay 20%.

In light of these recent changes and any increases that may affect you, here are 6 estate planning tips that can help you to protect your assets and potentially save you money:

1. Update your will and review beneficiaries

Whether you have children or not, one of the most important parts of estate planning is to make sure you have a will, which is a legally binding way of nominating beneficiaries and guardians. Once you have written a will, it is important to update it when the need arises. As the years go on and your situation changes, you may wish to change the names of beneficiaries in your will, life insurance policies, trust deeds and group life funds.

It’s also important to make sure that your loved ones know exactly where to locate all necessary documents in the event of your death.

2. Make a living will

It’s a good idea to draw up a living will, which is written evidence of your wishes with regards to the type of medical care that you would (or would not) want in the event that you don’t have the physical capacity to communicate your needs. This is especially important in cases where there is no hope of any sort of significant recovery.

3. Appoint guardians and trustees for minors

Deciding who would raise your children if you and your partner both die is a difficult task that many parents avoid doing. However, it is essential to nominate a legal guardian for any minors in your will in case there is ever a tragedy that would leave them orphaned. The legal guardian/s that you choose for your kids will be responsible for looking after them until they are 18 years old, so it is not a decision to be taken lightly, and there are several factors you should consider, such as the guardian’s age, location, financial situation, and existing responsibilities.

You can also set up a trust in your will so as to provide an income and capital for your children, and you can make additional provisions for their guardians. Furthermore, you should appoint a trustee in your will — their role is to administer your children’s inheritance to them, while a guardian’s role is to care for them. It is crucial that you appoint a trustee for inheritances by minors, as in the absence of such provisions in a will, your child’s inheritance will be kept until they reach adulthood in the Guardian’s Fund, which falls under the administration of the Master of the High Court.

4. Make donations

Donations tax still remains at 20% if you donate less than ZAR30 million in a tax year, and increases to 25% for donations exceeding this amount. However, you can donate up to ZAR100,000 each tax year to children or a trust, without needing to pay any donations tax; and there is no limit on the amount that you can donate to your spouse tax-free.

You can reduce your estate and avoid significant estate taxes by making donations. There are various other ways to limit certain taxes, such as estate duty and capital gains tax, depending on your family situation and the size of your estate, so don’t hesitate to arrange a meeting to discuss the options.

5. Secure your offshore assets

If you intend to keep any offshore assets, it means you have a foreign estate that needs to be administered too. Each country has its own legislation when it comes to dealing with inheritance, and a South African will won’t necessarily meet another country’s legal requirements, so you’ll need to execute a separate will in the jurisdiction that deals with the assets.

6. Get life insurance

When it comes to winding up an estate, many people are faced with liquidity issues, which is when there is not enough money to settle the estate’s liabilities — be that a bond, vehicle finance, taxes, executor’s fees or conveyancing costs.

If this is the case, your loved ones could be forced to sell assets, such as the family home, to cover the expenses. For this reason, it is important to get comprehensive life insurance, which will provide estate liquidity in the event of your passing.

(Information gathered from findanadvisor.co.za and proactivewillsandestates.co.za.)

Severe illness cover

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Each year, about a million people need to stop working due to an illness or a debilitating injury. Yet, according to an article published in The Times, only 10% of people have severe illness cover.

A severe illness is a medical condition that prevents you from leading your normal life, and the life industry covers a wide range of these dreaded diseases and health conditions, from Type 1 diabetes to Parkinson’s disease. However, the ‘Big Four’ — a heart attack, a stroke, cancer or a coronary artery bypass graft — form the core of most policies, as these form over 80% of claims.

A severe illness usually requires regular visits to specialists, treatment, medication, and potential lifestyle adjustments. However, it is possible to survive a severe illness with the right medical treatment and support.

Why is severe illness cover necessary?

A severe illness typically has three phases: 1. Diagnosis; 2. Treatment; 3. Recovery. Your medical aid and gap cover should be able support you through most of the basics of the first two phases, but severe illness cover is designed to support you through your recovery period, which can be expensive and is when you are likely to feel the financial impact of costs that you might not have initially considered.

While your medical aid and gap cover may pay for the direct costs of a severe illness, such as hospitalisation and basic treatment, there may be annual limits. It will also probably not cover specialised treatments, alternative therapies, and rehabilitation; or indirect expenses that arise to meet necessary lifestyle changes, such as taking time off work to recover, making home and vehicle adjustments, or hiring an au pair to look after your children.

Around half of people who survive a severe illness also suffer some form of depression, but one of the most commonly overlooked expenses is the treatment of depression, which can last weeks or years.

Disability cover vs. severe illness cover

If you have already sensibly taken out disability cover, you may think that severe illness cover is superfluous to your needs. However, you would be wrong. While basic disability cover is an important precaution that will protect you in the event of being permanently unable to work, it may not pay out if you are temporarily unable to work due to a severe illness that isn’t terminal.

Many employers in South Africa will pay 30 days of sick leave over a three-year period, but your monthly income will likely be reduced when you have used all of your entitlement. While disability cover will come into play if your income needs to be replaced on a long-term basis, severe illness cover will pay out a tax-free lump sum that you can use to replace any lost income for a short period.

A severe illness policy should also be able to cover anything from overseas treatment, to assistive devices and a home helper. The tax-free lump sum payout can be used immediately in whatever way you choose, so that you can have the best possible treatment and recovery plan, without having to dip into your investments or savings.

The options

Many severe illness policies pay out in tiers in accordance with the severity of an illness. So, for example, if you are diagnosed with stage 4 cancer, which is the most severe form of the disease, you will likely receive a payout of 100% of the sum insured. However, if you are diagnosed with a cancer that has less of an impact on your lifestyle, you may receive a payout of up to 75% of your cover amount. Likewise, if you have a heart attack, your payout will be determined by blood markers and the level of damage to the heart tissue.

If you have this ‘tiered benefit’, you can receive another payout if the illness progresses and becomes more severe. However, if you receive a 100% payout when you are first diagnosed, you cannot claim again for related conditions. If you have a comprehensive policy, you can receive benefits if you suffer a claimable illness that has nothing to do with your first claim. For example, if you once received a payout for a stroke then are diagnosed with cancer years later, you can also receive up to 100% of the sum insured for the second condition. Just do be sure to enquire beforehand as to your insurer’s definition of an unrelated claim, as this can differ between providers.

Whether you choose a stand-alone benefit, or one that accelerates, can also make a big difference to the cover you receive. Accelerated benefits may be cheaper, as they essentially are an early payout of your life cover, but they can also reduce other benefits.

In recent years, there has been an increase in the number of claims for the early stages of severe illnesses, which shows that policyholders are consulting their doctors earlier, thereby greatly improving their chances of successful treatment at a lower cost. Given that it is better to vigilant about your health and seek advice and treatment as soon as possible before a disease progresses, it is very important to opt for comprehensive severe illness cover that allows the flexibility of early payouts.

A comprehensive policy should have a catch-all category that will cover you if you contract a severe illness that does not fall within a specific definition.

If there’s a history of a severe illness in your family, it is advisable to have regular medical check-ups so that you can be diagnosed early if you are affected. An early diagnosis, along with comprehensive severe illness cover, can maximise your chances of recovery. If you have already had a severe illness, you may still be eligible for cover but, depending on the type of severe illness suffered and your age at the time, there may be restrictions, such as exclusion of specific illnesses.

A monthly contribution to a severe illness benefit can significantly ease any recovery or even save your life. Nowadays, over 300 illnesses are covered on some severe illness policies, but the breadth of cover beyond the core four illnesses may affect your premiums. Don’t hesitate to arrange a meeting to discuss the range of options and benefits available.

Avoid crippling your finances

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It is highly likely that one of your biggest assets is your earning power. It is vital to protect this asset and ensure you maintain a steady salary until you have reached your financial goals.

Many people take a head-in-sand approach when it comes to income protection, believing that they’ll never be inflicted with a disability, or assuming they can find a quick resolution if they are. However, this doesn’t necessarily equate to positive thinking, but rather naivety. A more responsible approach would be to hope that disaster won’t strike, while still having a back-up plan in place in case life has other ideas.

The truth is that a lot of circumstances are completely out of our control. And for most people, the reality is that losing a regular income stream (particularly that of the breadwinner) could potentially result in not being able to afford everyday items, such as groceries, as well as larger expenses, such as school fees and bond repayments.

If an unforeseen circumstance arises that prevents you from working, and you haven’t protected your income, you could immediately feel the blow and the knock-on financial effects for years.

Statistics highlighted in an article published on Money Marketing highlight that over a quarter of people will suffer a disability between their twenties and when they retire, and that 10 people per hour have a stroke in South Africa. Unfortunately, anyone can have a debilitating accident or develop a medical condition at any given time, so it’s important to safeguard our financial affairs in order to look after our liabilities and loved ones.

When it comes to disability cover, there are many options, but it’s advisable to choose the most comprehensive cover that you can afford. Fortunately, income protection benefits offer much more holistic protection nowadays, and can cover other claim categories, such as critical illness, hospitalisation and functional impairment. This is of particular note as, in 2017, almost half of the disability claims paid by a leading insurer fell under the classification of functional impairment.

You can easily reduce your financial risk exposure, protect your investments and ensure you can meet all your obligations by investing in comprehensive disability cover. A holistic disability cover will provide you with more certainty, so that you can rest assured that your financial situation is protected in all eventualities. Please don’t hesitate to arrange a meeting to seek advice on selecting the right disability cover for you.

(Info from moneymarketing.co.za)

Your health is your wealth

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“It is health that is your real wealth” — Mahatma Gandhi

Many entrepreneurs and ambitious people are concerned with climbing the career ladder and building their wealth. However, as you get older or suffer bouts of illness, you will start to appreciate the true value of your health and not take it for granted. Although achieving your goals is understandably important, you don’t need to completely abandon your health in your pursuit of success.

It’s simply not worth sacrificing your physical or mental health for the sake of your financial health. It is as important to lead a balanced lifestyle as it is to have a balanced portfolio, and to treat your health like your savings plan by investing in it regularly.

Certain practices that are common in today’s high-paced world — such as eating lunch at your desk, going home after dark, not having enough sleep — won’t help you in the long run. Working over 12 hours, eating junk food, and only catching a couple of hours of shuteye each day isn’t a healthy way to live and can easily lead to burn-out or severe illness.

And, what’s the point in saving for your future if you’re not going to be able to enjoy it?

Many illnesses these days are stress-related or the result of an unhealthy lifestyle, and are actually avoidable. For example, Type 2 diabetes is a common example of an often self-inflicted disease. And even If you don’t immediately die from an illness, you could still suffer some serious side effects that can last into old age and may stop you from doing some of the things you want to do.
Ultimately, prevention is better than cure. Starting a retirement plan isn’t the only way to make sure you will live comfortably in your autumn years. You can also prepare for your future by taking good care of your health. Otherwise, all those years of chasing dollar signs could cost you dearly, and you could end up paying a much bigger price — financially, physically and emotionally.
If living a longer, healthier life isn’t enough motivation to start caring for your well-being, then see your health as another financial investment, as being healthy can actually save you money in the long run! The cost of medication, doctors appointments and hospital stays can add up to way more than the cost of gym membership, healthy meals and adequate insurance. It may cost a bit of extra money now to stay healthy, but it’s even more expensive to get sick.
Value your health, as you could do much better things with your hard-earned money than spend it on chronic medication and specialist appointments that could have potentially been avoided.
Just as your savings are your responsibility, so is your health. Small lifestyle changes — such as going on a daily walk or drinking a green juice instead of a Coca Cola — can make a big difference.

It’s simple really — exercise regularly, let food be thy medicine, get enough rest, and spend quality time with your loved ones.

And just as you get professional help with your investments, it can also be worth employing experts to help you to attain your lifestyle goals. A personal trainer or a nutritionist can guide you in making good choices, just as a tax consultant can advise you when it comes to filing your tax return.

Ultimately, you still need to do the real graft yourself, but a qualified professional can encourage you, as well as save you from making mistakes that can make it harder to achieve your goals.

Manage your health for the sake of your wealth, and realise the value of a healthy body and mind. As with many things, a bit of foresight and preparation can save you a lot of issues in the long run. Don’t hesitate to arrange a meeting if you wish to make any changes to your financial plan to ensure you can maintain a healthy portfolio that complements, rather than obstructs, a healthy lifestyle.

Females and Finance

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This Thursday, 9th August is National Women’s Day, which marks the historic moment on 9th August 1956 when 20,000 South African women of all races showed that they would not be intimidated by unjust laws when they marched to Pretoria’s Union Buildings to present a petition to the prime minister against the carrying of passes. It was one of the largest demonstrations staged in the country’s history and, to commemorate the event, the first National Women’s Day was declared a national holiday in 1995 once South Africa was a democracy.

Since then, celebrations take place throughout the country on this day each year, and August has been declared National Women’s Month.

With various campaigns that have come to the forefront in recent times, such as #MeToo and #ImWithHer, women are more empowered than ever. However, there is still a long way to go in terms of female rights around the world, and women are still often subject to discrimination and inequality, not to mention harassment, in the workplace. According to research published in September 2017, female managers in the UK earn GBP12,000 less than their male counterparts, and the World Economic Forum believes that it will take 170 years to completely close the gender pay gap around the world.

South Africa is particularly guilty of this gap. A 2017 report run by a market research firm highlighted that women in South Africa earn, on average, 27% less than their male counterparts. And the report found that the difference is even wider when it comes to high earners, with men in top positions earning as much as 39% more than women of the same standing.

Experts believe that this pay inequality could be one of the reasons that many South African women are not properly prepared for retirement, as recent findings published in Fin24 have revealed that 32% of female South Africans feel unsure about their retirement plans, while men seem to be clearer about their long-term investments.

A survey conducted by Ellevest has found that women don’t invest as much or as early as men do, so women often retire with less money, even though they also tend to live longer than men. Many of the women surveyed were actually very clear on their financial goals — retirement, travel, and paying off debt were the top three priorities — but less than half of those questioned said they know how to achieve these targets.

The survey showed that the majority of women are dissatisfied with many aspects of their finances, such as their net worth, their investment portfolio, and their retirement savings. And less than half of the women surveyed felt satisfied with their financial knowledge. Furthermore, 48% agreed with the statement that “most women have to work twice as hard to get half as much,” and this double standard clearly needs to be rectified.

Taking control

Slowly times are a-changing and, in January 2018, Iceland became the first country to make it illegal for women to earn less than men in the same position. As women are gaining more and more control over their professional lives, they are also looking to take more control over their finances too. Experts believe that a key step to female empowerment is for more women to get involved in their family’s long-term financial planning.

Although gender discrimination is sadly still an issue in our society, it’s time for more women to take responsibility for their savings plans, including retirement preparation, which is often left to men.

Recent political and economic events across the world are forcing women to reevaluate their financial situations. Many women questioned by Ellevest admitted that putting away money for their financial goals would boost their confidence, and the survey showed that women clearly value the feeling of being financially savvy. According to the survey more savings equates to more confidence for many women — and is more important than salary and support in the workplace.

National Women’s Day pays homage to the women of South Africa who fought against the tyranny of the Apartheid government and helped to shape the country. Their march in 1956 when they delivered bundles of petitions containing more than 100,000 signatures was an inspiring display of political and inner strength, as well as female solidarity. Let this day serve as a reminder of the capable women who continue to pave the way forward; and let it give courage to women across the nation to realise their strength and to take control of their wealth portfolios.

(Info sourced from time.com, fin24.com and iol.co.za)

Retirement 101

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Creating your long-term saving goals (this is retirement for many people) is not something that you can simply decide on the spot – and often, these goals may change over time. Before you even get into some of the technicalities of long-term saving strategies, as we will cover in this blog, you need to know why you’re saving – and what you’re saving for. When you know the why, the how is much easier.

This should become an ongoing conversation with your financial advisor – one blog simply cannot cover it all – but hopefully it will help you on your journey!

Given the advances already made in the fields of technology and medicine, we are living longer than previous generations, which means that a balanced and robust portfolio will make provision for a long and happy retirement after you hang up your work boots.

Delaying saving for retirement is not uncommon, as other life costs can easily seem more important when you are young. Even those who are forced to save — as a result of a compulsory deductions at work — still might not have enough when it comes to retirement age.

It’s not only how much money we save that counts, but also when we start saving. Your retirement should be a time when you finally get to reap the rewards of decades of hard work. However, if you wish to enjoy these golden years in comfort, it’s best to start saving when you’re young, as the earlier you start, the less you need to put away each month.

Many people only start saving at the age of 28, rather than when they first start work. And there are even more who wait until their thirties, or later still. The problem is that if you start later on in life, you’re not just faced with trying to catch up on the amount that you could have been putting aside before, but you also need to make up for the compounded returns that you’ve missed out on. The earlier you start saving, the more you can benefit from the market contributing to your retirement through the power of compound interest.

For example, if you start saving ZAR5,000 a month at 25 years old, at an
annual average of 6% return, you’ll have more than ZAR7-million by the time you hit 60.

However, if you start saving the same amount a decade later, you will only have ZAR3.46 million by the age of 60. You’ll, therefore, need to increase your savings to ZAR10,000 a month to reach ZAR6.9 million in your 25-year investment horizon.

How much will you need

The first step towards saving for your retirement is to figure out how much you will likely need. Most retirement experts in South Africa advise that you’ll probably need to replace about 75% of your current income to retire comfortably, assuming you don’t have a home loan or any other large debt by that age. Peter Doyle, the former president of the Actuarial Society of South Africa, explains that “12 times your annual salary is likely to buy you a financially comfortable retirement.”

However, in recent experience we are finding that those wanting to retire need about 90% replacement ratio, especially as medical expenses are likely to rise as you get older.

To achieve a comfortable retirement, it is widely recommended to save at least 15% of your gross income over a 40-year career if you start saving at the age of 25. However, a late start or early retirement would obviously require a much higher savings rate.

How to save

When it comes to saving for retirement, you need inflation-beating investments and as much time as possible to benefit from the compound interest.

There are various retirement plans that you can choose from. The most tax efficient way of saving in South Africa is arguably to invest the maximum percentage of your salary possible in your company’s pension scheme and/or a retirement annuity (RA).

The good news is that contributions to a retirement annuity, which you can invest in through a financial services provider; and/or pension or provident funds, which are provided by employers, are tax deductible up to a certain amount (you can contribute up to 27.5% of your gross remuneration — up to a maximum of ZAR350,000 per year — to a pension fund or RA). And, as you can save pre-tax with these vehicles, you can benefit from the compounded growth on a larger amount.

A major benefit of an RA is that all growth is completely tax-free, but it is important to review all the costs, as life-linked retirement annuities can be expensive. If you do wish to invest in an RA, it’s advisable to select one that has no penalties or obligation for monthly contributions. The best ones don’t have any upfront fees and operate on a pay-as-you-go basis.

More flexible retirement products are usually unit trust-based, as these allow you to decide when and how much you want to contribute. Generally speaking, a balanced unit trust offers a good savings option for retirement, as it should provide adequate equity exposure for long-term growth, as well as more stable asset classes that can mitigate the investment risk.

You can also supplement your savings by investing in a tax free savings account (TFSA), an investment property, or trading in shares. A tax-free investment could be a suitable additional investment, as it still offers tax benefits without some of the restrictions that can come with a retirement annuity. However, it does have its own restrictions — a TFSA currently only allows for tax-free savings of ZAR33,000 a year, and a lifetime limit of ZAR500,000.

How to play catch-up

It’s worth aiming to save at least ZAR15 of every pre-tax ZAR100 if you have a 40-year timeline. However, if you want to retire before the age of 65, or put off saving until your thirties or later, then you will need to increase that saving rate. If you start saving at age 30, you will likely need to save 20% of your gross income, while starting at 40 years old will mean you will need to save 42%.

If you’ve left it late or realise you need more savings to retire comfortably, the easiest way to solve this problem is to save more (saving an extra ZAR4,000 a month on a ZAR40,000 salary will make a big difference). If you are willing to cut back on expenses, find a way to generate extra income, inject part of your annual increase or bonus, or pay off your debts as quickly as possible, then invest the freed up money. Essentially if you clean up your budget, and get into the habit of saving regularly, you can work towards a healthier retirement fund.

You may also need to be more aggressive when it comes to investing. A widely accepted rule of thumb is to subtract your current age from 100 and invest that percentage of your portfolio in equities, or many people now follow the ‘110 rule’ as we are living longer. So, if you’re 30 years old, you’d invest 80%, and you’d decrease this to 70% at age 40 to also decrease the risk in your portfolio as you get older. However, if you don’t have enough saved for whatever reason, you may well wish to increase the equity portion of your portfolio. Don’t hesitate to arrange a meeting to discuss this so you can make an informed decision and not take unnecessary risk.

Another thing to bear in mind is to preserve your benefits rather than take the cash if you are offered withdrawal benefits or change jobs. Furthermore, although you can also access your savings in preservation funds and retirement annuities at age 55, it’s best to again keep your money invested. Don’t be tempted to use your money for anything that is not essential, as you should be adding to your savings at this stage, rather than eroding them.

Saving for retirement can seem a complex task, but it doesn’t have to be if you do a bit of research and arrange a meeting to discuss the different retirement plan options available. Building a diversified retirement portfolio will depend on your assets, your risk profile, your age and your financial goals, but you’re on the right track once you have picked a strategy that you trust, and have established a suitable retirement portfolio. This should then be reviewed at least once a year — even quarterly — so you can track whether you are saving enough and make adjustments if need be. This can be done at the same time as your tax planning so you can ensure you are taking full advantage of all the tax breaks each year.

(blog ideas were added to from fin24.com)

Financial lessons from Rich Dad, Poor Dad

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In his bestselling book, Rich Dad, Poor Dad, the author, Robert Kiyosaki, explains the fundamental differences in the way his two fathers thought about money — his real father who was ‘poor’ and the father of his best friend who was ‘rich’, despite both earning a good salary. From studying their journeys, he realised that your wealth can depend more on your actions than the money you earn. He surmised that it is, therefore, important to first change your attitude about money because your thoughts lead to your actions.

Here are 6 fundamental financial lessons from the book that can help you to build wealth and retire in comfort.

1. Manage your money

Many people are able to make money, but not everyone learns how to manage it properly. Financial intelligence starts with learning the difference between assets and liabilities. By enhancing your savings and tracking your expenses, you can become aware of your spending patterns and ensure that you have more money coming in than going out, which is what will make you richer.

Many people make the mistake of thinking that earning more money will solve their financial problems, but this could only serve to compound them if your outgoings increase exponentially too.

2. Make your money work for you

A main point that Kiyosaki makes is that the lower and middle classes work for their money, whereas the wealthy have money work for them.

Learn how money works, then work out how to make it, independent of a paycheck. Look into how you can generate more income by investing your money wisely. And don’t give the financial power to your employer, but rather keep the power by taking control of your money and making it work for you.

3. Be brave and don’t be scared to fail

Most people never win because they’re afraid of losing or failing. However, we often learn and improve by making mistakes, and failure is often part of the process of becoming successful.

You don’t have to be ridiculously intelligent to have financial success. While Kiyosaki’s father had multiple qualifications, his best friend didn’t have a proper education. A degree cum laude won’t necessarily make you wealthy if you don’t have guts and an understanding of how money works too. Generating wealth sometimes involves taking risks and dealing with a level of uncertainty. The trick is to be clever about when and how to take risks, by being savvy and learning from your experiences to assess a situation, rather than dive in blindly. The path to wealth often requires you to leverage money to mitigate your risk and maximise your profit.

4. Become financially intelligent and literate

The biggest cause of financial trouble is ignorance because this isn’t taught in many education systems or societies. Financial terms can be complex and daunting, but you can develop financial intelligence by reading about accounting and investing, and keeping informed about the markets. Kiyosaki believes that the cause of so much suffering is due to a lack of financial education. Courage plus technical knowledge will take you far.

5. Train your mind to look for opportunities

Look for creative solutions to any money problems. Maximise your options and work out what you can do to improve your financial position if opportunities aren’t falling from the sky. It is not so much a question of what happens to you, but the different financial solutions you can think of to turn things into opportunities.

6. Focus on assets over income

Concentrate on your net worth rather than your monthly salary. Start acquiring assets — such as stocks, bonds, or your own company — to earn you money, as opposed to liabilities — such as mortgages, loans, or credit cards — which cost you money. Build your asset column first, then buy any luxuries with the income generated from these.

According to Kiyosaki, you can measure your wealth by the number of days you can live off the income from your assets. And you can consider yourself financially independent if your monthly income from your assets exceeds your monthly expenses.

Making money is a question of mindset. Ensure you understand how it flows, and don’t hesitate to arrange a meeting if you need any help in applying these principles for financial freedom.

If you have the time – take a look at reading the book – Rich Dad, Poor Dad, by Richard Kiyosaki!

The urgency of an emergency fund

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An emergency fund is a lump sum of money that is important to set aside to cover any financial surprises, such as car breakdowns, medical requirements, home repairs, vet bills, or sudden unemployment. These unexpected emergencies can be stressful, costly, and they often demand immediate payment.

You can financially manage these unanticipated disasters by ensuring you have an emergency fund to fall back on when the need arises.

Insurance can play a big part in financing emergencies, but it still does not replace the need for an emergency fund — your medical aid provider might not cover every expense; warranties come with a timeframe; and your home and car insurance policies may still require you to pay excesses.

You should, therefore, regard your emergency fund as an additional insurance policy that needs to be kept solely for emergencies, rather than dipped into for incidental expenses. Even if your income increases, it’s advisable to increase the amount you save for your emergency fund too.

In addition to the financial stability, there are other benefits to having an emergency reserve of money. Having a financial safety net can give you the confidence of knowing that you can tackle whatever life throws at you, which can help to keep stress levels at bay. An emergency fund can also prevent you from making bad financial decisions in times of crisis, such as borrowing a lot of money at a high interest rate, with fees and penalties. Having an emergency fund is arguably a necessity nowadays to save you on a rainy day from having no choice but to go into a lot of debt.

Studies have shown that many South Africans sadly don’t save enough for emergencies, and when faced with unexpected expenses, people often use credit that they can’t easily repay. Many people don’t save for emergencies because they don’t believe that something will happen to them, or they are not wholly aware of all the costs involved if the unforeseen does happen. Emergency savings are often not given priority as people tend to put their money towards short-term gratification or long-term goals. It is also understandably easier to save for positive events, such as a holiday or retirement, rather than prepare for the negative.

How much to save

While anything is definitely better than nothing, most financial experts recommend that you aim to grow an emergency cash reserve that would be large enough to cover all of your expenses for three to six months. The exact amount may depend on a few variables, so it’s advisable to arrange a meeting to discuss how your emergency fund could fit in with the rest of your priorities.

Saving for an emergency fund can require a bit of effort to achieve. The first step is to figure out how much you spend each month — accommodation, food and transport are likely to take up most of your budget — then multiply that number by three and you can set that amount as an initial three-month target.

How to save

There are many ways you can approach saving for this goal. For example, cutting back on the amount you spend on eating out can help to fund your savings plan. The key is to add to your emergency fund at regular intervals, and you can do this by dedicating a feasible amount from your paycheck and treating it like any other recurring bill that you need to pay each month. Saving a raise, bonus or tax refund, will also give a healthy boost to your emergency fund, as will downgrading your mobile phone service or trading in your car for a cheaper model.

If funds are a bit tight, you can start simply by emptying your pockets each day or tipping yourself whenever you eat at home, and stashing the change in a jar. If you manage to dedicate ZAR50 per day to your effort, you’ll have ZAR18,250 by the end of the year, which will add up to ZAR91,250 in five years!

This is when it helps to have a financial planner/coach helping you to create the saving behaviour change – and then keep to it!

Banks offer a range of savings accounts that may appeal to you. However, you should discuss whether there are any notice periods, possible penalties or minimum deposit requirements before going ahead.

Alternatively, you may wish to put your emergency savings into a money market unit trust fund or a high-interest savings account, as they are low-risk investments and accessible (although harder to dip into than a jar, your funds can be accessed in between 24 to 48 hours with no penalties), and you can also earn an interest rate on the money, which can be reinvested to keep up with inflation. A low-risk fund, however, does still carry the opportunity cost of putting your money in an investment that could be earning a higher return in a riskier investment.

Funds with a higher risk profile, such as a low-equity multi-asset fund or a bond fund, will generally earn a higher return than a money market fund. And you could select these funds for emergencies that are prone to above-inflation price increases, such as medical expenses. However, do bear in mind that if you choose this option, there is a risk of capital loss, as these funds are more volatile than money market funds. It is, therefore, advisable to invest for a longer term to reduce your chance of losses. You’ll find that each unit trust fund has a recommended investment period so that investors can maximise the benefit of that fund.

The amount of money required to fund a proper emergency fund is significant but necessary as we live in uncertain times with an uncertain economy. If you don’t have a rainy day fund already, start saving now and put aside whatever you can, even if it isn’t much. It will allow you to weather those rainy days without running up unnecessary debt. Be prepared — save towards an emergency and don’t hesitate to discuss how best to allocate your savings to appropriate investments.

Recent change to TFSAs

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A National Treasury regulation that came into play on 1st March 2018 now provides South Africans with more flexibility when it comes to investing their money in a tax-free savings account (TFSA).

According to an article published on Business Tech, South Africans will be able to switch as much as they want of their money in a TFSA between financial service providers at no additional cost. They can do this up to a maximum of twice per year, and this will enable investors to adjust their tax-free investments to best suit any changes in their personal circumstances.

On 1st March 2015, the government first introduced tax-free savings accounts to encourage more South Africans to start saving, as there was found to be an exceptionally poor savings rate in the country.

Tax-free investments allow you to save without incurring any tax on the growth of your investment. This means that you don’t have to pay any tax on interest, capital gains tax (CGT), or dividends. Investors can invest up to ZAR30,000 each year (or ZAR2,500 per month) tax-free, until they reach their lifetime limit of ZAR500,000. However, do be sure to stay below the annual ZAR30,000 limit, otherwise you will incur tax penalties.

If you save the maximum annual amount consistently, investors can take advantage of the long-term benefits of compound interest and should, after just less than 17 years, have saved ZAR500,000 as a tax-free investment — in addition to compounded capital growth, interest and dividends.

Tax-free savings are for anyone with a taxable income, so it’s not worth putting a tax-free savings account in a child’s name if you wish to save for their education. Furthermore, be careful not to donate more than ZAR100,000 a year to children or grandchildren as a tax-free investment, or you will be liable to pay donations tax.

Make the most of a TFSA

To really reap the benefits of a tax-free savings account, it’s advisable to try to reach the ZAR500,000 limit as soon as possible, after which point you can watch your money grow with the power of compound interest for as long as possible. While saving, it’s also not worth making any withdrawals from your tax-free accounts, as you cannot inject the amount back once it’s been withdrawn if you have already reached the annual limit.

As a holder of a TFSA, consider the following factors before you choose an investment product (be that cash at a bank; or equity-based or unit trust-based investments).

• Consider your investment goal.
• Think carefully about your return requirements and risk profile.
• Decide who will be the beneficiary if you don’t intend to make any withdrawals and would rather leave the product as a legacy.
• Reflect on whether you wish to access your money when required or if you are happy to invest it for several years.

To best grow your portfolio, it’s worth considering all the tax-free benefits for which you are eligible. And, with the extra flexibility that this recent change to TFSAs provides, it could become (if it isn’t already) a wise addition to your wealth portfolio.

Don’t hesitate to arrange a meeting to discuss all considerations so that you can select the most suitable product and asset class for your personal risk profile and your wealth portfolio.

(information was sourced from businesstech.co.za and fin24.com)