Cold hard cash

Debt statistics are growing – this is very likely in part to the fact that a vast majority of us today prefer credit cards over cash. The benefits of credit cards are obvious. They are more convenient and offer more security.

Cold, hard cash, however, can be the best way to organize your spending.

Here are three reasons why you should opt for using cash instead of credit cards for managing your daily budget.

1. Less likely to overspend

Healthier spending habits develop when you use cash. You become more mindful of how much each item costs that you’re putting into your basket, and you won’t want to spend all that you have. More self-control is gained, as you make less impulsive purchases of unnecessary things than you would have if you were using a credit, debit or store card.

Also, cash payments carry no interest rates that you will have to pay back later. You pay the amount on the price ticket, nothing more.

2. Become more engaged with your budget

You will become increasingly engaged with your budget when you work with cash. As compared to the possibility of inconsistent credit card interest rates, with cash you can easily track your expenditure, ATM withdrawal fees and how that favours against your income.

Budgeting and planning your expenditure can be a more enjoyable exercise when you use cash. You can easily reduce your debt too because no interest will be accumulating with every payment you make and you won’t be bleeding money on overspending.

3. Become more creative with your spending

Carrying cash can alter your financial mindset for the better. Since you’ll be limited to what you have in possession and not have the same spending power you get from credit cards, you’ll find that you will become more inventive with your spending.

The longer you challenge yourself to use cash, disciplined spending will become ingrained into your lifestyle as you’ll look for bargains, better deals and more ways to make your money go further.

Studies say that you develop an emotional attachment to items paid for with cash because you feel you made that purchase possible and it was not enabled by your creditor.

Consider the advantages of using cash before swiping your plastic. You can form a better financial identity and live without the drawbacks of credit cards when you go for cash. You can even develop a more mindful approach to your spending because your purchases will depend literally on how much you have in hand.

Three ways to thrash your debt

Effectively managing your debt is one of the best and most proactive ways of ensuring a sustainable financial future. It is deeply gratifying knowing that you’re doing something right when you see your debt shrinking!

The journey of exploring the best ways to manage your debt can improve your attitude and enthusiasm towards settling it. Instead of seeing it as a burden to your financial goals, you’ll recognise that it’s an inspiring investment towards your financial freedom.

Here are three often-cited ways to repay your debt.

  • Snowball method

The snowball method is frequently thought of as the best debt-relief option as it means you start off by paying the smallest debt and then move on to bigger loan amounts. This technique can be valuable for boosting morale and improving your sense of achievement as you start to see the results early on. Your debtor statements are reduced and you will be encouraged to continue with this debt repayment plan.

However, this means you end up paying higher interest costs, because it considers the payment of the debt and not the interest rates around it. To get around this, you can find other ways to refinance your high interest debts.

  • The Avalanche method

This strategy is the opposite of the snowball method. You start off with the biggest debt and finish with the smallest. If you’re looking to save on interest this is the best strategy to employ. 

This strategy requires patience as it doesn’t offer immediate results but, in the long term, you can be debt-free quicker. You need to have the resolve to settle bigger debts. From there you’ll be more motivated because only the small obstacles will be left. 

  • Debt consolidation

Through debt consolidation you can easily keep up with multiple payment deadlines by combining all your debts into one. This involves taking out one large loan, equal to the amount of your entire debt, and paying off what you owe in one place. 

The obvious risk is that you would now be using debt… to get out of debt. However, you will end up owing one creditor instead of many, and could potentially secure a more beneficial interest rate overall. When followed effectively this method can help reduce your debt whilst improving your credit score.

All three of these strategies can be useful for reducing your debt. Discipline is required with all of them because having the best strategy is not enough – you have to follow through with it too. 

If you need help with this – just give us a shout!

Are you a savings statistic?

Most Sub-Saharan African countries are chronic ‘dis-savers’. But, you don’t have to be. Before we look at the options, let’s take a snapshot of recent events.

Last July, the South African Savings Institute gave the country a wakeup call when it said that the average household rate had fallen from 0.5% per month in 2018 to 0.4% in 2019. 

While 2020 figures are not out yet (at the time of this blog) anywhere in the continent, there’s a likelihood of more challenging times – unemployment is rife, little to no growth pervades most asset classes and economies around the world are suffering mightily.

Another look at South Africa’s Household Saving Rate shows that it decreased to 0.20% in the fourth quarter of 2019. That means, of every R1000 coming into every household, R2 or less was being saved. (according to Trading Economics)

Desperate times

In the current economic climate, we are finding that very few people have an umbrella to help them weather the storm.

Last year, even before the current lockdown impact, over 80% of people did not have sufficient savings to last just three months if they lost their job.

Or, when faced with an unforeseen emergency of around R10 000, many people would have to ask family and friends for help, or take out a loan or cover the emergency costs with credit.

Numerous studies, including the well-known True South one a few years ago, show that many of us don’t have sufficient income protection cover or any other form of insurance, leaving us completely vulnerable when (not if) disaster strikes.

Are you one of the many or one of the few?

You are part of the greater statistic, and aren’t financially protected and prepared enough, if one or more of the following is true of you:

  • You do not have an emergency savings fund
  • Of every R10 000 you earn, R200 or less is saved
  • You do not have life insurance or income protection insurance
  • You do not have a financial plan worked out with a professional financial adviser

The good news about saving is that it’s never too late to start and more is always better. So, if any of the above sounds familiar, let’s have a virtual coffee and help you secure a sturdy financial future.

The long haul

Saving is not just about a plan – it’s a behaviour.

Part of this behaviour is rooted in our mental ability to overcome our own fears. We reduce these fears by mentally preparing for life goals and recognising that we have what it takes to achieve them.

Mentally preparing for long term savings is like preparing for a long-distance race or a trip. You start exercising today so you can cope with the physical demands of next year’s marathon. You sort out your travel necessities now so you don’t struggle with them when you have to go on your trip.

The same goes for your long-term savings. Starting to save today helps to accumulate more wealth for the future; anticipating and providing for the expenses that you expect to incur.

Here are four ways to help you prepare for a financially secure future:

1. Set a goal and start saving as soon as you can

Establishing a monthly budget helps you develop healthy spending habits, reduce your expenditure and have more to invest. Having a goal is a big part of this process because it’s really hard to save if you don’t know what you’re saving for.

The value of saving early is that you’re creating an opportunity for your money to work for you longer through the value of compounding interest.

2. Start working on your debt

Being engaged with your budget means being engaged with your debts too. Actively dealing with your debt now, frees up money to direct towards your future. Picking a debt management plan that will work best for you and your unique goals is the first step.

Diminishing your debt should be one of your goals. Seeing your debt decrease will encourage you to save and build more wealth for your future self. There are various strategies you can use to settle your debt in a way that works best for you.

3. Stick to your retirement plan

It’s like sticking to the road map, even if there is construction along the way. Having a retirement plan can help you look into your future more optimistically because you’ll be comfortable knowing steps to ensure it have already been taken. This can be really hard when markets bottom-out or there is a major crisis – but this is when it’s even more important to stick to YOUR plan.

If you’re struggling to stick to your plan, consider doing your research on the various retirement plans and consult your financial adviser for help with balancing your investments or maximizing your tax advantage in order to build a substantial investment portfolio whilst creating more liquidity for your current situation.

4. Adopt a more positive outlook on your finances

Developing a positive outlook towards money begins with you understanding that a life of abundance is created by starting to enjoy what you have instead of focusing on what you think you need. It’s about stopping to smell the roses on your long-distance run, or taking a break to drink in the scenery on your road-trip.

Learn to make saving a part of your lifestyle. Recognise that short term savings can be good but prioritizing long term savings can create a more sustainable future for you. See it as a way of ensuring you have more spending power in the future.

Partnering with a financial adviser can help you put a plan into place – but also change your behaviour and attitude when it comes to money to make sure that your complete financial plan supports the life you want to lead and the legacy you wish to leave.

Words that will make (or cost) you money

Communication around your finances is crucial if you want to be more mindful and intentional around wealth creation.

There are some conversations that will help you ascribe meaning to your money, and these should happen early on in your planning process (and regularly thereafter). Then there are conversations that will facilitate the actioning of your financial plan and will be important when you need to make changes to your portfolio.

Here is a quick guide to five key terms that you’ll hear crop up again and again as you take action in your financial plan.

1. Dividend
A dividend is a portion of a company’s earnings that are distributed to shareholders. The dividends can take various forms but is most commonly a distribution in cash or as a portion of a share of the company. Furthermore, companies have their own policies as to when and how much of earnings are distributed in the form of dividends.

2. Bonds
There are many types of bonds, but in simple terms, a bond is a way of borrowing a sum of money – to be repaid by a fixed date in the future, with interest in the meantime. The buyers of bonds are essentially lenders, which means that if you buy a government savings bond, you become a lender to the local government.

The interest rate received is often referred to as the bond’s yield, and is the compensation that the investor receives for ‘lending’ their hard-earned money. According to an article published by Investopedia, “bonds are often referred to as fixed-income securities because the borrower can anticipate the exact amount of cash they will have received if a bond is held until maturity.“

3. Annuity
An annuity is a type of investment account that uses lump savings to generate a regular income stream – typically these are used for retirement planning.

There are two types of annuities – fixed and variable.

The key feature of a fixed annuity is that you enter into a contract with an insurer who subsequently guarantees a set income for life. This income is dependent on a number of factors such as your age, gender or whether the payment will be level or increasing. The annuity payment is guaranteed by the insurance company, so it is a good option for those who are risk averse (don’t like risk).

With a variable annuity, the risk of the investment is transferred to the annuitant in that her capital (saved money) and subsequent annuity is dependent on market performance.

4. Unit Trusts (also known as Mutual Funds in the US and UK)
According to an article published by The Balance, a “mutual fund (unit trust) is a pooled portfolio. Investors buy shares or units in a trust and the money is invested by a professional portfolio manager” who invests the capital in an attempt to produce an income and capital gains (profit) for the investors. The pool of funds is collected from many investors who wish to invest in stocks, bonds and similar assets.

One of the main advantages of unit trusts are that they offer investment vehicles where smaller investors have access to diversified, professionally managed portfolios in which each shareholder participates (wins or loses) proportionally in the gain or loss of the fund.

5. Asset Allocation
In order to invest your money, you essentially need to give it to someone who will in theory use it to make a profit by working with your assets (invested money), and you then enjoy the profits from that. If they make a loss, you make a loss too. That’s the risk you take.

Asset allocation is therefore the process of deciding how much money, based on your appetite for risk and objectives, is invested in the different available asset classes – such as equities (stocks), real estate (land and property) or commodities (eg. gold and silver).

Being able to talk about your money and how you are working with it is a powerful step in gaining confidence and power over your money, rather than allowing it to have power over you. The more we can learn together, the more we can build the lives that we want and enjoy what we have!

Hold onto your life cover

Sometimes it feels like this conversation is a broken record, constantly going round and around on the same track: people the world over are feeling the financial pinch and tightening belts.

It’s not just a local issue, and it’s not a new concern.

A few minutes on Instagram or Twitter will reveal just how many are building their third, fourth or fifth ‘side hustle’. This is partly because our internet age has made alternative streams of income more viable, but also because our current economic pressures make it almost impossible for families to cope with a single, or even dual, income.

When external pressures leave us feeling hard-pressed, it may be tempting during such times to reduce or release our risk cover policies – with life cover being a common policy to cancel. Sometimes, these decisions are made in order to maintain a certain living standard – however, this could have dire financial consequences for your loved ones.

Life cover is never an easy conversation to have. And when things are tight, you have to weigh up paying your monthly premiums against the potential effect on your family if they were to lose your income entirely in the event of a disaster.

The problem with cancelling your life cover isn’t just that it is a massive risk, but that it also may be impossible to replace it as you grow older.

Many people may assume that you can simply cancel your life assurance then reinstate it when it’s easier to afford. However, premiums are likely to be substantially higher when you’re older (cover is said to cost double at the age of 45 what it costs at age 25). Health conditions may also be excluded from the cover and, in the worst case, you may even be uninsurable if you are diagnosed with certain illnesses.

Even missing the payment of a few premiums can have a negative effect. Not only may you need to undergo the underwriting procedure again, but any deterioration in your health would be taken into account when considering policy reinstatement and premiums.

So what are the alternatives?

4 possible alternatives to cancelling life cover (this is not financial advice)

1. Reduce your monthly expenses
Cut back on items that aren’t essential, such as your television subscription. Critically evaluate your budget and examine what is imperative versus what you just would like. Remember, this is not forever, it’s about prioritizing your financial security.

2. Re-negotiate your debts
Try approaching creditors or your bank to negotiate terms of any repayments. They may be willing to accept smaller sums over a longer period.

3. Press pause on your savings
Consider taking a ‘payment holiday’ on your contributions to an investment portfolio.

4. Negotiate your premium payment pattern
Request to change to an escalating-premium pattern for your life cover, which means that your initial premiums will be lower and increase over time.

Please note that the above four points are suggested options, if you would like to review your plan inside of your changing situation – please arrange a meeting for us to objectively make the best decisions according to your individual needs. It is important to stay educated about life cover and informed about affordable solutions, so please discuss this if it is a concern.

Finding the fungibility in commodities

Depending on your level of investing savvy, you may or may not be comfortable with the term ‘commodities’. As our global systems currently enter one of the toughest times experienced in over a hundred years, you may hear this term bandied about a fair amount.

Essentially, commodities are the basic building blocks of the global economy, upon which most other goods are created. They fall into two broad categories – hard and soft.

Hard commodities are natural resources that must be mined or extracted. These include energies such as oil and natural gas, and metals such as gold and aluminium. Soft commodities, on the other hand, are agricultural products such as crops and livestock.

When it comes to investment strategies, commodities and stocks often move in opposite directions to one another. Hence, commodities can offer a good opportunity to diversify an investment portfolio — either for the long-term, or during unusually volatile periods.

Commodities are essentially uniform across producers, and this uniformity is referred to as ‘fungibility’. For example, oil would be considered a commodity, but Old Khaki’s jeans would not be, as consumers would consider them to be different from jeans sold by other stores. When traded on an exchange, a commodity must meet specific standards, which is known as a basis grade.

A commodity market is a virtual or physical marketplace that is dedicated to the buying, selling and trading of raw or primary products. There are currently about 50 major commodity markets in the world that facilitate trade in approximately 100 primary commodities.

Over the past few years, the definition of ‘commodities’ has expanded to also include financial products such as foreign currencies, indexes and exchange-traded funds (ETFs). Technological advances have also led to new types of commodities, such as mobile phone minutes and bandwidth, being exchanged.

Commodities can have a big effect on investment portfolios. Basic economic principles of supply and demand tend to drive commodities markets, so lower supply increases demand, which equals higher prices (and vice versa). For example, a major disruption, such as a health scare among cattle, might lead to a spike in the generally stable demand for livestock.

Slumping commodity prices can also provide opportunities for investors. However, investing in commodities can easily become risky because they can be affected by eventualities that are difficult to predict, such as weather patterns, epidemics, natural disasters, and even politics. As a result, it is important to carefully consider your risk appetite and the length of time you have until you wish to achieve your goals, as this will affect the recommended allocation of your portfolio to commodities.

As with all elements of your portfolio, it is important to ensure you have a solid understanding of what you have allocated and why. Don’t be afraid to ask questions if you’re ever unsure of any terminology.

Working with different money personalities

As the 2020 global pandemic for COVID-19 becomes forever etched in our history, most of us will remember how the term ‘lockdown’ moved from a novelty to a serious psychological threat. At the point of writing this blog, it’s not clear just how vast and integrated the knock-on effect of lockdown will be, but for most of us it’s confronted us with conversations we’ve never had to have before.

Being confined indoors, or a specific area for an extended period of time brings out the deeper facets of our personalities and stress coping skills. Several years ago an article by Maya on Money spoke to money personalities – and whilst this has perhaps been overlooked or avoided by many, lockdown will most certainly be a catalyst for addressing it now!

Money has been cited as the biggest reason for divorce, and differing attitudes towards money in any relationship can cause friction. So let’s take a look at some basic ‘money personalities’ and you can decide with which you most identify.

This may not only help you manage your relationships in both trying or triumphant times, but also how to go about managing your wealth creation as a couple, family or shared living arrangement.

1. The Spendthrift
A spendthrift tends to be extravagant and spontaneous with regards to money matters. However, sometimes they can be irresponsible and need protection from making financial mistakes and getting into debt that they can’t afford.

2. The Saver
Someone who saves may have quite modest tastes and needs, and long-term they may well reap the rewards of their cautious approach. However, their financial prudence and love for budgeting could be a turn-off for someone who is not that way inclined.

3. The Cinderella
Maya Fisher-French refers to the ‘Cinderella Complex’ in her article when she considers a woman’s unconscious (or conscious) desire to be cared for. Some people are simply looking for a partner who can spoil them, which Fisher-French refers to as a Blesser.

4. The Financially Independent
Other people make it their main focus to become financially independent so that they can manage their money and responsibilities on their own. They pride themselves on working hard to become financially organised and not needing to rely on anyone else. This type of person may fret about being pulled down by someone who is less financially astute.

5. The Power Hungry
Power plays can arise if someone uses money to wield power over others. The adage, “he who holds the gold, makes the rules,” may be true in some relationships – especially if there is a big difference in earnings. Money can create a shift in power that can be easily abused if all parties are not careful.

Rules should be agreed on by all who rely on each other. Different money personalities can be compatible if a balance is achieved; everyone needs to recognise the strengths they are bringing to the relationship.

For example, a Saver can help a Spendthrift to avoid some financial miscalculations, while a Spendthrift can teach a Saver to loosen up and enjoy splashing a bit of cash sometimes.

Likewise, someone who enjoys spending money on their family could be compatible with those who enjoy having money spent on them.

If there has been a major change (loss of income or work for any of the income earners in the home) it can be enormously stressful if we don’t have the words and tools to have better conversations about earning, saving and spending the household money.

It’s powerful to know what type of money personality you are and to find synergy in your relationships. It’s not necessarily a question of having the same attitude and approach to money issues, but rather finding compatibility and compromise.

Investing amid uncertainty

Anything of any value takes time. Likewise, creating wealth is a long-term process.

Well-structured investment strategies have always taken uncertainty into account. Patience, resilience and a robust strategy are imperative to weather the global investment storm that has been raging in recent times.

As you embark, or continue, upon your journey to great financial security, it is important to wholly understand the investment landscape. This is one of the areas where having an adviser you trust will help you successfully navigate the ups and downs of a stormy market and exploit the nuances of profit-yielding opportunities.

If you experience pangs of fear or doubt along your journey, then it means that you’re taking it seriously and you’re engaging in what’s going on around you. No-one is immune to these experiences.

What exactly has created the stormy conditions?
Recent market events are focussed almost entirely on the effects of the global lockdowns relating to COVID-19, but in the months leading up to 2020, we’ve been seeing volatility in the markets. Some of these relate to oil prices, trade wars between China and USA as well as credit ratings from the big three credit rating agencies — Fitch Ratings, Moody’s and Standard & Poor’s (S&P).

Add in the winds of political uncertainty and the high pressure systems of a fast changing global economy, many investors have at best been treading water or have seen their wealth decline in real terms, as portfolios have largely been unable to beat inflation over the short term.

Goodbye to the Past
It is important to put things into perspective and appreciate that investment markets often go through weaker growth periods of consolidation (this is technically known as a process of reversion to the mean).

Given the current global climate, 2020 and possibly 2021 are likely to be a time of consolidation in the markets. However, if you’re looking to achieve a long-term investment goal, it is important to not be swayed by short-term ideals or emotions, as you have a higher probability of growing your wealth if you stick to your investment strategy.

The Five Steps to Long-term Investment Success and Financial Independence

  1. Determine your investment objective by specifying a realistic goal you wish to achieve.
  2. Set your time horizon, which is the number of years you have to achieve your goal.
  3. Decide on an appropriate investment strategy by selecting a combination of asset classes in which to invest – bonds, property, cash, offshore assets, and equities.
  4. Select the most appropriate investment platforms, products and asset managers through which your chosen investments can be made.
  5. Monitor and review all of the above on an ongoing basis.

While a great deal of uncertainty remains for all investors, it is important to understand that uncertainty, and even volatility, in investment markets do not only represent risk, they also represent opportunities. Uncertainty is not new, either. It’s easy to blame current conditions, but if your strategy is prepared for uncertainty, if you are in the right headspace, you will be able to remain prudently invested in the markets.

It’s important to remain informed and seek to improve your knowledge about your investments, then keep the various elements of your investment plan aligned to navigate uncertain waters and continue on your journey to wealth creation.

A level head saves skewed vision

As Nelson Mandela said, once we’ve climbed a great hill we only find that there are many more hills to climb. When you’re looking up or down the hill, it’s easy to have a skewed vision of what’s really going on. We spend more time going up and down than resting at the top; it’s difficult to hold a level head in times of turmoil.

You may look at your bank statement this morning and see that there won’t be enough to cover your debit orders and upcoming expenses. This is scary! Conversely, you may see plenty of money and fear wasting it!

Money will always flow in and out; the longer we live and earn, the more we are reminded of this.

Whether your financial resources are lean or lush, you may be tempted to make some big moves to manage the coming months as wisely as you can.

When it comes to managing your investments it’s crucial to stay focused on the bigger picture – even when recent events may have you itching to move your investments out of the market and into cash. We need to keep a level head and not skew our vision.

The herd mentality, or groupthink, to ‘cash in’ arises from the fact that cash investments are readily available for use and are mostly free of investment risk. The low risk of a bank failing is essentially the only concern as they are investments on short-term, variable-rate deposits with reputable banks.

However, in an article published at the start of April 2017 in Personal Finance, Leigh Kohler, the head of research at Glacier by Sanlam (South Africa), explained that it’s important in uncertain times to remember that even though a cash investments may seem like a comparably safe option, the returns don’t often beat inflation. According to her, only once between 2001 and 2016, did cash investments outperform local equities and bonds.

Furthermore, if you had been invested only in South African equities over this period, you would have received an average return of 17.12%, compared to just 7.96% if you had only invested in local cash investments.

You are also taking two market-timing risks if you wish to move your investments into cash then back again once things have calmed down, and research shows that getting the timing wrong can be a devastating blow to your portfolio.

What should you do in lieu of making an emotional decision?

  • Slow down your decision making process and include your trusted adviser;
  • Invest in a combination of asset classes in line with your needs, time horizon, and risk tolerance;
  • Invest in a suitable multi-asset fund;
  • Ensure you have sufficient exposure to offshore assets;
  • Understand and believe in your long-term investment strategy, then stick to it.

Scary times come and go – the burden of responsibility weighs on us regardless. How we protect and use our hard earned wealth and accumulated assets need to reflect what’s truly important to us, and not be a reaction to current trends and happenings.