The gift that keeps on giving

This time of year sees both children and adults preparing their wish-lists for the upcoming festive season. But as many South Africans continue to grapple with rising debt, now is a good time to shift the focus from giving material items to providing future financial well-being.

Giving a child an investment as a gift will not only promote a culture of saving from a young age, but will also show them how you can make money grow.

There’s a powerful story of one customer’s commitment to leave a legacy for his family, and the value of sound financial advice. In November 1968, a customer made an initial deposit of  R400 into the Old Mutual Investors’ Fund and 48 years later, his investment is today worth over R600 000.

More precious than the value of his money, however, was the culture of saving and the legacy that he passed on to his children and grandchildren. On special occasions such as Christmas and birthdays, he invested a set amount of money on his children’s or grandchildren’s behalf. With this investment, his daughter was able to provide for her daughter’s schooling.

If South Africa is to develop a generation of financially savvy adults, it is crucial to not just talk about it, but actually practise good money habits. It is important to teach your children about money, and the festive season – with the spirit of giving – is a good time of the year for parents to set a good example. Teach your children about the importance of giving within your means, as well as showing them the value of relaxing with family and rewinding after a long, hard year, while respecting the value of hard-earned money.

Families should consider starting a financial tradition of their own. Set a reasonable budget for gift giving this festive season, and instead of spending all your money on gifts that are likely to fade, go missing or be forgotten, speak to your financial adviser about starting an investment in the name of your children.

When children become old enough to understand more about money management, parents should involve them in the process. Teach them the principle of compound interest and explain why putting money away today means they will have more money tomorrow. Help them set a budget for the money they’ll receive over the festive season, encouraging them to spend a smaller percentage today, and investing the rest for the future.

Here are various ways you can give a gift that keeps on giving long after the hype of the festive period has subsided:

  1. Start saving for your children’s education: A hotly debated topic this year, the cost of education is something that needs to be saved towards and planned for. Opening an account and allocating money to it each month can help you fund your children’s future education.
  1. Life-starter fund: Every parent dreams of having the power to provide their children with the necessities in life, but in reality, this isn’t always possible. Setting up an investment and adding to it each year, even just a small contribution of R500, will enable you to provide your children with a lump sum that they can use as a deposit for their first car or deposit on a house.
  1. Set up a tax-free savings account for your children: A tax-free savings account can enable you to save towards your children’s long-term dreams and financial goals, but is also flexible enough to be accessed at any time should it be required. Also, by investing in a tax-free savings account, you won’t get taxed on the growth earned from the investment.

Paying too much in bank charges

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.

In this example (loosely based on my transaction history), the bundled option makes the most sense. But, you’ll find that this is not always the answer. It is worth dissecting what does and what doesn’t form part of the bundled options from your bank. In all cases (at the higher end, i.e. platinum), debit orders and electronic transactions are ‘free’ and some transactions like cash withdrawals are free up to a certain number per month. But there are some variances that will attract fees over and above the flat monthly rate.

Once you’ve done this exercise – which you need only do once a year (June for FNB customers and December for Absa/Nedbank/Standard Bank ones), you’ll know exactly which account type suits you best. If you’re on pay-as-you-transact and you’re spending more than ±R200 a month consistently, you should change to bundled. If you’re on bundled and do a handful of transactions a month (and don’t have too many (any) external debit orders), then pay-as-you-transact will save you money. You’re not looking at hundreds of rands a month year, but across a year your savings would easily add up to over R1000.

A separate will for your offshore assets

While a clear, well-written will is always essential to avoid potential family disputes, South Africans with offshore assets in particular should seek professional assistance to determine if they are exposed to a foreign tax and if it may be necessary to draft a second or offshore will.

To determine whether an offshore will is required, practitioners will usually consider the type of offshore assets the testator owns and where these assets are located. If the testator’s only offshore asset is a bank or investment account, generally, one will that deals with all worldwide assets will suffice. In such cases, the offshore bank or financial institution would normally recognise the South African will, provided it covers all worldwide assets.

“One will promotes simplicity and certainty in a client’s estate planning. One worldwide will can also reduce the risk of accidental revocation, which can occasionally happen when a client has more than one will,” says Oliver Phipps, partner at Lester Aldridge in the UK and member of the Fiduciary Institute of Southern Africa (FISA).

Accidental revocation often occurs when an individual who only has South African assets drafts a will applicable to all worldwide assets and only acquires an offshore bank account at a later stage, for example in the UK. If an UK advisor drafts a will for these assets without knowing that the individual also has South African assets, the advisor could unintentionally revoke the South African will by not explicitly stating that the new will only relates to UK assets. Since the beneficiaries of the wills may not be the same, accidental revocation could have far-reaching consequences.

If an individual is domiciled in South Africa and has a bank account registered in England as his only offshore asset, the person drafting the will should consider what the formalities would be to administer the bank account in England should the testator pass away, Phipps says.

“Each bank in England has their own threshold in which they will release the funds without wishing to see an English court authority and, on average, this is approximately £15 000. If the funds exceed the bank’s threshold, an English court authority will be required. In these circumstances, there is a fast track procedure called ‘resealing’ whereby the English court could formally recognise and give effect to the South African letters of executorship,” Phipps says.

While preparing one worldwide will will likely be appropriate in this instance, there are potential disadvantages.

The South African and English administration cannot be conducted at the same time and before letters of executorship can be resealed, court sealed and certified copies of the letters of executorship will have to be obtained, which may delay the process considerably, he adds.

But where a South African jointly owns an offshore bank or investment account, care should be taken when drafting the will. If a husband jointly owns a bank account in England with his wife, he should not bequeath his share of the account to someone other than his wife, as it could result in a dispute, Phipps cautions.

Parents to save for their kids’ school fees

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.

Africans work two jobs to make ends meet

More than one in three working individuals earning more than R5 000 a month earn an additional income over and above their normal job, an online survey suggests.

These individuals, referred to as “slashers” due to the “slash” between their job titles (communication manager/yoga instructor), are part of a global phenomenon where people supplement their main source of income for various reasons. American author Marci Alboher coined the term in 2007.

Conducted towards the end of June among a booster sample of 943 individuals as complementary research for the annual Old Mutual Savings and Investment Monitor, the survey studied the habits of working South Africans. Twenty-four percent of respondents indicated that they earned additional income by doing something that was vastly different from their current job. An additional 13% said they earned more money by doing something similar to their current job.

Lynette Nicholson, research manager at Old Mutual, says it is typically entrepreneurial, go-getters who become slashers, in part to ensure greater job security and because their income may not be coping with growing expenses.

The South African economy recently entered a technical recession with some corporates cutting staff and many households feel the pinch of a higher effective tax burden.

One of the slashers who participated in the research project was Matilda Harris, a printing business manager and water aerobics instructor.

“The reason I have two jobs is the economy has become very tight and I needed a bit of extra income,” she says.

Having two jobs also means that if the printing business does not make enough money her extra job can help pay the bills and vice versa. Any extra money will be saved, but because of economic pressure this does not always happen, Harris says.

Another slasher and participant, Thapelo Mogapi, a customer service supervisor and DJ, says the financial benefit allows him to provide for his kids and live a normal life despite the economic slump.

When survey respondents were asked why they had more than one job, 55% indicated that additional income helped them to maintain a comfortable lifestyle. Forty-five percent said they were saving for unexpected expenses while 43% paid off debt. Almost 40% said they struggled to make ends meet (see graphic below).

Common second jobs included catering, event planning, photography, tutoring, waitressing, selling Herbalife, running a gardening service or installing water treatment equipment.

While more than 60% of individuals indicated that they enjoyed having more than one job, 17% said it had a negative impact on their personal or family life. Almost 30% said they found it difficult to manage everything, while 42% said they didn’t really have time for more than one job, but needed the money. Only 14% said they did not really need more than one job.

Nicholson expects the percentage of South Africans who supplement their main source of income to rise in future, although she doesn’t want to put a number to it.

The main survey, which was based on face-to-face interviews with a 1 000 working metropolitan households, shows that South Africans continue to save too little.

Impersonator still at it with phishing scam

A marketing and sales team purporting to represent Old Mutual Financial Services has re-emerged and is offering fraudulent loans to the public at 5% interest in an effort to get hold of personal details and solicit upfront payment for the release of loans.

This type of phishing scam has become popular over the last few years, with fraudsters using the name of well-known, credible organisations to gain legitimacy. Moneyweb’s name was previously illegally linked to a similar loan scheme offered by “Moneyweb Private Banking South Africa”.

In November last year, the Financial Services Board (FSB) issued a warning against a scam called Skeme Finance Group which requested an “enclosure fee” from individuals before a loan could be granted. To pacify individuals getting wind of the con, the scheme issued a fraudulent letter using the FSB’s logo and a picture of the deputy registrar of financial services providers, Caroline da Silva.

Consumers are lured with promises of very low interest rates – typically no more than 5% per annum. Interest rates on personal loans at most banks generally range from 13% to 28% per annum. This makes the offer “too good to be true”, often the first warning sign that something fishy is afoot.

But shutting down these operators can be a long and cumbersome process and individual vigilance remains the best form of protection.

The Old Mutual impersonator, who calls herself “Melissa Green”, was offering loans to the public late last year, but despite Old Mutual issuing an alert and reporting the case to the police, “Green” was sending emails with a loan offer as recently as Monday.

A woman named Mary-Ann reported “Green” to the fraudalert website in January and although she did not lose any money (Green allegedly asked for R5 750 to cover attorney and insurance costs), she did share her personal details.

“I am afraid that they can do something illegal with it,” she wrote on the website.

Green’s number is still in service. When Moneyweb phoned the number on Wednesday, she repeated the emailed offer, highlighting the “special” interest rate and added that the offer would expire by the 15th. Scammers often put a clock on offers to put pressure on individuals to commit.

The acquisition of the db x-trackers book

Last week Sygnia announced that it had reached an agreement to acquire the db x-trackers exchange-traded funds (ETFs) from Deutsche Bank. The listed asset manager said that the deal was worth R320 million.

The news raised a number of eyebrows in the industry because while Sygnia has been a vocal proponent of index tracking, it has been critical of South Africa’s ETF industry. The company has consistently argued that ETFs do not offer a cost effective way to access the market.

However, Sygnia’s CEO, Magda Wierzycka, says that this deal is not an indication that she’s changed her mind.

“What I’ve been very critical of in the South African context is the cost of access,” Wierzycka says. “ETF management fees themselves are quite reasonable, but for an investor to invest in one you are looking at trading costs, stockbroking commission, bid-offer spreads, and the cost of investment plans, which all add another layer of cost. When you start adding all of these together, the fee is commensurate with an actively-managed unit trust.”

She says that Sygnia’s aim will be to reduce and even eliminate these fees for accessing ETFs, and offer them in as raw a form as possible.

“The annual fees on investment plans currently range from 0.7% to 1.0% per annum,” Wierzycka says. “We want to place these ETFs on our platform as close to no cost as possible. The stockbroking through Sygnia Securities will also be minimal – below 10 basis points.”

While this argument is persuasive, Sygnia will have to compete with platforms that already offer extremely low cost access to ETFs. Absa Stockbrokers, Easy Equities and SatrixNOW already offer discounted brokerage on ETFs and no annual fees.

In this market, Sygnia will have to find a way to differentiate itself.

Wierzycka believes that there is also scope to bring down the trading costs of ETFs through engaging with the JSE. In addition, Sygnia plans to speak to international market makers that could narrow the bid-offer spreads.

With competition coming to the stock exchange industry in South Africa, Wierzycka suggests that there may also be the opportunity to look at alternative listings.

“It will boil down to fees,” she says. “If other exchanges can offer these products and are willing to list them at lower cost then either the JSE will have to come to the party or we will look at the alternatives.”

An immediate challenge that Sygnia will face, however, is that the db x-trackers products are currently the most expensive ETFs on the JSE. Although their fees do work on a sliding scale, their initial total expense ratios (TERs) of 0.85% are nearly double those of the only other foreign ETFs listed on the local market managed by CoreShares.

These will almost certainly have to come down if Sygnia wants to continue to claim that low costs are at the core of its value proposition. It will also have to ensure that any new products it introduces will carry much lower fees.

“We would like to launch international bond and international listed property ETFs, as well as one that tracks our 4th Industrial Revolution Global Equity Fund,” Wierzycka says. “Then potentially we will start looking at the domestic market and might also launch some smart beta funds, for instance the Sygnia Skeleton funds wrapped in ETF structure.

Spring clean your finances

With all the twists, shifts and turns the economy has taken this year, it certainly hasn’t been easy-going for cash-strapped South Africans. Now that we’ve kissed the winter blues goodbye, it’s time to welcome the warmer season with open arms and there’s no better way to do it than with a spring clean… of your finances!

“Take this opportunity to get organised. The more organised you are, the more in control you are. You want to be in control of your finances – not the other way around,” says John Manyike, head of Financial Education at Old Mutual.

While it sounds easy in theory, in practice there are often unexpected curveballs that can throw even the most prudent of budgeters off the straight and narrow.

“Changes in both the economy and your personal life affect your budget, which is why it should be revisited on a regular basis,” says Budget Insurance’s Susan Steward.

In September, petrol prices are expected to rise by 59 cents a litre and diesel by 56 cents a litre. Electricity tariffs are expected to increase by more than 20%. And as August stats indicate, South African consumers remain under tremendous pressure to clear debt.

Here are a few guidelines from the experts on how to balance our budgets between September’s petrol hikes and increasing consumer debt and living costs.

1.First things first: get rid of debt

Make sure to pay off the most expensive debt first. “This is the debt that carries the highest interest rate and is costing you the most. For example, if you have a bond at a 10% interest rate and a personal loan at a 20% interest rate, consider paying off the loan first,” says Manyike.

Winter shopping splurges on credit may have accumulated, but if you received an annual increase in July, you may have a little more in your bank account and – as much as it can be tough – use it smartly by paying off outstanding debt, Steward advises, or strategise a smart budget plan to make the necessary payments.

2. Cut costs

This isn’t about scrutinising every cent you spend but rather establishing spending patterns to identify possible areas for saving. A good way to do this is to look at your monthly bank statement and see where most of money is going. You may be surprised at just how much you’re spending in certain areas and how by making small changes you could keep your spending in check.

3. Less is more

Examine your monthly budget and if your expenses exceed your income, cut out things you can do without. Just like cleaning out your closet or selling old equipment that is taking up unnecessary space, try to eliminate all expenses and purchases that are not essential. Be very clear on the difference between needs and wants.

4. Remember your saving goals

If you didn’t stick to your New Year’s resolution to save more money this year, it’s not too late to start now. Make a plan to set up a monthly debit order to an investment account or open a tax-free savings account, increase your pension fund contribution and request the 13th cheque option from your employer, if available to you.

5. Save for the unexpected

The amount you save towards an emergency fund depends on your personal circumstances. Ideally an emergency fund should cover three to six months’ living expenses, says Steward, adding that while this might seem like an insurmountable amount to save, just by putting aside R250 a week, for example, you have yourself R1 000 at the end of each month.

“If you don’t have savings, you aren’t getting ready for the day when you must pay out more money than you have. This day can come in the form of an unexpected medical bill, or family emergency, and it is at times like these that your savings can save you,” Manyike points out.

Important than the return you get

When saving for retirement, there are three big factors that have an impact on the final outcome: how much you save, what return you get on your investments, and how long that growth has to compound.

Many investors tend to focus mainly on the second of those. They spend a lot of time worrying about how their portfolio and its underlying funds are performing.

This can become such an obsession for some that it may even cause them to make the mistake of chasing performance and trying to pick the best funds year after year. They move their money between funds regularly trying to capture the best returns.

The major problem with this thinking is that performance is the one factor that an investor actually cannot control. Of course you can make sound decisions about which funds you use and therefore give yourself the best chance of seeing good returns, but nobody can predict the markets.

No investor, or financial advisor or fund manager for that matter, can make any decision that they will be certain will guarantee them an extra 1% return over the next year (unless it is switching from one bank deposit to another). There is simply no way of knowing what markets will do.

That is why investors should rather spend more time considering the factors that they really can control.

The first of those is how soon you start. There are thousands of articles all over the internet explaining why it is so important to begin investing for your retirement as early as possible, because the more time you have the greater the power of compounding becomes.

A simple example makes this clear. Assuming an annual growth rate of 10%, an investor who saves R1 000 every month from the age of 20, would have accumulated more than two and a half times as much money by the age of 65 as someone who saves the same R1 000 every month but only starts at age 30.

Investment spikes after ratings downgrade

High Net Worth South Africans (HNW), in pursuit of alternative citizenship and residency, are forking out millions in job creation and investment initiatives abroad.

New United States Citizenship and Immigration Services (USCIS) data shows wealthy South Africans consistently rank among the top 15 investors by origin in pursuit of EB-5 visas.

South African filings for “immigrant investor” status more than doubled to 40 in 2015, with the applicants spending $20 million on creating around 400 jobs in the US. South Africa’s unemployment rate stood at 24.5% in the fourth quarter of 2015.

To qualify for the visa, which enables applicants to obtain US green cards, foreigners must invest $500 000 in businesses or real estate projects that create or preserve at least ten full-time jobs for American workers.

Listen to the podcast: US residency viable through investment

Although no data is available for 2016, it is highly likely that the number of filings doubled again in 2016, said LCR capital. The international private equity investment firm, which facilitates local applications, says political developments drive interest among HNW South Africans.

Following South Africa’s credit rating downgrade to junk status, the firm has seen a spike in interest with new enquiries being made on a daily basis rather than weekly.

“It is an extremely niche market as individuals need a lot of money [to secure the visa]. Some of the enquiries are from people who want to relocate and some are just looking for a ‘plan B’ or to secure better education opportunities for their children,” said Douglas van der Merwe, LCR’s local representative.

He added that the Fees Must Fall protests and Nenegate also triggered significant interest. Additionally, some applicants cite Black Economic Empowerment (BEE) laws and glass ceilings in the corporate world as motivating factors.

LIO Global’s Nadia Read Thaele also reported an increase in interest in citizenship by investment and second residency programmes following the cabinet reshuffle, which ultimately lead to the credit ratings downgrades.

“This industry is based on public perception. Demand is almost never consistent as the industry and markets are always changing. Lately, politics has been driving interest, there was definitely a strong spike in interest after the cabinet reshuffle,” she said.

According to Thaele, the majority of HNW individuals don’t necessarily want to leave South Africa but are seeking freedom – freedom of business travel for entrepreneurs and freedom to study abroad for their children.

She said that more than 80% of the applications facilitated by LIO were for programmes in Malta and Antigua, both of which offer strong passports.

The Maltese programme requires an investment of €1 million. Antigua requires a $250 000 donation to the government or a $400 000 investment in real estate projects largely geared toward hotels and hospitality.

Read: South Africans looking to buy foreign citizenship increasing

She said programmes in Portugal and Grenada are also proving popular especially as the latter has signed an E-2 investor visa treaty with the US. The treaty allows citizens of Grenada to obtain US residency permits provided they operate businesses in the US.

Read Thaele said tighter immigration controls being implemented by a number of countries is expected to drive the markets for citizenship by investment and second residency as wealthy individuals are likely to seek more global freedom and mobility.

In the US, the EB-5 visa programme is expected to be reviewed at the end of the month. Despite new US President Donald Trump’s promises to clamp down on immigration, Van der Merwe said the EB-5 visa programme is likely to continue.