Monthly Archives: June 2017

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.

Tax relief when submitting yearly returns

Q: I am a 54-year-old male member of the Transnet Pension Fund. I recently responded positively to my employer’s advice for increasing monthly premiums. I have realised that Sars does not consider pension fund contributions for tax relief when submitting yearly returns. I am therefore thinking of reversing my decision, rather increase my Retirement Annuity, which I have with a financial institution, for tax returns purposes.

Please advise if it is a right decision.

A: As of March 1 last year, irrespective of whether you have a pension, provident or retirement annuity (RA), you will qualify for a tax deduction of up to 27.5% of your taxable income (subject to a maximum of R350 000 per year). This limit applies to the total contributions you make to all retirement funds in the tax year.

Prior to March 1 2016, members could get a deduction of up to 7.5% on their own contributions, and no deduction on their employer contribution. Post 1 March 2016, you will now pay fringe benefit tax on the employer contribution, but at the same time get a deduction on both your own and your employer’s contribution by way of a reduction in taxable income, subject to the limits referred to above. This will leave you in the same position as before March 1 2016, as long as your contribution is below the limits mentioned above. By increasing your contribution to the employer pension fund, you get the benefit of the effective tax deduction monthly and you won’t have to wait until you file your tax return (as is the case if you contribute to your own RA).

I would advise you to speak to someone in your HR/payroll department as you should be receiving the full tax deduction for the total contributions if they are below the limits mentioned above. Any contributions in excess of these limits will be carried into the next tax year.

The best deal on your personal cheque account

The latest report by the Solidarity Research Institute shows that increased competition among the nation’s banks appears to be driving fees down. But increased financial pressure on consumers means charges, albeit lower, can still be a significant burden.

So, how do you get the best possible deal on your personal cheque account?

Negotiate your bank charges

There is no law or code regulating the negotiation of bank charges. But Advocate Clive Pillay, the Ombudsman for Banking Services, says the charges levied on ordinary cheque accounts can be fully negotiated.

“In the case of a ‘big account’ with much activity and a reasonable balance, a bank would be more likely to negotiate a reduced rate, to retain the customer, than it would in the case of ‘a small account’, with little activity, such as a salary deposit each month and a number of withdrawals during the course of the month with a very low balance,” he told Moneyweb.

However, it is important to note that the bank can refuse to negotiate lower rates by “exercising their commercial discretion,” says Pillay. In which cases, customers can do little but switch banks, provided the new bank offers lower rates.

If that fails, there are other relatively simple ways to save money on bank charges.

Make sure your account suits your needs

Some banks offer two types of basic cheque accounts: bundles and pay-as you-transact accounts. Depending on the amount of activity on your account, one option may prove more cost-effective than the other.

Bundles, offered by the big four banks, comprise fixed monthly fees for a package of transactions including finite cash deposits and withdrawals, and oftentimes unlimited electronic transactions and notifications. Any transactions which breach the bundle limits are typically charged on as pay-as-you-transact (PAYT) basis.

The PAYT charges – offered by Absa and Standard Bank – include a minimum monthly service and additional fees per transaction. Capitec’s sole account option, the Global One Account is a PAYT account.

Savings rate critical to economic growth

As savings month comes to an end, government, business and individuals need to take a critical look at what is being done to turn the savings crisis around. The Investec GIBS Savings Index figure for 2017 Q1 reveals a score of 60.7 (where a score of 100 represents a pass mark), suggesting that little progress since the index was launched at the start of 2016.

Drawing on international research and evidence, the index assesses SA’s savings performance based on the extent of SA’s stock of savings, the savings rate and changes in environmental factors that influence the propensity of SA’s government, corporates and individuals to save.

“Evidence from across countries, at all stages of development, and through time identify a high saving rate as a critical driver of sustained, elevated and inclusive economic growth,” says Dr Adrian Saville, professor in Economics, Finance & Strategy at GIBS and founder and CE of Cannon Asset Managers.

“Sadly, despite the ambitious promises of elevated growth made by South Africa’s policy makers, this has not come to bear in recent times. Rather, the country has been caught in a low growth trap. Whilst the temptation is to point to a range of explanatory factors, the cause of low growth is the same in South Africa as elsewhere – and absence of saving to fund the investment required that supports economic growth and industrial transformation.”

The poor savings behaviour and performance by the SA economy from 1990 to present is broad-based and entrenched. The index reveals that the stock pillar has moved in a very narrow range over 27 years. This suggests that the country’s stock of savings needs to expand permanently by about one third.

The stock pillar and the flow pillar are consequences of SA’s savings behaviour, while the environmental pillar is where the search for factors and forces responsible for the inadequate savings result should begin. By identifying the most depressed components within this pillar, it’s evident where SA policy and effort should be focused in order to have the greatest impact.

With SA’s domestic economy having gone into recession in the first half of 2017, the growth rate will likely continue to lag the global figure by a wide margin in 2017. Unfortunately, this low growth will remain a headwind to job creation, further exacerbating an already elevated unemployment rate of 27.7%. Further casualties of a low growth environment include business confidence and profitability, which are important drivers of investment spending.

René Grobler, head of Investec Cash Investments says: “The insights derived from the index point to an enduring trend of spending rather than saving and both the macroeconomic as well as individual consequences of this merit serious attention in policy action and microeconomic initiatives.

“Our economic growth is at stake so the time has truly come for Savings Month to shift to a yearlong commitment by all stakeholders to play their part. For the consumer, it’s about looking for tangible, sustainable ways to reduce consumption to bolster savings and for government and business, it’s about putting in place mechanisms to assist this process. As is evident from the research one of the key focus areas of all stakeholders should be broad-based financial literacy education.”