Money Tips

Take these tips to heart and you’ll have a solid foundation for future financial well-being.

1. Save 10 cents from every R1 you earn. If you put away at least 10 percent of your income as part of a long-term savings plan, there is a good chance that you will have a financially secure future and be able to attain your financial goals.

2. Put 10 percent of every pay increase towards savings, particularly long-term savings such as a retirement plan. If you are employed and belong to a retirement fund, your contributions will increase automatically in proportion to your pay rises. This will help ensure that you stay well ahead of inflation.

3. Use the “Can I sleep?” judgment when making investments. An investment is too risky if you are going to lie awake at night worrying about it.

4. Diversify your investments. Never invest more than five percent of your assets in a narrow investment (for example, a specialist unit trust fund such as an emerging company one) or in an unregulated investment. Diversifying your investments will ensure you don’t lose everything if one investment bombs out. Many people who invested all their assets in major scams such as Masterbond lost everything, and the same thing can happen in the regulated market if you put all your money into one sector ... just consider how the information technology bubble burst in 2000.

5. Be extremely cautious if the returns promised on an investment exceed what is generally available. If they sound too good to be true, they probably are. It usually means the investment is too ambitious in its claims, too risky, or simply a scam.

6. Know the difference between effective and nominal interest rates. Normally, banks will quote you a nominal interest rate when lending you money, but a higher, effective interest rate when you invest money. The nominal interest rate is the simple rate. The effective rate is calculated by compounding the interest earned or charged.

7. Check whether the interest you are being paid is credited monthly, quarterly or annually. Say you invest R10 000 for 10 years. If you receive interest at 10 percent credited annually, you will get a total return of R25 937. If it is credited monthly, you will receive R27 070.

8. How do you decide whether you should invest directly in shares? Simple. If you haven’t got the time to learn about stock markets, to follow the progress of companies or to track your portfolio, rather invest in unit trust funds and/or life assurance endowment policies that have shares as their underlying investments.

9. If you do invest directly in shares, your two most important considerations should be ensuring that you have a properly diversified selection of shares across the stock market sectors to reduce risk, and regularly rebalancing your portfolio. When a share rises in price, you should consider selling some, but not all, of these shares, so that you make a profit, but your overall portfolio remains proportionally the same as it was when you started. By doing this, you’ll be able to reap further profits if the share price continues to rise.

10. If an investment product is too complicated to understand, avoid it. It does not mean you are stupid. It simply means that the product provider and/or financial adviser are trying to baffle you.

11. Always check the costs of any investment product. Some products are prohibitively expensive. You should be given a breakdown of the costs in three ways: as a percentage of your investment; as a fixed amount; and as the amount by which the costs will reduce your investment at maturity date. Be very careful if the costs are more than six percent at entry and more than two percent a year thereafter.

12. Always check how much commission is being paid to your financial adviser. Some financial products – particularly those offered by so-called linked investment product providers – come with particularly high costs and commissions. High commissions can be a perverse incentive for advisers to mis-sell.

13. A product offering a range of underlying investment product choices, such as a wide collection of unit trust funds, is often not in your best interests and may come at additional cost. Be very cautious if anyone recommends that you invest in a linked investment product with a wide selection of underlying investment choices. Remember that linked investment products come in many forms and are also offered by life assurance companies. The simpler and cheaper solution may be to invest in a properly diversified unit trust fund, such as an asset allocation fund that offers underlying investments in all the main asset classes, such as cash, bonds and shares.

14. Don’t be afraid to negotiate commissions/fees for financial advice. Most financial products allow you to do this. After all, it is your money.

15. If you have a choice, should you pay a fee or commission for financial advice? As a general rule, a fee is better for large amounts of money and a commission for smaller amounts.

16. If you are a true investor, you invest for the long term and you don’t panic when markets fall. If you want to invest for the short term, you should use a bank term deposit or a money market account rather than an investment in the equity markets.

17. It is time in the market and not timing the market that counts. Don’t try to time markets or sectors of markets. Few people have got rich from doing this and most have lost money. The best way to get rich is to take time to select an investment product that has properly diversified underlying investments, and then to stick with it for the long term. Most people make the fundamental error of buying into an investment when it is at the peak of its performance and then selling out when its value has dropped.

18. Always check that an investment product and/or company is registered with the Financial Services Board (FSB) before investing. If it is not registered and things go wrong, you will have little recourse, so be extremely wary. You can telephone the FSB on 0800 110 443 or 0800 202 087 to check.

19. Charges on life assurance investments (endowments) are proportionally higher on lower amounts. Check the structure of costs in relation to premiums. You might find that paying just a few rand more every month costs you proportionally less. This will give you a better return.

20. Investing on a regular basis is a good strategy in volatile markets. If markets rise, your investment improves in value. If markets fall, you get more for your money, and you’ll benefit when markets go up again. This is known as rand-cost averaging.

21. If you are investing a large lump sum, put the money in a money market account to start with and phase it into pre-selected investments over a period of time. This is particularly important with equity markets: don’t invest all your money when prices are high and lose out later, when they come down.

22. Don’t be taken in by labels. Some investment products style themselves as fulfilling certain needs (for example, “a savings plan for your child”). Banks often offer need-branded products. Always check the underlying investment proposal. There might well be a more suitable generic product with a better-performing underlying investment, such as a life assurance managed portfolio or a unit trust asset allocation fund, which has a low-risk structure but the potential for much better returns.

23. Don’t become emotionally attached to shares. If a particular share bombs out for good reason, such as bad management or failure to adapt to new markets, get out. But if the share value is falling as part of a general sector downgrade, there is little reason to sell.

24. If you are trading shares for short-term gain, you are not an investor, you’re a gambler. Don’t be surprised when you make a loss.

25. Avoid investing in unlisted companies. These companies are not properly regulated and are the favourite vehicle of scam artists. If you decide to invest in an unlisted company, make sure you do your homework first and understand all the risks.

26. Never invest in anything where the underlying investments are shrouded in secrecy. Your money is likely to be secreted away too, never to be seen again. A good example was Jack Milne’s PSC Guaranteed Growth investment scam. Milne refused to divulge the underlying investments, claiming it would show his competitors how he was getting exceptional returns.

27. Being a contrary investor can make all the difference. As investment market guru Sir John Templeton says: “The time of maximum pessimism in the stock market is the time to buy; the time of maximum optimism is the time to sell.”

28. Never invest on an ad hoc basis. You should have an overall financial plan designed to meet all your financial needs, taking into account your investment goals and life assurance needs. Investing in something simply because someone (and that includes your neighbour or hairdresser) recommends it, is unlikely to help you achieve your financial targets.

29. When you are advised to invest in something, always do a bit of research of your own. Get a second opinion and use the internet.

30. Use comparatively safe investments – such as life assurance smoothed-bonus policies and unit trust prudential or flexible asset allocation funds – as core investments. They may not give you spectacular performance, but they will provide you with a measure of security.

31. Investing in a low-cost index fund may not give you top performance, but at least it will not give you bottom performance. Local and international research has repeatedly shown that very few active fund managers consistently out-perform the markets. With an index fund, you are likely to do better than the average fund manager – and at lower cost. Index investments come in many different forms, from unit trusts to exchange-traded funds, which are listed on stock exchanges. You need to understand them before you invest.

32. As a general rule, only invest when you have no debt. The tax-free return you receive from paying off debt is likely to be greater than any returns (which are likely to be taxed) you receive from an investment. There are exceptions, such as paying into a retirement fund while you have a home loan.

33. Be prepared to pay for good advice, as you would for any expertise. But make sure you deal with an adequately qualified adviser – preferably one who is a Certified Financial Planner accredited by the Financial Planning Institute. Good advice is worth its weight in gold. You would not go to a barber to have your teeth checked, so why go to someone for financial advice if that person is not properly qualified?

34. Always have an emergency cash fund. Ideally, the fund should be equal to three months’ income. This way you will not have to cash in investments at an inopportune time or take out a high-interest loan if you are suddenly landed with a major expense.

35. An investment in a unit trust fund that is always in the top 25 percent of performers, even if it has never come first, is preferable to one that has been ranked first once and languishes in the lower realms of the tables for the rest of the time. Check the consistency of performance tables published every three months in Personal Finance to help you find funds that perform well consistently.

36. If you are a member of a defined benefit or defined contribution retirement fund, or you contribute to a retirement annuity, you can deduct your contributions (limited to pre-determined levels) from your taxable income and defer tax until your retirement years. This way you get to earn investment returns on money that would otherwise have gone to the Receiver of Revenue.

37. Money paid into a retirement fund or retirement annuity is not counted as being part of your estate, so your creditors cannot claim this money if you go bankrupt. This is very useful if you are involved in a small business or you have provided personal security for a loan to a business.

38. At retirement you should consider exercising your option to take as cash up to one-third of your retirement savings from a defined benefit or defined contribution retirement fund or a retirement annuity. There are two reasons for doing this:
In the case of retirement funds, you are entitled to either R120 000 or R4 500 a year multiplied by the number of years you belonged to the fund (whichever is the greater) as a tax-free amount. With retirement annuities, you are entitled to R4 500 multiplied by the number of years of membership, tax-free.
The remaining amount will be taxed at your average rate of tax for the year of your retirement and the previous year, instead of at your higher marginal rate of taxation. Invest the tax-free amount where it will attract the lowest rate of tax and earn the best risk-adjusted returns.

39. The earlier you start a retirement annuity, the greater your tax-free benefit at retirement. This is because the tax-free portion is R4 500 multiplied by the number of years of membership of the fund. You should avoid having too many retirement annuity plans as you could undermine your ability to get the maximum tax-free allowance at retirement.

40. Mind the gap. Very few retirement funds provide enough money to ensure a financially secure retirement, particularly now that most companies are reducing or discontinuing medical scheme subsidies to retirees. This means you need to have other investments to top up your retirement fund savings. Make sure you check up on how you are managing to fill “the gap” by regularly having a financial needs analysis with a properly qualified financial adviser.

41. Start planning your retirement at least three to five years before the date on which you are due to retire, so that you understand all your options and are not rushed into any last-minute decisions.

42. Be careful when buying an annuity (pension) with (at least) two-thirds of your retirement fund savings, as you are required to do by law. Living annuities have been widely mis-sold because of their potential to earn higher profits for the companies selling them and higher commissions for advisers. With a living annuity, you take the investment risks; with a traditional guaranteed annuity, you don’t, the life assurer does.

43. If you are investing in a living annuity to buy a pension and you need to draw more than the minimum five percent of the annual value, you could be exposing yourself to the risk of not having sufficient money to provide you with a financially secure income until you die.

44. Most living annuity providers allow you to draw your pension from different parts of the underlying investments. This enables you to structure the annuity so you have an income-generating portion and a capital growth portion. You should use this facility to invest mainly in interest-generating investments for the income portion. This will significantly reduce the risk of undermining your capital.

45. If you use a living annuity to buy a pension, do not invest all the money in equities or equity unit trusts. At the absolute maximum, you should have no more than 75 percent invested in equities. The balance should be in more stable interest-earning investments.

46. Always pay the full amount owing on your credit card. If you do not, you will be charged a punishing rate of interest from the date of purchase. The so-called budget account on your credit card is a misnomer, as you pay a high rate of interest.

47. Use a credit card to get 55 days’ interest-free credit by buying at the start of the buy-and-pay cycle and repaying the debt in full by the due date. This option does not apply to cash withdrawals and petrol purchases, on which you pay punitive interest rates from the date of the transaction.

48. Don’t leave large amounts of money sitting in a low-interest bank savings or current account. Rather put the money into a money market account or into your mortgage bond.

49. Pay yourself first. Set up debit orders that channel money into investments as soon after pay day as possible so that you will not “miss” the money.

50. Never use debt on which you have to pay interest to buy products you consume. You are in effect making the items far more expensive, and will be able to save less and buy less in the long term.

51. Borrowing to buy reasonably priced property is a good thing because you can expect the property to improve in value.

52. You should not, as a rule, borrow to invest, particularly not in volatile markets, such as share markets. The exception is property that you intend to hold for at least five years and in which you live.

53. Keep a good credit record. It could save you thousands of rands, particularly when you want to borrow money for big-ticket items such as a home or a vehicle, because the better your credit record, the lower the interest rate you can expect to pay.

54. The best investment you can make is to repay debt. Interest rates in South Africa are high. By paying off

debt, you get one of the best returns available, tax-free.


55. Borrow wisely. Expensive debt is a quick way to lose money. For example, borrowing against a credit card is far more expensive than borrowing against a home loan. The difference can be more than 10 percentage points.

56. If you have a problem meeting your debts, don’t try to hide away. Go and speak to your creditors, particularly your bank, to find a way out of your problem. Don’t use debt consolidators/administrators. They will charge you far more interest and make your problem worse.

57. Beware of plastic. Store cards and credit cards may be convenient, but they are also an easy way of running up debt.

58. Don’t fly now, pay later. It is very depressing to be still paying for a holiday (or any other luxury) five years later, when you want another.

59. If you take out life assurance or short-term insurance to cover debt or an asset financed with debt, always pay the premiums as they become due to avoid paying interest on the premiums as well.

60. Try to repay more on your home loan than the minimum. For example, on a home loan of R100 000 at a mortgage bond rate of 15 percent over 20 years, your normal repayments will be R1 316.79. Increase the repayments by R100 and you will reduce your repayment period to 14 years and five months, and you will save R88 224.93 in interest repayments.

61. Always negotiate your interest rates. Shop around. A one-percent difference can have a significant effect. On a R100 000 mortgage bond over 20 years at 15 percent, you will repay R316 029 in total. At 14 percent, you will repay R298 444 – a saving of R17 584.

62. When mortgage bond interest rates come down, keep your repayments at the same level. You will pay off your bond quicker and save yourself a whack in interest repayments. Repayments will also not be so difficult to contend with if interest rates rise again.

63. If you take out a home loan when interest rates are low, always ask yourself whether you will be able to afford the repayments if interest rates go up. If you are in doubt, take out a smaller loan.

64. Most mortgage bonds enable you to repay more than your set repayments and to borrow against what you have paid. This is useful not only to borrow money for other things at short notice, but also to use as a savings account. The effective interest you receive is much greater and there are no additional costs. Say, for instance, you need to put away money to pay school fees or provisional tax. “Save” the money in your mortgage bond until you need it, rather than in a low-interest bank savings account.

65. Get a pre-approval agreement on a mortgage bond before you start looking for a home. This will give you the advantage of being able to shop around for the best rate while you’re not under pressure and the buyer will be more willing to sell to you knowing that the money is available.

66. Always have a lawyer check a property deed of sale before you sign up. Also make a deed of sale subject to conditions such as a proper inspection being done, if you suspect building faults, and to raising a mortgage bond, if you need one.

67. A bank valuation of a property is not a guarantee that the building is structurally sound. If you suspect a problem, get a full structural survey before you enter any contractual agreement.

68. Don’t fall prey to what is called a mortgage bond-linked endowment. With these products, you are encouraged to take out a home loan, repay only the interest, and invest the amount that would have repaid the capital. The theory is that, at the end of the period, the investment should be worth more than the capital. With high interest rates and poor investment returns, these are high-risk products.

69. If you take out life assurance, always declare any health problem or habit or hobby that might affect your insurability. You may have to pay more in premiums, but at least your dependants will receive the money if and when a claim is made. If you lie, either by omission or commission, your dependants may be left with nothing. The life assurance company is legally entitled to repudiate any claim when incorrect information is provided, even if it is not associated with the cause of death or disability.

70. Never buy too much life assurance against death or disability. The purpose of life assurance is to ensure you and your dependants maintain a standard of living, not to enrich dependants in the future. Too much life assurance merely means you are paying out more in premiums and costs, and you have to accept a lower standard of living now.

71. Always avoid cashing in an investment (endowment/universal) policy before its maturity date. Cashing in is costly. Not only could you receive less money than you have paid into the investment, but if there is life assurance cover attached to the policy, you may not be able to replace the cover in the future, particularly if you are less healthy.

72. When taking out life assurance cover against dying or being disabled, always establish whether the premiums are guaranteed – and for how long. It is preferable to get a longer term guarantee on your premiums.

73. If you have no option but to surrender a life assurance investment policy, always see if you cannot get more than the surrender value offered by the life assurance company by trading the policy on the secondhand market.

74. Rather than surrendering a policy, consider other options, such as making it paid-up so you can stop paying premiums. You may also be able to take a loan against the policy, but check the interest rate; sometimes it is higher than it would be if you used the policy as security to get a bank loan.

75. If you are concerned about volatile markets, one of the best investment products you can get is a life assurance smoothed bonus policy that guarantees your capital and smooths out the market returns.

76. If you intend the benefits of a life assurance policy to go to someone in particular, have this on record with the life company by naming the person as the beneficiary of the policy. This has two advantages: You do not pay executor’s fees of up to 3.75 percent with VAT on the amount; and the beneficiary receives the money almost immediately, without it being tied up for months or even years while your estate is finalised. More often than not, your dependants will need the money immediately after your death.

77. If you can afford a hamburger and Coke every day, you can afford life assurance. Life assurance is essential for anyone who has dependants.

78. If you plan to stay single with no dependants, you do not need life assurance against dying, but you do need disability assurance in case you become ill or are injured in an accident.

79. It is not saving if you put money away at the start of the month but withdraw it before the end of the month. Life assurance investments are useful for people who find it difficult to save, because they commit you to a contract for at least five years and cost you dearly if you break the contract.

80. Do not take out a life assurance investment contract for more than 10 years. You don’t know how your financial position could change. At the end of the period you can always extend the contract, but if you have to cut it short, there are penalties involved that could see you getting back less money than you paid in. The main reason life assurance sales people attempt to get you to take out longer-term policies is because they receive more commission.

81. If you have dependants, life assurance is more important than investments. Investments take longer to accumulate to the level that may be required by your dependants, whereas life assurance benefits can immediately meet those needs if required.

82. As a general rule, you should keep your risk life assurance against death and disability separate from your investments, particularly if the risk assurance is for a long period. The main reason for this is that, if you land up in financial difficulties, you do not want to lose the risk cover because you have had to stop paying the investment portion. This strategy also gives you more flexibility with your investments.

83. Life assurance against dying or being disabled may only be required for short periods. For example, you may need cover to provide for the education of children for 10 years or until you have built up sufficient savings. You do not need a 20-year contract.

84. Consider joint life assurance if you have a partner. It is often cheaper. It comes with the options of paying when the first of the two dies, or when the last partner dies, or fully on the death of each partner. Obviously, the premium will be determined by the option you choose.

85. Be very wary of credit life assurance. Although it can be essential to ensure debts are paid when you die, it is also open to abuse. Often, when you finance, for example, a motor vehicle, you will be sold life assurance to cover the debt. But many sales people sell you assurance that runs for a longer term than the debt and credit life assurance has an investment element included. Commission, not your financial well-being, motivates sales people.

86. You need to do some estate planning, particularly if you are wealthy. Any amount above R1.5 million that is not left to your spouse is subject to estate duty at a rate of 20 percent, and any capital gain that is not exempt is subject to capital gains tax, as death is considered a capital gains event. (The first R50 000 is exempt when you die.) If you do not have readily available cash to cover these taxes, you need life assurance to ensure there will be no need for a fire sale of other assets.

87. Apart from when you have a home loan, you cannot be forced to take out short-term insurance with any particular company when you receive a loan on a fixed or moveable asset. You can be forced to take out insurance, but you can and should shop around for the cheapest premium.

88. You can reduce the amount you pay in short-term insurance by increasing the excess (the first portion of any claim, which you pay). A higher excess will mean lower premiums. However, you should keep the excess within affordable limits. Better still, build up savings equivalent to any excess you may be required to pay and earn interest on them.

89. When you change address, check whether your short-term insurance premiums could be reduced. Where you live can effect the level of your short-term insurance premiums.

90. Most short-term insurance policies have a number of exclusions. For example, on motor vehicle insurance, you are required to maintain the vehicle properly. For example, if your tyres are smooth, your claim will be rejected no matter what the cause of the accident. Be aware of the exclusions, so that you don’t have a claim refused unexpectedly.

91. Check the value of your motor vehicle. One racket perpetrated by insurance companies is to increase premiums annually, when they should be decreased to take account of the declining value of your vehicle. When you claim, you will only be paid the actual value, not the insured value.

92. When making a short-term insurance claim, first find out what effect the claim will have on your no- claim bonus. If the claim (after payment of the excess) is relatively small, it may be better not to claim and keep your no-claim bonus intact. A no-claim bonus can equal as much as a 60 percent reduction on premiums after five years.

93. Use the R10 000 exemption from capital gains tax. Every year you are entitled to claim an exemption of R10 000 against any capital gain. Say, for example, you want to cash in an investment with a capital gain of R20 000 in November. Instead, cash in half in November and half after March 1, the start of the new tax year.

94. Interest-bearing investments become far more attractive when you don’t have to pay tax. For the current tax year, the first R10 000 in interest income is tax exempt if you are under the age of 65, and R15 000 if you are over the age of 65.

95. If you are investing for an income and have exceeded your tax-free interest exemption, consider cashing in investment capital that you can offset against your R10 000 capital gains tax exemption.

96. Never make a tax decision first when investing. Consider the tax implication last. Many people make the tax decision first and reject what could have been a good investment.

97. If your spouse is on a lower marginal income tax rate than you, it is best to transfer interest-earning assets to him/her. Also, remember that each spouse is entitled to the tax-free amount of R10 000 under the age of 65 and R15 000 over the age of 65.

98. To qualify for the R1 million capital gains tax exemption on your primary residence, you actually have to live in that property. If you rent out the property for even part of the time, you will have to deduct the period proportionally from the exemption.

99. The benefits of a life assurance policy are not subject to income tax or capital gains tax in your hands. Tax is paid on your behalf by the life assurance company at rates of 30 percent on interest, net rental and foreign dividends, and an effective 7.5 percent on capital gains. So, if your marginal tax rate is greater than 30 percent, you are receiving a tax advantage by investing in a life assurance policy as opposed to a unit trust investment with similar underlying investments.

100. Assets can be transferred between spouses without attracting donations tax. So it can pay to transfer assets on which capital gains tax may become due, to take advantage of lower marginal tax rates and the R10 000 exemption. Remember, 25 percent of a capital gain (which is not exempt) is included as income for tax purposes. So, the lower your marginal rate, the lower your capital gains tax will be.


MY BEST TIP

Themba Siyolo, the head of distribution at Sanlam: “No matter how much or how little money you have, start taking responsibility for what happens to it by drawing up a budget and taking control of your expenses and income. Then you can start planning for other things in your life such as your education, your family, your home, your car, your holidays, your retirement and so on. There is no excuse for delegating this responsibility or for allowing your money management to happen by default.”

Gerrit Viljoen, the Financial Planning Institute/Personal Finance Financial Planner of 2003: “Don’t let greed and fear be the primary drivers of your financial decision-making process. And get out of debt as quickly as possible.”

Giselle Gould, the executive director of the Institute of Retirement Funds: “Buy your home to give yourself and your family security. Then pay off your bond as soon as possible to save yourself interest payments.”

Lionel Karp, independent financial adviser and host of Financially speaking on Radio 702/567 Cape Talk: “Always think of your finances in terms of your needs, not your wants. Most acquisitions – cars, houses, boats and so on – are wants, not needs. Financial planning is just the opposite. If you look at it in terms of what you need, you will make far more informed decisions. Wants relate to your heart, while financial planning should come from your head.”

Wilma Mokupo, the head of pensions at the Financial Services Board: “If you are a retirement fund member: ensure you read and understand your retirement fund rules; make sure that you receive regular benefit statements outlining all your benefits; and monitor the performance of your own board of trustees. The regulator depends on members and other stakeholders to report wrongdoing.”

Selwyn Feldman, the president of the Financial Planning Institute: “My favourite pieces of financial advice are: Preserve your retirement fund payouts when you change jobs, and increase monthly payments to eliminate debts as quickly as possible.”

Di Turpin, the executive vice-chairperson of the Association of Collective Investments: “The best investing tip I was ever given was to arrange a regular debit order effective on the day my first salary went into my bank account. It has created a habit that I am not even aware of half the time. This habit of investing regularly each month as a matter of course, regardless of financial pressures, has created a tidy little nest egg for the future already. As I made sure that the debit order coincided with the day my salary went into my account, there was always money for the investment. I also became used to operating without the money and adapted my lifestyle accordingly. You would be amazed how, if the money is there, one can always find a use for it!”


This article first appeared in the 4th quarter 2003 edition (volume 17) of Personal Finance magazine.