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Monthly Archives: September 2016

Don’t Make These 5 Mistake

1. Obsess Over Investment Strategy

There’s often this feeling that if you can just find the perfect investment strategy, your financial success will be guaranteed.

So you read articles, listen to the experts on TV, and tinker with your investments, all with the hope of finding an edge that puts you over the top.

But here’s the truth: the returns you earn, good or bad, have almost no impact on your bottom line until you’re a decade into the process.

What does matter, a lot, is your savings rate. It may not be sexy, but simply saving enough money is far more important than any other investment decision you can make.

2. Forget About Irregular Expenses

If you’ve tried budgeting before and it hasn’t worked, chances are you’ve been undone by all the unexpected expenses that keep popping up.

Your car needs a new tire. Your daughter has to go to the doctor. Your friend gets married in another state.

Here’s the thing: a good budget knows that these kinds of expenses aren’t unexpected. You may not know when they’re coming, but you do know they’re coming.

And you can make them a part of your regular budget simply by saving ahead for them each month. That way the money will already be there when you need it.

3. View Cutting Back as the Only Option

Cutting spending is often the quickest and easiest way to free up room in your budget for the big financial goals you’d like to achieve. Which is why it’s usually a great first step.

But it’s not the only option.

In fact, the biggest long-term results often come from finding ways to increase your income. So don’t be shy about asking for a raise or starting a side hustle. Those are powerful tools that can expand your world of financial opportunities.

4. Think That Credit Card Debt Is Normal

According to NerdWallet, the average American had $15,310 in credit card debt as of 2015. So I guess debt is normal in the sense that a lot of people have it.

But if you want to be financially healthy, you need to accept that credit card debt cannot be part of your life. It’s actually the biggest obstacle that’s keeping you from reaching your goals.
If you have credit card debt, getting rid of it is almost always a top financial priority. That may mean that other financial goals have to wait, but the sooner you get rid of your debt, the sooner you’ll be able to make real progress towards the things you care about most.

5. Look for Easy Fixes

Unfortunately, there is no easy button when it comes to your finances. The solutions are often fairly simple, but they take time, dedication, and hard work before they truly pay off.

For example, creating an account with mint.com and linking all your bank accounts is a great start to the budgeting process. But the app itself won’t solve all your problems.

You’ll still need to take the time to categorize your expenses, both up front and on a regular ongoing basis. And you’ll need to use that information to take action and make changes in how you use your money.

No single app or tactic is going to fix everything for you. You have to take ownership of your situation and do the hard work to make it better.

 

How to Save Money for a New Car

The first step one should take is to identify the investment objective. In this case that is a car, with an assumed cost of R300 000 at the end of a five-year term horizon. It is important to understand this time horizon as well as your appetite for risk to decide on the most suitable investment vehicle.

Some of the most popular after-tax investment vehicles include endowments, unit trusts and the tax free savings accounts. These vary in terms of accessibility and tax implications and we would need to know the clients full financial situation before recommending a suitable product.

For a client who wants to lock their investment for a five-year period, an endowment would be a vehicle to consider. We do, however, have to take into account their marginal tax rate when making this decision.

This is because endowments are taxed within the fund at a set rate of 30%. This benefits investors who have a marginal tax rate greater than that, but can be prejudicial if their tax rate is lower.

Because the money in an endowment is taxed within the fund, your withdrawals are tax free. In order to get this benefit, however, endowments have a minimum investment time horizon of five years. At that point the money can be accessed or the investor can choose to extend the policy term.

You would be able to choose different underlying investments within the endowment, and given your time horizon, a moderate-to-balanced portfolio will most likely be appropriate. It is, however, important to take your risk appetite into account.

To know whether this would really be the best option for you, however, it is important to get an understanding of the tax implications from your financial advisor.

Financial Planner

On my blog, one of the topics I like to cover is explaining how the personal financial advice industry works. Most people get financial advice from someone who is a salesman of insurance, annuities, mutual funds, and other products. You can also get help from someone whose main profession is something related like a CPA or lawyer who offer advice as a side business. The best way to get advice however, is from someone who functions as a consultant.

There are financial advisors out there that charge by the hour for financial advice. They often call themselves financial planners to distinguish themselves from financial advisors. You can find these financial planners through industry associations like the Garrett Planning Network and NAPFA.org.

I say it’s best to work with a consultant style of advisor because the consultant works only for you. Ask yourself what someone’s motivation is. A financial advisor employed by an insurance company or investment company (like Merrill Lynch, Morgan Stanley, Fidelity, Vanguard, etc.) has sales managers above them making sure they sell a certain number of contracts every month. You don’t want to be one of those sales targets. It may work out for you, and there are representatives who do look out for their clients, but ask yourself what their motivation is before signing anything.

By hiring a financial planner that charges fees only and no commissions, you are going to get an advisor who puts your best interest ahead of their own. Ask the advisor to sign the fiduciary oath. Advisors out to meet sales performance targets won’t put their fiduciary duty in writing. By going with a consultant style of advisor, not only will you get sound financial advice, you won’t wonder if the advisor recommended a product because his sales manager told him to.

Two Big Reasons to Watch Your Investment

1. Low Fees Lead to Better Returns

This is pretty counterintuitive. We’re used to better things costing more money and cheap alternatives meaning important sacrifices. But it’s the exact opposite when it comes to investing.

In 2010, Morningstar released the results of a study in which they found that cost was the single best predictor of a mutual fund’s future investment return. The lower the cost, the better the future return. In other words, in investing, the cheap alternatives aren’t a sacrifice at all. They’re actually the higher quality items and they increase your odds of success.

2. Even Small Fees Cost You a Lot of Money!

You may think that a 1% difference in cost isn’t that big a deal, but over long periods of time it adds up to a huge difference. Let’s put aside the fact that lower cost investments typically outperform and assume that you’ll get a 6% return no matter what.

Now let’s say that you’re saving $5,500 per year (the annual maximum for an IRA) and you have two investment choices: an index fund that costs 0.10% per year or an actively managed fund that costs 1.10% per year.

After 10 years, here’s your balance in each fund:

  • Low-cost fund = $76,412
  • High-cost fund = $72,230
  • Difference = $4,182

Here it is after 20 years:

  • Low-cost fund = $211,969
  • High-cost fund = $188,770
  • Difference = $23,198

Finally, here’s what it looks like after 30 years, which is a pretty standard amount of time for most people investing for retirement:

  • Low-cost fund = $452,449
  • High-cost fund = $376,801
  • Difference = $75,648

What would you do with an extra $75,000?