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Monthly Archives: October 2016

Give 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.

Unplugged Financial Planning

Knowing where you are

Simply put – you need a budget. Don’t frown. Let me explain. Budgeting is not about what you can’t do with your own money, but what you CAN do. Have you ever felt guilty about a purchase? Have you ever thought to yourself in the store “ugh, I should really hold off, we’re trying to be better about this”? Do you feel like all the effort and restraint doesn’t seem to be paying off in your checkbook from month to month anyways so why bother? Know what? A properly executed budget can free you from all that. Really.

To live a better life today and tomorrow, you need a sustainable budgeting process that accounts for your needs, funds your most important and enjoyable wants, and allows you to plan for your future with hope and confidence. Yes, a spending plan is the key to unlocking all of that. The best part is, YOU (along with a spouse if in the picture) are the Chief Financial Officer(s) of your household deciding where the money goes. You work too hard not to spend a bit of time each month telling your money what to do. Money is finite…..you’re the boss of it. Tell it where to go. Enjoy spending it according to your plan.

Knowing where you’re going

Save! Invest! Pay off debt! So much noise. Save where? Invest in what? Pay off which debt first? Psychologists call it “the paradox of choice”. Too many options and unknowns create anxiety and we end up spinning our wheels. I hate to break it to you, but you probably can’t accomplish all those goals at once. There’s only so much money. You need a plan that identifies what’s most important to you, puts a timeline and a dollar sign next to each of those, and then lays out the order of operations to get you there. In short, rather than getting bogged down by the myriad of options, identify what to do NEXT and then get after it.

You should spend your time focused on what’s most important to you. Spend a sliver of your time being intentional about your financial plan and you just made the important stuff in life that much better.

Three ways to give your children a financial

Give presents that mean something

Of course children love toys and having something to play with, but not every present they receive has to give them instant gratification. Putting money in a unit trust or stock broking account might not sound like the most exciting gift in the world, but it can be very rewarding.

For a start, it gives them some sense of having their own savings and some money of their own to look after. Over time, it’s also the best way to teach them about different savings products, asset classes, and things like interest and dividends, as they can see for themselves how they work.

A low-cost online stock broking account could even allow them to make their own decisions about what stocks to invest in. At an early age their decisions are not likely to be influenced by rigorous analysis, but they can still invest in companies that they know something about.

Involve them in their own savings

If you are saving for your child’s education, are they aware of it? Do they know that you are putting away money every month, where it is going, and what it is for?

Explaining to your children that you are saving for their future allows for you to have a discussion around why it’s important to do this and how it works. Not only will this give them some sense that they can’t just take things for granted, but it also gets them thinking about the importance of financial planning.

Think of their future before they do

The earlier your children start saving for retirement, the less they will need to save. One of the biggest impacts you can make on their future financial well-being is therefore to start for them.

Plan to present your child with a lump sum on their 18th or 21st birthdays, either in their own tax-free account or placed in a retirement funding vehicle. You may not think you are contributing much, but just R10 000 will grow to nearly R1 million over 45 years at a compound growth rate of 10% per year. That is a worthwhile boost to their future retirement, and will also get them thinking about their financial future as soon as they enter the working world.

If you do this in a retirement annuity (RA), they will not be able to access the money until they are at least 55, which will ensure that it is kept for what it is meant for. However, if you believe that they will be disciplined it makes more sense to use a tax-free savings account. This is because over such a long period the benefits of a tax-free savings account will likely be greater, and you can also invest fully in growth assets like equities, while an RA will have to meet the restrictions of Regulation 28.

For a Successful Financial Plan

On the surface, the cost of a financial plan is simple: generally between $2,000 and $4,000, depending on its complexity and where you live.

But dig deeper and you’ll find that the plan’s success also depends on you spending time to implement it.

Consider the case of a young physician who recently came to my office inquiring about a financial plan. His primary issues were cash flow with tax considerations, debt service and investment advice. I suggested he would also need an insurance review and estate planning, since he had none. At the conclusion of our getting-acquainted meeting, my colleagues and I quoted a fee for the financial plan and what it would include. He decided to work with us.

Next we had a goal-setting meeting and collected his pertinent financial documents such as his tax return, investment statements, debt statements and more. We provided risk-tolerance questions and discussed his short- and long-term goals in greater detail. Then there was an interim meeting where we reviewed his goals — to be sure we prioritized them correctly — his risk-tolerance results and his investment analysis.

A couple of weeks later, we had a plan-delivery meeting, where we reviewed the recommendations in all the areas of his financial plan. He took the binder home to review and start implementing the plan.

He returned in a month for a progress meeting. He had made some headway on our list of recommendations, but not as much as I had hoped for. At the conclusion of that meeting he told me: “You were very clear as to what the plan would cost me in dollars. What I did not know was the time it would take me to collect the information on which the plan is based, to meet with you, to read and study your recommendations and then to finally implement them.”

He was correct: It costs both time and money to enact a financial plan that will really help you. Eight months later, I received an email from the doctor, letting me know he’d completed all the recommendations. In the end he said the total cost, in terms of dollars and time, was well worth it.

Beware of additional costs

Keep in mind that with some financial service providers, there could be huge additional costs in the form of fees or commissions. This could also be a conflict of interest if your advisor recommends products that pay him more, rather than the ones that are best for you. So be sure you know exactly what fees are involved when you start working with an advisor.

While my recommendations in the doctor’s plan included specific changes to his insurance and investment holdings, I did not sell him any of the coverage plans that I recommended, nor did I sell him the investment products he needed. That’s because I am a fee-only advisor. I want my clients to know that I have no vested interest in the implementation of the insurance or investment part of the plan.

This is not the case for advisors who provide both a plan for a fee and then sell you the investments or insurance products as well. All too often, the insurance recommendations made by those who sell the products, too, include more and larger policies than what I would recommend. It is a sad fact that the commission may be driving the plan recommendations, rather than what is best for the client.

When you are looking for a financial plan, be sure that you use the services of a Certified Financial Planner and that the planner does not sell any products. To find such an advisor near you, contact Garrett Planning Network or the National Association of Personal Financial Advisors.