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Monthly Archives: December 2016

Your lifestyle versus your budget

How did this happen?

My sense of these investors is that they earned a great income and never once budgeted to save. Their saving was an accident and something that happened on an ad hoc basis because they never had a spending plan. Your budget is in constant competition with your lifestyle unless you keep it under tight control. Life is about making compromises, but you need to make sure that you take the negativity out of this process and look for positive compromises. What do you really want? Do you want to curb your grocery spending so that you can have one great meal eating out at that fantastic new restaurant? Would you like to send your child to private school or live in the bigger house? Drive the new shiny car or go on a holiday?

You need to decide what makes you happy and spend your money on this. That means you need a budget – something most people don’t have. Once you have worked out what you need every month to cover your lifestyle costs, transfer the difference in your transaction account to another account, where you won’t be tempted to spend it on frivolous items. Hopefully there is an excess in your budget and if there isn’t, get a third party to help you. You are the only one with an emotional attachment to your money and a pair of impartial eyes can help to make you think clearly about your money and to make smarter decisions.

And then you need patience. Once you have decided that you want to take that trip to Italy, you have two choices. You can go immediately and use your credit card or you can save and wait until you have the money to pay for the trip. If you have the cash available; a trip to Italy will cost you at least R 25 000 (as an example). If you decide to pay upfront with a credit card it will cost you between R 44 289 and R 64 843, depending on whether you pay it off in three or five years at an interest rate of 21% per annum. Most of us are able to stomach R 25 000 for such a trip, but R 64 843 is a bit rich. Patience has a real monetary value.

Patience is tested especially when you start to save for retirement. This is usually because we do not have an idea of what retirement will look like. We almost try to avoid it, because it reminds us that we are getting older. If you know where you would like to stay after retirement and what you would like to do with your time, the decision to save for it becomes far easier.

Lifestyle is important; this is how we live every day, but it must fit into your income. So figure out what you can do without to make the things that are really important to you, obtainable.

Financial Planing for Women

You need your own will and have to understand the implications of your partner’s estate planning

Chairperson Ronel Williams, says in practice, Fisa often finds that where a woman does not have a lot of assets, or leads a busy life, proper estate planning is neglected.

This could have far-reaching consequences.

Where estate planning is done, it is important to not only consider current circumstances, but to plan for the future, should the situation change, she says.

One example is in cases where a woman’s husband passes away, leaves the bulk of the estate to her and she dies shortly thereafter.

“So then suddenly she does end up with having quite a sizeable estate and her will actually doesn’t reflect the position for her changed financial circumstances.”

She could for example have provided in her will that her estate devolves on her children. If they are still minors (under 18 years) and inherit small amounts, this does not necessarily pose a problem. If, however, her estate is sizeable, the children’s inheritances have to be paid to the Guardian’s Fund unless her will provides for a trust.

While the law allows parties to have a joint will, Fisa usually advises against it, Williams says, mainly for practical reasons. There have been isolated instances where the surviving spouse dies and the Master’s Office battles to trace the original will that also applies to the surviving spouse.

Men and women living together are not automatically treated as ‘married’ under the law in case of intestacy

The Intestate Succession Act applies to every South African who dies without a will and stipulates that the estate should be divided according to a specific formula. If the person was involved in a relationship other than marriage, the type of relationship will determine whether the partner will be allowed to inherit.

Williams says in terms of the Act partners need to be regarded as a “spouse” in order to inherit in the case of intestacy, but the term is not defined in the Act. As a result, other legislation and court cases have to be consulted for an explanation.

Historically, a marriage entered into in terms of the Marriage Act was the only recognised spousal relationship, but with the introduction of the Constitution, the legal system acknowledged that people in other types of relationships were entitled to protection.

Williams says as a start, legislation was passed in the form of the Customary Law of Succession Act and parties to traditional marriages under black customary law are now regarded as spouses when dealing with an intestate estate.

Court cases have also extended the definition of a spouse in this context to include monogamous Muslim and Hindu marriages and polygamous Muslim marriages.

The Stock Market and Bank Risk

EXECUTIVE SUMMARY — It is clear that risk-taking by financial institutions is one of the main causes of financial crises and severe recessions. Yet we know relatively little about what gives rise to such risk-taking in the first place. This paper presents evidence that a focus on short-term stock prices induces publicly-traded banks to increase risk relative to privately-held banks. The findings provide support for the view that compensation schemes should require management to hold stock for longer periods to mitigate their incentives to pump up short-term earnings and the short-term stock price.

AUTHOR ABSTRACT

We present evidence that pressure to maximize short-term stock prices and earnings leads banks to increase risk. We start by showing that banks increase risk when they transition from private to public ownership through a public listing or an acquisition. The increase in risk is greater than for a control group of banks that intended but failed to transition from private to public ownership, a result that is robust to using a plausibly exogenous instrument for failed transitions. The increase in risk is also greater than for a control group of banks that were acquired but did not change their listing status. We establish that pressure to maximize short-term stock prices helps to explain these findings by showing that the increase in risk is larger for newly public banks that are more focused on short-term stock prices and performance.

Financial Crisis Caution

Leverage, Transparency, Liquidity

Dean Jay Light began his introductory remarks by characterizing the crisis and collapse of housing prices as a test that has exposed how fragile the recently evolved U.S. financial system is. “Leverage, transparency, and liquidity lie at the heart of much of what’s going on. The system has proven to be unexpectedly fragile in a way that I think nobody I know really understood,” Light said.

To illustrate his point about the interlocking nature of housing and the U.S. financial system, Light said that for decades beginning in the 1930s, the ratio of median home prices to median income remained relatively stable, about 3 to 1. Over the last 20 years, however, the financial markets that financed the housing system in the United States changed remarkably. Local markets once dominated by tightly regulated savings and loans—a simple system of buy and hold—evolved into something much more complicated due in part to the development of mortgage brokers. The new system fueled a bevy of mortgage backed securities and derivatives that were terribly difficult for experts to comprehend, he said.

Too much leverage combined with too little transparency meant that the markets froze. Liquidity vanished. Similar to mortgage-backed securities, highly leveraged loans and other transactions were characterized by a lack of transparency. “When one looked at an institution, it was very hard to understand who had what risk. In a world like that, liquidity disappears. So too does the liquidity of institutions. … That in fact is where we are today,” Light said.

Just as a hospital treats patients by focusing on three tasks, so too should we remedy financial turmoil, he said. First, stabilize the patient, in this case the markets. Second, fix the problem through either surgery or other medical care. Finally, prepare long-term rehabilitation. Those three tasks must be accomplished in order.

As for the $700 billion proposal described as a bailout by Treasury Secretary Henry Paulson, it is deliberately void of many details that would be hard to pre-specify, Light said. “It isn’t clear it’s a bailout at all. … It may in fact be a very profitable investment. And at what price are the assets to be purchased? You see, it’s actually needn’t be a bailout proposal at all. It’s in fact a proposal to try to re-liquefy markets by reducing leverage, by increasing transparency, and by increasing liquidity by establishing a set of pricing processes that involve the private market as well as whatever this public entity is.