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Category Archives: Finance

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.

When Good Incentives Lead on Bad Situation

An Experimental Field Study

In an experimental field study, the researchers set out to test the efficacy of three distinct incentive schemes for employees in charge of assessing risk and issuing loans: the origination bonus (in which officers are rewarded a commission for every loan issued); the low-powered incentive (in which officers receive small rewards for loans that perform well and small penalties for loans that perform badly); and the high-powered incentive (in which officers receive big rewards for issuing loans that perform well, but big penalties for loans that default).

To begin, the researchers collected a random sample of actual applications from entrepreneurs seeking commercial loans for the first time. They acquired the loan files from a large commercial lender in India, a country challenged by a dearth of verifiable financial data. As is common in emerging markets, many residents have no personal identification documentation, let alone a credit score. Loan officers often end up relying on qualitative information and intuition, all the while knowing that these loans may be vital to the nation’s economy.

“Small businesses in emerging markets are thought to be among the large engines of employment and economic growth,” Cole explains. “But they often find it hard to get access to financing because they lack the large amounts of collateral that banks typically require. So we were interested in studying this small business segment, which is difficult to lend to but could potentially have a large impact.”

The researchers then recruited 209 experienced loan officers from several leading private—and public-sector Indian commercial banks to participate in up to 15 loan assessment sessions. Participants were asked to evaluate six applications per session, rating applications on personal, business, management, and financial risk before granting or denying the loan.

The Small Business Administration

A look under the hood at SBA, however, reveals a small but important agency. In fact, the SBA is perhaps the perfect prototype for a Trump administration agency: a public-private partnership driving valuable outcomes to a critical (but often neglected) part of the economy, all at a low cost to taxpayers.

Gallup and other surveys show high support for small businesses. However, programs that support small businesses are not popular for superficial reasons. Instead it’s because small businesses touch the lives of every American in ways that are not only tangible, but also, in fact, consequential.

Half of the people who work in America either own or work for a small business. And small businesses have created 60 percent of all net new jobs since 1995. Four million Main Street businesses—including neighborhood restaurants, dry cleaners, and local grocery stores—form the backbone of communities across America and they are responsible for about 40 million jobs. And, as Mercedes Delgado and I show inresearch released earlier this year, small business suppliers—locally and across the country—contribute importantly to American innovation and growth.

Small businesses are actually the foundation for economic growth and, with that, critical to policy that purports to care about the average American. In fact, if we consider what Americans expect from their government, small business should have a voice in all of the key decisions facing the next president’s administration, from Dodd-Frank reform to the anticipated overhaul of the Affordable Care Act.

If you ask small business owners what they need to grow and thrive, they will talk about lower taxes, less burdensome regulation, and—what I spent four years working on as the head of the SBA and what I continue to write about today—access to capital.

SBA’s flagship loan programs are made through more than 3,000 banks, where the private sector picks “winners and losers” and the government provides a guarantee in areas where the bank wants to make a loan but needs some credit support. This allows women-owned small businesses, minority-owned small businesses, and others in underserved geographies to get credit even if the private sector market is not fully providing access.

As my co-author Brayden McCarthy and I detail in research released last month, the credit gap in small-dollar loans—those under $250,000, which is the size that 76 percent of small businesses say they need—is very real. While new private sector players like online lenders can help in this segment, they will certainly not replace the SBA. A well-functioning, low-cost agency—that expands access to credit to small businesses across America with an overall loss rate under 5 percent—should be viewed as a huge asset, as it most certainly was when I joined the agency in 2009 at the height of the credit crisis.

SBA’s loan guarantee programs were actually a mechanism that helped unlock capital to small businesses at a time when most banks had stopped lending to small businesses altogether. In fact, SBA’s guarantee brought many banks back to small business lending, helping resuscitate this critical sector of our economy right where it was needed, on our nation’s Main Streets.

The effectiveness of SBA programs also explains why during my time at the SBA, we hosted more than 150 delegations a year from countries around the world who wanted to use the agency’s programs for small business assistance in their own country. The Chinese visited nine times. And, David Cameron’s U.K. government borrowed from the SBA’s contracting efforts, setting an even higher small business contracting goal than ours here in the United States (25 percent versus our 23 percent) and achieving it in less than two years

 

4 Tips to Prepair Your Finances for Your First Baby

1. Track your current expenses

The first step in preparing for the future is knowing exactly what the present looks like. Having a handle on how much money is currently coming in and what it’s being spent on each month will provide the baseline you need to make educated decisions going forward.

You can go over your expenses yourself by looking at receipts and bank statements, or you can use tools like GoodBudget.com and You Need a Budget.They make budgeting easier by automating most of the process, pulling in transactions from bank accounts and credit cards and helping you categorize them.

2. Estimate your new expenses

Having a baby will add some expenses to your monthly budget, but you can get a handle on them ahead of time.

Babycenter has two great tools for estimating the overall costs of raising a childand the specific first-year costs. Use them to get a ballpark figure for baby’s first year, then divide that number by 12 for a monthly amount you can plug into your budget.

3. Build a cash cushion

Take that estimated baby budget and start setting the monthly amount aside insavings account now — before the baby gets here. This will do two big things for you:

  1. It will help you adjust to your new budget before you have the additional stress of caring for a newborn.
  2. It will help you build up a cash cushion to handle unexpected expenses that come up after the baby is born, so you won’t have to resort to credit cards.

4. Keep the lines of communication open

Having a baby is a huge change, and no matter how well you plan, there will be plenty of ups, downs and surprises.

Setting a regular time to talk money with your spouse or partner can do more than anything else to keep you on track. Open, honest conversations allow you to stay focused on your biggest personal goals, adjust to changing circumstances, and solve problems before they get too big.

Just like learning to walk, adjusting to the new financial realities of having a child is a matter of taking things one small step at a time. If you track your spending, build your savings, and have regular check-ins with your partner, you’ll have all the tools you need to get up and running.

Don’t Wait Till Year’s End to Fix Your Finances

Add to an HSA

A health savings account, or HSA, is a powerful tool that many people don’t know much about. If you have a qualifying high-deductible health plan, you can make tax-deductible contributions to an HSA, much like you do with a 401(k). The money also grows tax-free within the account and can be withdrawn tax-free for medical expenses. That’s a triple tax break you won’t find almost anywhere else!

As it turns out, an HSA can also serve as a fantastic retirement account, if you manage it correctly. That triple tax break is too good to ignore, and with the right provider, you can invest the money just like you would within an IRA. So I recently maxed out my HSA contribution for 2015, putting $3,350 into my account and investing it in low-cost Vanguard index funds. (The maximum contribution for individuals is $3,350 in 2015; for families, it’s $6,650).

Make a video for homeowners insurance

I encourage my clients to create a video record of their belongings, which serves two purposes if something were to happen to their home:

  1. It documents their personal possessions for insurance purposes, which increases their chances of getting fully reimbursed.
  2. It make it easier for them to re-create the home they love.

I recently realized, however, that I hadn’t taken my own advice. So I got out the video camera (phone), and took a slow stroll through my house.

It was especially important to me to document my dearest possession, a 16-volume pictorial history of the Civil War my grandfather gave me years ago. You could burn the rest of my stuff, and I might not care. But I wanted to be absolutely sure that I had this on record.

Max out a Roth IRA

Finally, I went ahead and maxed out my Roth IRA for 2015 with a $5,500 contribution, ensuring that I’ll have a little more money to tap tax-free years down the road when I’m ready to retire.

I still haven’t met my goal of opening a Roth Solo 401(k) through my business, but nobody’s perfect! That is in the works for early 2016.

Waiting until the last minute to handle financial responsibilities creates a lot of stress as we rush to get things done before the calendar turns over. Take these or other positive steps to improve your finances sooner rather than later this year.

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.