Financial planning can be a minefield for the unaware. Ferial Haffajee looks at the basics
WITH new products appearing on the market almost daily, the potential investor is easily overwhelmed. Between the bulls and bears, trusts, equities, money market funds, and now offshore options, personal financial planning can become a minefield for the unaware.
So, to start with the basics, here’s an A- to-Z guide to the essentials:
Alternative investments. For an ethical way to grow your money, both Old Mutual and Syfrets have unit trusts that invest only in companies that pass the litmus test of fair labour standards, creative empowerment opportunities and good green policies, among others.
Bull. Lots of it about. Treat your potential investment as you would a doctor’s diagnosis: get a second opinion and check out the competition. Bonus. Best not to blow it, but add it to the bond repayments or invest it in unit trusts and other sure performers.
Current accounts are transaction accounts, commonly used only for bill payments.
Debt. Still too easy to get into, despite high interest rates.
Equity. The opposite of debt. Your personal equity is a measure of your monetary value including cash, investments and insurance policies.
Endowment policies are sold by insurance companies and mature at anything from five years on. They lapse when you don’t pay, unlike unit trusts where you can’t lose your money if you skip a payment.
Forex or foreign exchange is no longer the swear-word it used to be. As of this month, locals can invest R200 000 overseas or keep it in a foreign currency account in this country.
Gear, the government’s growth, employment and redistribution plan, seeks to keep down public spending. The implication is that only the poorest will receive social assistance; most people will have to provide for their own retirement and health-care.
Home. Is owning a home the most solid investment? The jury is still out on whether other long-term investments offer better returns. Many swear property is still best – but it’s a very long-term commitment. Renters should also consider whether they will really save what they don’t spend on a mortgage.
Interest rates are tipped to drop by up to two percentage points by the middle of next year – with provisos. Should the rand go into a tail-spin, the picture may change significantly.
Johannesburg Stock Exchange (JSE) is classified as an emerging market exchange. Companies sell shares so they can expand. Brokers say anything less than R5000 is not really worth putting into stocks.
Krugerrands. Not just the bust-head of the Krugerrands is out of favour; the value of the coins is based on their gold content, so the outlook is pretty bleak at a current bullion price of $320/oz.
Life insurance. One of those must-haves that may not be a must-have. Insurance adviser Joel Hurwitz says people with dependants and debts should have a policy. But for the carefree and unattached, it’s probably better to make a medium-term investment. “Policies are many and varied,” says Hurwitz. These days rates change if you’re a smoker or a non-smoker, whether you’re rich or poor. A more flush lifestyle could mean your premiums will be lower because the risks are fewer than those facing low-income communities where violence and ill-health are higher.
Money-market funds are relative newcomers. They’re like a cross between a unit-trust and a cheque account which means it’s easier to withdraw money from them. Benefits accrue more quickly because investments are short- term.
Neat. Smart cards look like an ordinary ATM card, except for the little microchip that stores all your information on it. The smart card works like a debit and credit card and you can pay accounts, transfer money and use it to pay (as cash) at stores that have the system.
Off-shore investments. With the relaxation of exchange controls, the array of off-shore investments is mind-boggling. But check them out carefully. Bear in mind that interest earnings may not be as high overseas as at home.
Patriotism. It may be a case of local is more lekker. Individuals can hold foreign currency accounts at local banks. That way you can hedge against any depreciation of the rand.
Quintessential saving. Personal finance gurus suggest you should be investing about 10% of gross earnings.
Retirement annuities. This is a private nest-egg to make sure your golden years keep their shine. They are run by insurance companies and you receive a lump-sum payment at retirement, usually 55 years. For many, this type of investment is also used to top up company pension or provident funds. Payments into a retirement annuity are tax deductible because, by providing for your own old age, you don’t burden the state.
Savings. A savings account is a bit pass. Better to put any spare cash into a credit card account – the interest rates are higher.
Tax consultant. If you earn less than R60 000 a year, there’s no need for one as you don’t have to submit tax returns. Tax advisers don’t come cheap. At between R200 and R400 an hour you would be better served filling in a return yourself. But if your salary package is tax-structured to include a car, travel and other allowances, your returns could become quite tricky. Government is overhauling the tax system completely, so while the transformation is under way it’s not a bad thing to get help from someone whose job it is to stay abreast of changes.
Unit trusts. Probably the most popular form of investment in the country. This is a pooled investment for small-time savers. Your money – the minimum investment is R100 a month – buys you shares (units) in a range of companies chosen by a fund manager, the unit trust’s chief, thereby spreading risk. Unit trusts are a guaranteed investment, so you can’t lose money, as long as you don’t cash them in too soon (five years). According to Micropal’s latest audit of unit trust performance, the top unit trusts in the three months to June were Norwich Managed Bonus, BoE Growth, Southern Managed, Standard Bank Industrial and BoE Managed.
Virtual banking. More and more bank clients do it by mouse. All major banks offer some Internet banking service. The more sophisticated sites enable you to do everything from paying your accounts to making a loan application from your computer. They swear it’s safe; that computer “firewalls” and encoded information are impenetrable to hackers. But some systems are still slow.
Will. Get one. Wills have gone DIY. They cost about R40 and will make sorting out your affairs much faster and less painful for your family.
Xtra high interest-bearing accounts. Considering the long notice periods, high minimum deposits and fairly pedestrian interest rates, not a good option.
Youth accounts. It may be a marketing ploy, but the various accounts and packages available from banks for young adults are a good way of teaching the next generation to manage their money. But banking sources say many young people are getting into trouble with credit cards.
ZZZZZ …don’t snooze on the job. New investments are being developed all the time.