Financial planning varies from person to person — the individual who has more money than he or she knows what to do with clearly has a different financial planning problem from the person who’s been living beyond his means for the past 12 months.
Both types exist in South Africa. The booming economy over the past four years, with buoyant business conditions, a rampant bull run on the stock market and rocketing home prices, means many people are a good deal wealthier than they were. Some don’t even know it. On the other hand, for those who did not benefit from these conditions, rising interest rates and indebtedness have put their monthly budgets — if they have such a thing — under intense pressure.
Carel van Aardt, research professor and head of income and expenditure research division at the Bureau of Market Research, Unisa, says: “A lot of high-income earners are deeply in debt and trapped in a cycle of perpetually upgrading their possessions, cars and homes. They buy a car and replace it after three years instead of, say, seven.
“But even the poor and unemployed are deeply in debt. During the consumer binge that has only just abruptly terminated, banks and retailers virtually thrust credit at often undeserving customers. This trend accelerated up to the introduction of the National Credit Act in June 2007 and has heightened the impact of the consumer slowdown since.
“One of the most baffling things is that as a result of credit mismanagement, we have seen many low-income, poor and even unemployed people shopping not in discount stores, where one would logically expect to find them, but in expensive high-LSM stores. The reason is that these stores were providing credit. So even jobless people have been able to acquire high-quality clothes, furniture and appliances that otherwise would have been beyond their reach,” explains Van Aardt.
As a result, most South African households are living beyond their means and many are living well beyond their means. The latest statistics of household savings in South Africa show that in 2007 South Africans saved a miserly 1,5% of gross domestic product (GDP). As recently as 1990, South Africans saved 11% (which even then was a cause for concern). Is there a more graphic indication of the credit frenzy?
American author Suze Orman has published a series of financial planning books aimed at assisting consumers to change their spendthrift ways.
She proposes a practical five-month “save yourself” plan, which aims to take all the uncertainty out of financial planning. By following the plan’s step-by-step method individuals are assured of gaining control over their financial affairs.
Her latest book, Women & Money, starts at the basics: its premise (though obviously not applicable to all) is that people often never so much as open their monthly bank statements, blindly hoping instead that they have sufficient money to cover the monthly bills. Many of us are guilty of it.
Orman demands of the reader that they devote 24 hours every month for five months to get on top of the five most common areas of financial indiscipline: spending, basic saving (through control of bank accounts and credit cards), retirement investing, wills and estate planning, and insurances.
In a world where one is constantly advised to seek “professional advice” Orman insists people do each step personally. The success of the plan comes from this insistence that readers personally do all actions: whether opening bank accounts or closing them. The first action, for instance, is to personally balance one’s bank account. This forces one to confront income and expenditure, on the basis that from knowledge comes responsibility and ultimately control.
“I don’t care if Warren Buffet is your financial adviser. Power doesn’t come from relying on someone else to handle your money,” says Women & Money.
For the wealthy, Acsis, the asset consulting and financial planning consultants to financial planning firms, has designed a series of client-based methodologies.
The methodology requires people to look at their wealth as four different types of assets, each of which has a different approach.
Henry van Deventer, a consultant at Acsis, says: “A high net-worth individual has: business assets, lifestyle assets, lifetime assets and surplus assets.
“Business assets are what produced the wealth in the first place, are typically high risk and most wealthy people’s greatest fear is of losing these assets,” says Van Deventer.
“Lifestyle assets are homes, cars and other luxury items. These are not investments and must never be seen as such. The rule here, even for the super wealthy, is to ensure they do not over-extend themselves, because the wealthy are as liable to do so as anyone.” He cites the case of one client who used to spend R40 000 a month on flowers for his girlfriend.
“Lifetime assets are those assets that will support your lifestyle until retirement, and the objective with these is to reduce risk to the minimum the individual is comfortable with. This is one of the most critical aspects of financial planning — determining that risk level.
“Surplus assets are those that you will never need to sustain your lifestyle and where one can either take some risk or get involved in philanthropy,” he says.
At this level, Van Deventer says, if a person is going to speculate, it is typically aimed at earning extraordinary returns. But the most common use for it is planning for generational wealth planning.
Beware supermarket wills
We are all aware that wills are essential, but equally essential is an acute understanding of how and if a will is legal and able to be realised. Peter Prentice, senior partner at Cameron & Prentice Chartered Accountants, recounts how a recent experience with an off-the-shelf will almost went horribly wrong:
“I recently had occasion to lodge a will as agent with the Master of the High Court on behalf of the executrix of a deceased estate. The will was a typical pre-printed shelf will or, as I prefer to call it, a supermarket will. It was neatly set out leaving large gaps for the testatrix to fill in her last wishes,” says Prentice.
“Unfortunately she was getting on in years and was very short-sighted. Her daughter, the nominated executrix and chief beneficiary, diligently completed the will under her mother’s directions and they proceeded to the local police station to sign and have the will witnessed in the presence of two local police officers.
“The mother, the daughter and the police officers were not aware of section 4A of the Wills Act, which may disqualify anyone from receiving any benefit from the will if that person writes out the will or any part of it. Although the will was declared invalid, the beneficiary received her inheritance, not in terms of the will but according to the law of intestate succession,” explains Prentice.
“Be warned, don’t be tempted to use the pre-printed will variety without being aware of the legalities surrounding its completion.”