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Losing Touch With Our Money

Losing Touch With Our Money

As the world gets faster and technology improves: we are losing touch with our money. What can we do to take our financial power back?

The human mind is one of the most complex and powerful things this world has ever known. When nurtured and cared for it can produce remarkable ideas that can be harnessed to make the world better. It can also be manipulated and twisted to serve a purpose. Companies have learnt how to use our thoughts and impulses against us. To a point where being a consumer in the 21st century is a tremendous challenge: a minefield of tricks and distractions.

Companies have designed their marketing to use our behavioural biases and emotional biases against us. As human beings, we only have a finite amount of willpower. When we wake up in the morning and start making decisions, this willpower starts depleting. After a long day at the office, our willpower supply is completely depleted. This is when they pounce.
The most basic tactic is temptation alley at the supermarket where they surround us with sweets, snacks and cold drinks. The next time you are standing in the cue at the shops after work have a look at the people around you. Many of them have started to drink something from the shop or are eating something from the bakery because they are hungry or have snaffled a few chocolates for later. This is no coincidence. When we are hungry and tired (no more willpower) our decision-making ability is impaired (as discussed in Thinking Fast and Slow by Daniel Kahneman). Companies understand this and shops are designed to use our lack of willpower against us and to tempt us to spend more. On the topic of companies wanting us to spend more: the banks are taking it to a whole new level.

Whenever we use a bank card to make a purchase we are effectively disconnected from our money. Yes, we get a message from the bank saying how much we have spent and how much is left in our account, but when we look at the amount that has come off, it doesn’t seem that bad, and looking at the balance always makes it seem like we have plenty of money left. Banks encourage us to use virtual money for just this reason. They want us to lose touch with how much we are spending. Further to this they incentivise us by giving us purchase rewards points so that we spend more and more using our cards (and not cash) and are “rewarded” for it. When we have spent all our money they offer us personal loans and credit cards so that we spend even more. Then, once we have accumulated all this terrible debt and we want to purchase a home using a mortgage bond they give us ridiculously high interest rates because they see us as a risk. It’s a never-ending debt spiral and if we are not careful, and do not use debt responsibly, we can land up in a massive debt hole.

Banks have now started issuing bank cards that have a tap system built into them. Below a specific limit we merely must hold our card above the card machine and *beep*, our purchase is done. No pin code required. No time to think twice. It is instantaneous and evil. Online shops encourage us to preload our credit card details to make impulse buying that much easier. Amazon has a Buy-with-one-click feature. There is a button on the right-hand side of the page. *Click* and your purchase is done. No pin codes. No prompts (are you sure?). No second thoughts.

Nobel Prize winner Daniel Kahneman in his book “Thinking Fast and Slow” describes the brain as having two systems: The Fast system and the Slow system. The Fast system is the first system the brain uses (The first line of defense). As the name suggests: it is quick, impulsive and emotional. Kahneman describes our brain as lazy, relying principally on the Fast system to make decisions. The Slow system is the deep thinking and more rational of the two. It is only activated (Woken up) after some time, however. The Fast system is not all bad. It is the system that will react in a split second, causing us to pull the steering wheel of the car hard left thereby saving us from a potential car crash. However, it is also the system that will cause us to react in a split second, whip out the credit card or Buy-with-one-click: causing a financial car crash.

The solution to this is that we need to get in touch with our money again. To get in touch with your money, break up your spending into monthly expenses and weekly expenses. For the weekly expenses, draw the money in cash and ration it for each item. For example: R2 000 total, R500 for petrol, R1 200 for groceries, R300 for dinner etc. Do this only on the day when you normally go shopping. You do not want to sit with a pile of cash burning a hole in your pocket. If we’re not careful, we’ll find something else to spend it on and companies will try to take it from us.
The One Rand Man that was sponsored by Sanlam was a fantastic example of this. The participant had lost touch with his financial affairs because of constantly using cards and automatic debit orders going off his account. In a drastic turn of events he was paid his entire salary in one rand coins and had to ration them to get through the month. It was only then, with the physical money in front of him that he truly realised and appreciated how much he had been spending in various areas of his life. He did not have credit cards to lean back on. He had to make it through the month with his stash of one rand coins. Whilst I wouldn’t go as far as to break up all my monthly spending into one rand coins, I think there is value in physically quantifying what you are going to spend and rationing it.

If the physical cash route is not for you then there are many apps that will help you to track your spending. A tool such as 22seven.com will allow you to take a step back and see where you are spending your money. You can link many of your bank accounts, investments and credit accounts to this app to give yourself a bird’s eye view of your financial affairs at the click of a button.

With the world looking to rush us into decisions and trying to force us to act emotionally and impulsively, the best solution may to be slow things down. If it is truly not a life or death decision, sleep on it before making it. Give yourself a few days to consider something before acting on it. By taking things slowly, in a fast-paced world, you can take some of your power back from those who are trying to steal it.

Trying to take a different perspective on a financial decision may be a way of short circuiting impulsivity, emotion and bias. There are two good ways of doing this. The first is to pretend you are giving advice to a friend. What would you tell them to do if they were faced with the same set of circumstances you are now facing? Say it out loud. You would be surprised how much what you are about to do and what you would tell your friend to do will differ. Be true to yourself and follow the advice you would give to your friend. The second way to do this is to seek out the advice of an independent neutral party, ideally someone who can give you their differing perspective. At the very least it will lead you to think more deeply about the decision you are about to make.

Avoiding decision fatigue is the best way to go. Deciding on an empty stomach or when you are tired can lead to disaster. Monitoring yourself before making decisions could lead to much better decisions, that are made for the right reasons not just because you are hungry or tired.

Remembering a list of new things to consider can be a burden. Perhaps a better way to do this is to create a decision matrix that asks you good questions in deciding. Some examples of these questions could be:

  1.  Is this purchase something I need or is it something I want?
  2.  How important is it that I buy this right now? Is this a matter of life or death?
  3.  Do I really have the money for this?
  4.  Can this decision wait till tomorrow?
  5.  Are they trying to rush me into this?
  6.  How am I feeling right now? Am I tired? Am I Hungry?

 
As Kahneman proved through his Nobel Prize Winning studies: we human beings can be irrational, emotional and impulsive when it comes to our decision making. It is through understanding this and understanding that the business world is trying to use this to their, and not our, advantage, that we can take a step towards making better decisions in the future. In this fast world, we should never be afraid of driving in the slow lane: it may help prevent us getting into a financial car crash.

A quick summary of how to take your financial power back:

  • Use Physical cash whenever you can and ration it. Don’t keep it too long, however.
  • If the cash idea doesn’t work for you, an app like 22seven will help.
  • Sleep on it: Take your time, they are trying to rush you and play on your impulses, biases and emotions. Don’t let them.
  • Give someone else advice about it (get perspective).
  • Never make decisions when you are tired or hungry.
  • Partner with a neutral, experienced third party (CERTIFIED FINANCIAL PLANNER®) to help you strip the impulse and emotion out of your decision making.

Ask yourself good questions when deciding:

  1.  Is this purchase something I need or is it something I want?
  2.  How important is it that I buy this right now? Is this a matter of life or death?
  3.  Do I really have the money for this?
  4.  Can this decision wait till tomorrow?
  5.  Are they trying to rush me into this?
  6.  How am I feeling right now? Am I tired? Am I Hungry?
Shocking costs may eat away at your investment

Shocking costs may eat away at your investment

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Good day!

Theo Voster talks to the media on a regular basis, especially NETWORK 24, with focus on investments. The article below received a great deal of attention, which we would like to share with you.

The questions you should ask yourself is:

  • How much do I pay?
  • Do I know what the total cost is, all levels included?

Please inform us if you are unsure about your cost structure. Enjoy the read.

Enjoy the read and please inform us should you wish not to receive any ad-hoc communication.

Shocking costs may eat away at your investment

The Business and Sauvignon-workshops at the “Vryfees” in Bloemfontein were special events – Media 24 has a winner with their Festival Café concept, where all the newspapers, TV channels (kykNET and Via) and magazines are under one roof!

The conversations had with people about the costs they pay for investments and investment advice left a somewhat bitter aftertaste.

I almost find it criminal when an elderly lady and man tell me that an advisor quoted them a starting fee between 3% and 5% on their investments – on a nest egg of R5 million it comes down to a fee of between R150000 and R250000 which goes to the nest egg of the advisor (and that be it from a well-known institution) instead of the investment!!!

There is more than sufficient proof that people who make use of financial advisors are significantly better off than people who don’t.

The question is: If financial advice plays such a major role towards one’s financial wealth, what is a fair price to pay for the service?

Before we get to the cost of advice, the latest study (July 2017) about the value of financial advice comes from the International Longevity Centre in Britain (ILC-UK). What gives this study so much value is that the ILC-UK is independent and is not connected to any financial institution, and focus their attention on research regarding the implications of longevity.

In this study, they looked at actual data of more than 90000 households in England. The conclusion was that the people who made use of financial advisors are better off than those who do not, irrespective of how prosperous they are.

“Poorer” people, in other words, people who must survive on a strict budget, were actually better off, in actual fact they were 21% better off. The more prosperous group of people were 16% better off. This is compared to people who did not make use of financial advice.

This study was performed over a period of 10 to 15 years. As expected, the benefit of advice increased over time and age.

The question is now:

If financial advice adds so much value to your life and financial well-being, what would be a reasonable cost structure for good advice?

To answer the question properly it is important to keep the different costs apart, since apples are not always compared with apples.

The points below are the basis on which the financial advisor eventually will be responsible for financial analysis, planning and implementation together with ongoing management and monitoring of the portfolio:

  1. Money that is deducted from your investment prior to the money being invested (it is normally called structuring-, implementation- or planning fees): There is normally a lot of work to be done prior to presenting a complete plan, for example, things like an analysis, long term financial models and investment recommendations. The starting point is that the cost should be linked to time and ability. As a guideline, it should be somewhere between R7500 and R25000 (if really complicated) if the investor eventually places the investment with the advisor. In the R5 million case above, the planning cost should not be more than R7500!
  2. The fee for the management of the underlying investment portfolio: As a starting point, the total ongoing fee should not exceed 3% of the value of the assets per annum. Depending on the structure of the asset (active vs passive or domestic vs foreign) the 3% per annum could be heavily reduced. To understand the ongoing fees, three elements need to be separated and should be understood separately – although these are eventually added together to calculate the ongoing fee:

  • Advisory fee – approximately 1% of the assets under management; it can be reduced if the investment amount is relatively high and/or the client does not expect too much ongoing input from the advisor. It is also advisable to negotiate a maximum fee per month if it is a large investment.
  • Platform and administration fee – levels between 0.5% and 0.75% for assets under management is a reasonable standard in the unit trust and investment industry.
  • Underlying fund management fee – This fee can vary between from 0.5% to 2% of the assets under management depending on the specific mandate and fund manager.

You need to be cautious of performance fees, “fund-of-fund” fees, transactional costs and wrapper fees, which in some cases can be added!

There are alternatives to the above fee structure, especially where the investor only requests a specific service or transaction. I specifically refer to estate planning, asset allocation and/or portfolio modelling services. In this case the advisor will levy a fee for the specific service and will not be responsible (or earn money) for the long-term performance of the portfolio.

Call us on 021 943 5301 or email us at info@verso-wealth.co.za

Visit our website today at www.verso.co.za

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The content in this article is wholly owned by the Verso Group of Companies. Companies in the Verso Group are authorised Financial Services Providers.

Making the Most of your Retirement Annuity

Making the Most of your Retirement Annuity

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Take advantage of this gift from the government.

I’d like you to please take 3 minutes to imagine and write down how you would feel having a comfortable and worry free retirement one day. It could be going on holidays, spoiling your grand kids and never having to worry whether you have enough money coming in every month.

How do you get there?

A retirement annuity is one of the best tools to accumulate wealth for your future. It is a form of investment that has been in the market for many years and in many forms. The so-called legacy RA’s, dreamed up by Insurance companies in the 80’s and 90’s, are becoming extinct and are being replaced by their younger and more nimble Unit Trust based descendants.

In 2014 National Treasury estimated that only 6% of South Africans would be able to retire into the same standard of living they enjoyed in their career and be able to earn the same income they were earning when they retired. To address this National Treasury has been working hard to improve South African’s retirement prospects by incentivising investing for retirement.

What makes a Retirement Annuity great?

A retirement annuity is a wrapper/shell/outer layer. Within the retirement annuity is the underlying investment. These days this is likely to be a Unit Trust based investment.

There is no taxation payable within the Retirement Annuity. All interest and dividends generated by the Unit Trust investments inside the Retirement Annuity are tax free. These incomes are kept inside the retirement annuity and used to buy more units of the Unit Trust. You can replace the unit trusts inside your R.A. with others and not be liable for any Capital Gains taxation.

You are entitled to deduct your contributions to your retirement annuity from your income tax. This means that by contributing to your Retirement Annuity, you will effectively be paying less income tax.

You can retire from a retirement annuity as early as the age of 55. When you retire you will be entitled to a maximum of one third of the retirement annuity as a cash lump sum. R500 000 of this will be tax free. A minimum of two thirds of the retirement annuity must be used to buy an annuity that will give you a monthly pension for your retirement.

In Short

Income and Growth are both tax free. You are entitled to a tax deduction for your contributions to your R.A. You are effectively paying less income tax by contributing to a retirement annuity. You can retire from an R.A. at age 55. When you retire you can take one third of the value in cash. R500 000 of this will be tax free. Two thirds must be used to purchase an annuity that will give you a monthly pension.

A gift from National Treasury

From March 2016, National Treasury has given us a real gift. They increased the deduction allowable for our retirement funds to 27.5%. This means that you will be able to contribute 27.5% of your Taxable income (All incomes less all deductions) to your Retirement Annuity and receive an income tax deduction. This is to a maximum annual deduction of R350 000. Anything in excess of this will be carried forward to your next tax year.

In previous years we were only allowed to get a tax deduction for contributions equal to 15%. It is now seriously in our interest to be contributing as much as we can to our Retirement Annuity.

In Short

We can contribute 27.5% of Taxable income to our Retirement Annuity and receive an income tax deduction.

Give your future self a raise

Your retirement annuity will be used to produce a salary for yourself in future. The larger the retirement annuity you accumulate the more your future salary will be.

South Africa is a high inflationary environment. Most expenses increase by at least inflation every year and many of them, such as medical expenses increase well in excess of this. In order to keep up with inflation and protect our retirement capital we need to increase our retirement annuity contribution by inflation every year. This needs to be the first thing on your list when you get a salary increase. By increasing your contribution by inflation you are effectively giving your future self a raise.

In Short

Increasing your R.A. contribution with at least inflation every year protects your capital and is effectively giving your future self a raise.

Give your future self a bonus

Personal finance is about consumption. The more or less you consume of your salary every month will have a direct bearing on how much you have to provide for your future retirement. Often we put everything ahead of our retirement provision. This is one of the chief reasons why many South Africans will not have enough to retire one day. We need to put our retirement first and then live off the rest, not the other way around.

This is especially true when it comes to surprise lump sums such as a bonus or an income tax refund. This is money that we may not have been expecting. If we use it to fuel our lifestyle we are in fact creating more of a burden on our future selves. We will be reliant on having the lump sum available in future to cover certain expenses. However, if we put the lump sum directly into our Retirement Annuity we have essentially given our future self a bonus. We have also reduced our tax liability this year. We will have lived off less and provided more for the future.

We have until 28 February 2017 to put a lump sum into our Retirement Annuity this year. It’s something that will pay major future benefits.

In Short

Putting a lump sum into your R.A. will be a major future benefit and will save you tax this year. It is like paying your future self a bonus. You have until 28 February 2017 for this tax year.

Just get started and increase aggressively

There are multiple articles in the media that talk about the percentage of your gross salary you need to put into your retirement annuity in order to successfully retire one day. Knowing how much you should be investing for your retirement each month can be extremely intimidating and demoralising. The most important part is to get started. Any goal can be reached in small increments. You can now take out a Retirement Annuity for as little as R500 per month with many providers in the market. This is not much money at all.

Once you get started you need to increase your contributions aggressively every year or whenever you get a raise. A 10% increase in your R500 contribution is only R50 per month. If you get a big bump in your pay cheque you can also aggressively increase your retirement annuity contribution. Providing adequately for retirement is about getting started and then making a series of small wins, and occasional big ones, throughout your career.

Think about this:

If we use a cricketing analogy: We do not need to hit a four or six every ball to win a game of cricket. Provided we do not lose wickets (We get started and stay consistent with our contributions) or have too many dot balls (not increasing our contributions) and that we get consistent 1’s and 2’s (annual increases in our contributions) and the occasional 4 and 6 (increasing aggressively when we get a raise) we are setting ourselves up for an imposing total (an adequate provision for retirement).

In Short

The most important thing is to get started. You can do it for as little as R500 per month. You then need to aggressively (above inflation) increase your contributions whenever you get a raise and especially when you get a promotion.

Having a comfortable and worry free retirement one day is peace of mind that is worth hard work and effort. The truth is: one day after a long career you will deserve a rich retirement, but the only person who is going to make it happen is you. To make it happen you have to:

  1. Get going;
  2. Give your future self a raise and;
  3. Pay your future self a bonus.

This article was brought to you by Verso Wealth (Pty) Ltd, an authorised Financial Services Provider, FSP license number: 46260. To speak to an advisor, call us on 021 943 5301 or mail us at info@verso-wealth.co.za.  

Verso Wealth (Pty) Ltd is a division of the Verso Group of Companies.