As we head into a new decade, fraught with economic uncertainty and with the country on the brink of a recession, it could well be time to review your money habits. We rounded up the ideal money resolutions to ensure you start this decade off on the right financial foot.
- Diversify your portfolio
South Africa’s equity market capitalisation equates to morethan200% of the country’s gross domestic product (GDP), the highest proportion in the world and a level that is simply not sustainable. Economist, Kevin Lings of Stanlib, says in a low-growth economy, it’s high time that you started expanding your investment universe beyond equities. He recommends geographic diversification, citing the fact that South Africa accounts for just 0.4% of global GDP.
- Incorporate non-traditional assets
Continuing the diversification theme, Craig Gradidge, executive director of Gradidge-Mahura Investments, recommends non-traditional assets such as hedge funds, S12J investments, structured products, broad-based black economic empowerment (BBBEE shares), and private equity. “South Africans tend to be overexposed to unit trusts, endowments, retirement annuities and bank deposits,” he says.
- Use your personal balance sheet as a frame of reference
Gradidge notes that too often, investors tend to assess their investment options in isolation. “Ultimately any investment should strengthen your personal balance sheet. A strong and well-constructed balance sheet is what carries you through changing market and economic cycles,” he advises.
- Increase your contributions
Set up a debit order for your investments if you have not done so already and increase the contributions you are making. It doesn’t have to be a large amount. R50 a month amounts to an additional R600 contribution for the year.
- Step back from the noise
As we head into a tumultuous period with low growth and a recessionary environment, you may find yourself daunted by the plethora of bad news. Resolve to be firm in your investment strategy, to ignore the noise and to remain committed to your long-term financial plan.
- Revisit loadings. If you had a loading or an increased premium on your policy as a result of health conditions or dangerous pursuits, you can approach your insurer to reconsider the premium if your health has improved significantly or you no longer take part in a dangerous activity such as skydiving.
- Quit smoking. Premiums for smokers can be significantly more expensive. If you quit smoking, insurers will often reduce your life insurance premium (after you have been smoke-free for about six months). Note that insurers are also starting to reassess the health risks around vaping.
- Update your will. Make sure your will has been updated in line with any major life changes such as having a baby or getting divorced. Also check that all the requirements have been met so that it can be recognised as a valid will.
- Organise your documents. Get all your filing up to date and put all the important documents such as your life insurance policy and will in one place. Let a trusted family member or friend know where these documents are in case of emergency.
- Read through your policies. Check the fine print on your life insurance policies and ask a financial planner to explain anything you don’t understand. In particular, find out what is excluded on the policy and why, so you can take steps to improve your cover before claims stage.
- Check the value of your insured household contents to ensure that you are insured for the correct amount. Bertus Visser, chief executive of distribution at PSG Insure, says your insurer will only pay out a claim proportionately to the sum insured, and if you have underestimated the value of your household contents, it can be a costly mistake. “If for example, you have R100 000 in contents cover but the real value of your goods is R200 000, your insurer is likely to only pay out R50 000, because you’re 50% underinsured,” he warns.
- Update your insurer. Notify your insurer before starting with any renovations to your property as this can affect your cover. If a wall comes crashing down or there is a theft of your home contents, there is a good chance of your insurer rejecting a claim because you did not inform it of a change in the risk.
- Pay an annual premium. If you have access to a windfall, find out about paying an annual premium for your short-term insurance. You may receive a slight discount on the premium and it frees up money in your monthly budget.
- Consolidate your insurance: There are often savings available through having all your valuable assets covered with one insurer rather than many. Having car, household and building insurance with the same insurer typically results in a lower total premium.
- Increase your security: Your car, home or building insurance premium is calculated based on your risk profile. For example, you could reduce your car insurance premium if you’ve fitted your car with additional safety features such as a tracking device or an alarm.
- Avoid personal debt. While the festive season does tend to draw people into purchases they often can’t afford – do your best to avoid getting into more debt. Hardi Swart, director of Autus Private Clients and Financial Planner of the Year 2019, says he often warns clients about the dark side of compound interest. “While compound interest works heavily in your favour when you’re investing, it works just as hard against you if you don’t pay off your credit card every month. The interest is added to the balance of your debt, which means that you pay interest on your interest charges as well as on the loan itself,” he says.
- Budget, budget, budget. Swart says a budget does not constrain you but helps you prioritise your investing and spending patterns. “The budgeting exercise will teach you the true worth of money and is one of the most powerful tools for long-term wealth creation,” he says.
- Use your tax breaks. When you commit to saving and investing, it makes sense to make optimal use of the tax breaks available to you. For example, your contributions towards retirement funds such as retirement annuities, provident and pension funds are tax-deductible. Swart notes that this effectively lowers your tax rate, freeing up more money for you to invest. “Also, the growth within your retirement funds is not taxed, which speeds up the growth of these investments,” he notes. Also take advantage of tax-free savings accounts. The limit on these is R33 000 a year and R500 000 in your lifetime.
- Don’t over-invest in your home. “This should be regarded as a lifestyle asset, rather than an investment. Although the return on residential property generally keeps up with inflation, the cost of maintaining a home effectively reduces the growth rate. If you over-invest in a residential property, you run the opportunity cost of not being invested in more equity, which outperforms property by far in the long-term,” Swart advises.
- Invest in your family. Prioritise special family experiences over excessive partying. Time is the most valuable commodity and gift that you can give anyone. “Why limit your gifts to expensive items that will lose value over time – open a tax-free savings account for your child or top up your spouse’s retirement annuity – with some flowers on the side!” Swart concludes.