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Monthly Archives: February 2017

Get your cash together

Go carless

The idea of the first challenge – to ‘go carless’ – was to walk/cycle/use the bus or Gautrain or a service like Uber to get to work instead of driving.

I took Uber to work for a week and each trip cost me about R130 one way. If I extended this over a month, this ended up being more than my average spend spend on petrol per month, which is about R100 per day. What worked better was carpooling with a colleague, allowing us to both save money on petrol.

As a young adult I have not been responsible for a lot of my transport costs and one of the things I realised is just how expensive it is to move around a city like Johannesburg. Transport costs add up quickly, and if you can do a bit of planning in advance, you can save a fair amount of your disposable income.

Subscription subtraction

This was the next challenge and I was asked to cancel or reduce a subscription such as DStv, gym, magazines or data.

When my mother was picking up the bill, it was easy to start a whole lot of hobbies but as soon as I realised how much it costs to fund these activities, I had to rethink my existing subscriptions.

I don’t go to gym as often as I would like to and if I was honest with myself, I wasn’t getting my full value out of this contract. Dancing was a better form of exercise for my health, so I prioritised what I got the most value out of.

Decelerate

This challenge helped me the most and I recommend it to anybody struggling with their cell phone or data bill. I was on contract and my data bill came to R2 000 in June, this was not the first time that happened, and my parents were less-than-impressed.

How did it get to R2 000 you ask? Well my data for that month would run out but wouldn’t cut me off… it allowed me to use data just at double the price.

I am now on pay-as-you-go and able to limit the amount I spend on my data every month and with the 22Seven app, it is easy to monitor.

When I run out of data it is cheaper to top up than it would have been on my contract. It has also made me a lot more conscious of my daily data usage.

Lunch de-loaded

When you start earning your first salary you start spending money on things like Woolworths sandwiches and fast food.

In this challenge you had to pack lunches for a week instead of buying them and then compare that cost with what you normally spend on food. I started tracking the spend on the app and found I was often spending R50 per day on lunch. And on an interns salary, that adds up pretty quickly.

I found this challenge difficult because I didn’t have a lot of time in the morning, but on the days I was able to do it, I could save between R30 and R50.

Find something free

As I’m still young, I do want to go out and have fun but unfortunately that comes at a cost.

This challenge was to find something free (or very cheap) for entertainment and compare that to what a meal or night out would have cost.

This month I was fortunate enough to have received a two-for-one ticket to Parker’s Comedy and Jive at Montecasino. I went with a friend and I now aim to find more things like this where I can socialise smartly.

Have a no-spend Sunday

If I have money I will spend it. By picking one day in the week where I tell myself that I am not spending any money, I can immediately take some pressure off my budget.

For this challenge, I chose a Sunday and packed a picnic basket from groceries we had at home and then enjoyed a great day in Delta Park with the family.

Pay yourself first on payday

This challenge meant I had to put a few hundred bucks into a loan or savings account or investment and see if I even felt the loss of that money later in the month.

This helped me create a habit of putting R200 away in a small investment account and I will be able to monitor how much I save with this monthly task through the app.

By doing this I discovered an interesting calculation using one of the online savings calculators. If I take the R200 per month and save it for the next 20 years, and increase it by 10% each year, I will have saved about R258 000 just through this habit.

Overall the 22 days were a success and while I did have a few bumps in the road it pushed me to break those bad spending habit that I have adopted and helped me to implement some good habits that I will be able to use in the future.

How is estate duty calculated?

The value of the assets is based on their market value, which the executor is tasked with determining. When it comes to assets such as immovable property, an appraiser appointed in terms of the Administration of Deceased Estates Act will have to be used and the estate will have to pay this person’s fees.

Practically, the car’s value will be the book value, unless it is sold, in which case it will be the actual sale price. Note that the Master can insist on an appraiser valuing any property (not only immovable property) if he has reason to believe that the value provided by the executor is not reasonable.

  • Are life insurance policies included in the assets as deemed property a) for the purposes of calculating executor’s fees; and b) for the purposes of calculating estate duty? 

If a beneficiary has been nominated then the policy benefits will pay directly to the beneficiary and will not fall into the estate. The executor will therefore not be eligible to charge his fee on the amount and it will only not attract estate duty if one of the spouses is the beneficiary or if it is a qualifying keyman or buy and sell policy.

If, however, no beneficiary is nominated or the estate is nominated as the beneficiary, then the benefits will fall into the estate, under the administration of the executor and he will charge his fee accordingly.

In such a case, the benefits will also be taken into account when calculating estate duty, unless the life insurance policy is exempt in terms of the provisions of the Estate Duty Act, or accrues to the surviving spouse. Interestingly, it is the person who receives the benefits who will have to actually pay the estate duty attributed to the policy benefits.

The types of policies that are exempt are certain employer owned policies, such as certain keyman policies, certain buy and sell policies, and policies that have been taken out to meet a requirement in an ante nuptial contract. In addition, any benefits, including death benefits from long term insurance policies that accrue to a surviving spouse, qualify as a deduction when it comes to estate duty under section 4(q) of the Act, thus no estate will be attributed to those policies. 

  • I have a retirement income fund (living annuity). Is this included in the assets of the estate for the purposes of a) calculating the executor’s fees; and b) for the purposes of calculating estate duty? If so, what value is given to this retirement funding given that it is pre-tax money?

If you have nominated a beneficiary for the annuity, then the benefit will pay directly to that beneficiary and it will not be included in the estate. The executor will therefore not be eligible for a fee on it. If no beneficiary is nominated, then the benefit will be paid to the deceased’s estate, as a lump sum.

This lump sum will attract retirement tax in the deceased’s hands, and the after tax benefit will be paid to the estate. The executor will then deal with this asset and will accordingly charge his fee.

In terms of current legislation, the benefits in an approved retirement fund or compulsory annuity are exempt from estate duty. This may change to some extent going forward, as National Treasury intends to include any “disallowed contributions” for estate duty purposes. We only have draft legislation on this at this point in time, so we do not know for certain how this will actually play out.

  • From what I have read, the entire estate from the first spouse to pass away can be transferred to the surviving spouse with no estate duty being payable. Also, the first R3.5 million of the value of the estate is exempt from estate duty. My wife and my wills, which were drawn up some time ago, specify that the first R3.5 million of our estates is transferred to our family trust. This means that the second of us to pass away will have R7 million exempt from estate duty. However, I have read more recently that the R3.5 million exemption is automatically transferred to the surviving spouse, so is there any need to transfer the second R3.5 million to a trust?

You are correct that the abatement now automatically rolls over to the surviving spouse, unless used on the death of the first dying spouse. So, if the first dying spouse leaves his or her entire estate to the survivor, then on the survivor’s death estate duty is only levied on the estate in excess of R7 million.

It is therefore true to say that the abatement is no longer lost if not used on the death of the first spouse. But, what must be kept in mind is that the potential growth on the R3.5 million may well be lost.

If R3.5 million is bequeathed to the family trust and invested, when the surviving spouse passes away, then R3.5 million could have enjoyed good growth and now be worth more. If it had not been bequeathed to the trust and invested, it would remain R3.5 million.

Overall, when looking at your estate planning it is essential to ensure that the surviving spouse is adequately catered for. He or she must have sufficient capital after all the taxes and administration expenses have been paid to enjoy a comfortable standard of living.

If bequeathing the R3.5 million to the family trust (or adult children) results in his or her standard of living being adversely impacted, then this should not be the route selected. However, if there is more than enough cash in the estate, and the bequest poses no risk at all to the surviving spouse, then it still has merit as an estate planning tool.

When is investing in property a good idea?

In looking at your situation, you are both doing relatively well from an earnings point of view, but the 15-year difference in age is a huge factor that makes planning much more difficult. You also started a family relatively late and as we all know, kids are incredibly expensive, especially in their teens and early 20s.

Given your family situation, it counts in your favour that your husband plans to work until age 71. We fully support people carrying on their working lives while this is still fulfilling, and the additional economic contribution it provides increases your chances of being financially independent in retirement. If it is possible for your husband to continue to earn some money for another few years beyond age 71, this again would be an enormous help.

Before going into the specifics of your situation, there are a few considerations to bear in mind when considering the investment case for physical property against an investment in a balanced portfolio:

  • Property can be leveraged, balanced unit trusts should not.
  • You will receive a capital gain from the property and also earn an income once you have retired.
  • Liquidity in real estate can be a problem from time to time. The transaction costs involved are also very high and there is the hassle factor of maintenance and finding tenants. If you hire a management company to do this, then this will reduce the rental income. A balanced fund is liquid within a week and is hassle free.
  • Property prices are very interest rate-sensitive and rates are expected to continue to rise in the short term.
  • The long-term average return from SA residential property is lower than portfolios with high equity holdings.

To look at your specific circumstances, we performed a calculation to ascertain how long your money would last, and to determine what returns your investments would need to achieve in order to reduce the risk of outliving your capital.

What should you do with your business’ cash?

I understand your frustration. As a business owner and entrepreneur, every financial decision you make for the business has its opportunity costs. Holding money in a current account, or any savings and investment vehicle, where you earn below inflation, let-alone no yield, exposes you to the following risks:

  • Cost risk – which is the erosion of your capital due to costs and fees incurred to maintain the account.
  • Inflation risk – which is not being able to grow your capital or funds in excess of inflation and eroding your purchasing power over time.
  • Asset allocation risk – which is your capital not being exposed to an optimum mix of asset classes through different investment cycles that can offer the optimal return for a given level of risk.

Like an individual investor, a business should be clear on articulating their short-, medium- and long-term financial objectives and the quantum of funds needed to achieve these. In other words, be clear on how much cash flow is needed to meet the daily operational expenses of the business as well as what potential capital expenditure is required for future projects. These should be invested differently.

Depending on your business’s cash flow cycle, you may find that there is excess cash in the business account from time to time. It’s therefore a good idea to decide on the minimum balance that you’re comfortable having there.

As you indicated, the challenge in deciding how much liquidity you are comfortable with is key. Having a clear plan for the business in the short-, medium- and long-term and reasonable estimates of the costs associated with each will help you to make this decision.

This is on the assumption that the capital currently sitting in your business account is intended as working capital. As a first point of call, banks offer a savings facility attached to your business account.

These come in various forms, for example, money market call accounts or fixed term deposit accounts. The conditions of returns, liquidity and costs will vary with each product. The average yield on a money market call account with one of the four big banks is between 3% and 6% per annum. At these yields, you are barely fending off the inflation risk.

There are, however, alternatives to having your capital lying in your business account. There are many local investment managers that have fixed-income unit trusts that utilise enhanced cash and cash equivalent instruments. These solutions are designed to offer similar levels of liquidity, flexibility and preservation to a money market account, but with the opportunity to earn higher yields of between 5% and 7% per annum.

In conclusion, your business needs to be clear on its minimum cash flow requirements. Traditionally six, eight or 12 months’ average operational expenses should be held in cash depending on the nature of your business.

Ask your bank or another financial services provider how you can incorporate a savings facility within your business account.

Articulate the short-, medium- and long-term financial objectives of the business and align cash flow accordingly.

Divert excess capital in the business account to an alternative savings or investment vehicle, ideally one which gives you exposure to various asset classes.

Always consider the risk factors when making these financial decisions.

Explore consulting a certified financial planner to perhaps create a holistic investment strategy for the business.