Wednesday, July 21

Rich South African, Poor South African

Wayne Wides points to speculation that South African GDP growth has been underestimated for the last few years. It does not seem unlikely, as STATS SA has done it before and South Africans confidence in their economy is certainly not explained by the meager growth we have apparently been achieving.

Wayne also encourages South Africans to save more, something I can certainly recommend. He does not include capitol gains tax into his calculation however, which I believe will have a major impact on those numbers and complicates the situation.

I just want to make a few points about saving money in SA today.

Investing in a retirement annuity allows you to lower your income tax as well as escape the ravages of capitol gains until you retire. Management fees for most funds in SA are insane however, so finding a safe, low cost, index tracker might be difficult. You'll possible have to use slivers of bamboo and hot tongs on your insurance consultant to drag out this information from him, even if they offer something like that (he makes more money selling you high return, high cost managed funds). If he tells you the return his fund has been making the last few years makes his management fee insignificant, explain to him the law of diminishing returns then tell him you think you've got a lump in your back and can he explain their life insurance policies to you again. That should get rid of him. Two things to remember. You cant touch this money until your life is over, and you'll need less money to retire with than the insurance agent is telling you.

In the comments of Waynes Post the SATRIX 40 is recommended as an investment alternative. I heartily concur. I cannot laud this investment vehicle enough, even if its management costs are still high compared with international standards. If your looking to start saving relatively small amounts (say R10000)  for the long term it is possibly South Africas best option.

Saving is more than putting away a R1000 a month however. The fact is it takes money to save money. The best savings account is borrowing money to buy a  house, as perverse as that sounds(up to a monetary limit  and if your planning to live in it, otherwise the rules change again). Apart from the monthly loan repayment, any money you put into your homeloan is free from capitol gains tax (CG tax will be charged to any profit you make when you sell your house due to growth in the market, not money saved by paying less rent), earns interest at prime and is immediately available if you need it with most modern home loans. Buying a house also protects your savings from the ravages of inflation as well as providing security for other investments you want to make. (It also forces you to save by just making you service the loan every month.)

Another savings vehicle often overlooked is spending money to decrease the cost of your lifestyle. If you’re spending R400 a month at the laundromat, buying a R2000 washing machine will pay for itself in less than half a year.  Spending too much money on food? Buying a fridge allows you to purchase food in bulk and storing it for when you need it. Spending too much to keep your car running? Buying a new second hand car (Never buy a new car in South Africa. Were being cheated. Lets repeat that so everyone gets that. Never buy a new car in South Africa. Were being cheated. ) can lesson your costs considerably even if it does increase your short term debt. You can use the money you save on the car to pay of your car debt faster.

Rich people get richer because they can save money just by spending it. Buying a Mercedes? Chances are you'll be able to sell it in a years time for the same of more money. Buying a dining room cupboard? You'll never be able to get rid of your fake oregan pine chipboard monument to "I bought it for myself before we married",  but the R80000 Stinkwood Louis XIVth imitation is going too make you a pretty penny in 10 years time. Woolies plates at R30 a pop? Cracked and sitting in the attic for when "You throw those parties for 'those' your friends". Spode dinner plates at R350 a pop? Not a scratch and its listed in your will. What is the moral of this story? You can save just by spending decadently wisely. Buying something valuable to use is not necessarily extravagance, but good business sense (and it makes your wife happy, which is priceless).

However! The first rule of saving will always be that you will never get rich by just saving. The second rule is that you cant take it with you. This means that next time the clever young salesgirl tries to explain to you how much money you can save in the next 20 years by just giving up drinking a soft drink at work every day and applying the laws of compound interest, explain to her you like drinking a soft drink everyday and talking to that smart young chap from marketing with all those crazy ideas. Having a party is an investment in your business network. Lunch is networking. Don’t try to save money by skimping on those things that make your life enjoyable and might just make you rich (If not in money, then at least in friends. You can repeat that as a mantra later in your life "At least I’m rich in friends...".).

The third rule of saving is you should always be saving more. How much should you save? Between 20 and 35% of your income if your earning less than R20000 a month. If you’re earning more than that you should be saving more.

How do I start saving? Small amounts in a bank account monthly, and lump sums of R10000 into Satrix and similar investments. Why not directly into Satrix? Because you want to lower your banking costs and the higher the lump sum investment the lower the administration costs usually.

How much should I have as a cash reserve (or short term investments)?  At least 3 months income. That’s a lot of money if your making R15000 month, but you can reduce it considerable by having medical, automobile, life and house insurance.

Should I get a credit card? If you’re able to manage it responsible. If you know you cant, don’t get one. If you can, then easily accessible short term debt is one of the modern worlds greatest inventions. Bigger than the indoor toilet. Grander than sliced bread.

When should I buy a house? As soon as you can afford it. The sooner the better. If you cant afford it, you should still be looking at houses. For most people, your house will be your single biggest investment of your life. Buy in bad neighborhoods, buy a crummy dump, but get into the market.

As for getting rich? You’re on your own with that one. Would I blog if I knew how? 


Anonymous Anonymous said...

Richard, nice post.

A tip for using a credit card & bond. Every month when I get all my income I dump it ALL into my bond and then use my credit card for everything (except cash, but the only time I need cash is for car guards). Then the day the credit card bill is due I move the required payment from my bond into my credit card. So essentially the bank is lending me my salary every month & paying me interest for the pleasure of lending me the money - and that is how I like banks.


21 July 2004 at 15:11  
Anonymous Anonymous said...

an one other thing. If you sell your primary house you pay CGT on the profit over R1million if my memory is correct.

An on that point buying houses to let (not to speculate an sell as the costs are way to high) is also a good long term investment. Over 20 or 30 years you could build up a very nice portfolio of houses/flats all paid for and all earning income. Fully taxable.

The issue of are we in a property bubble or not is not that important if you're buying for rent. The bubble is only a worry to those wanting to sell. Initially a small 1 or 2 bedroom flat could end up costing yu a R1000 or less per month after costs and income - assumign you have some up front money for deposit & costs.


21 July 2004 at 15:19  
Blogger Richard said...

Excellent tip, as for buying houses to rent out, thats an investments strategy that probably deserves its own long drawn out post. any takers?

21 July 2004 at 15:57  
Anonymous Anonymous said...

Richard, I can prepare a post tomorrow night on property purchases and rentals, as well as the tax implications, technicals on structuring and the financial advantage of owning one's own house, but be warned. When I review the market statistics in conjunction with others like interest rates I don't necessarily arrive at a favourable conclusion.


21 July 2004 at 20:54  
Blogger Richard said...

Looking forward to it Wayne. Owning houses is a tricky business and I think making a decent profit i.t.o the capitol invested is not as easy as many people think.

22 July 2004 at 09:06  
Anonymous Anonymous said...

Whew, fulfilled the promise and it was also one of the hardest blog entries I've ever done. The choice was between a two thousand word entry that would have switched most off, or one under seven hundred words that more would be willing to read. I choose the latter and spent three hours having to rip out and edit swathes of technical matters.

- Wayne

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