What I Wish I Knew About Money…

-By Sunél Veldtman

I have been pondering what to write ahead of Women’s month. Today we welcomed a niece into the world and little Julia gave me a good reason to write about all the things I want her to know about money (and a little about life). She is too young now, but one day, I’d like her to know. My own daughter has just turned eighteen is on the verge of stepping out into the world.

 

Dear Julia,

It’s never how much you earn that will decide how much you spend.

Your grandfather gave me this sound advice when I started working for the first time. When I earned my first, meagre salary, I always thought that earning more would help me to be financially free. Of course, it helps to earn more money, but believe me, you will find hundreds of new possibilities to spend your money on. New winter boots. A car. A house. Children. A bigger house with a second garage. Cars for your children. Insurance for all of that. As your needs and wants grow, you will find new avenues to spend your money. The world is very willing to help you think of new things to spend your money on. Your friend has a new dress. You want one too. Everyone is going to holiday overseas. You want to go too. Realise right from the start that you decide what is left after each months’ salary. Realise that not all wants are needs.

 

Live within your means.

Do not ever borrow money to live a certain lifestyle. Borrowing is for building assets, like buying a house. An asset has the potential to increase in value over time. When you borrow money to spend on clothes, holidays or fridges, you will pay punitive interest to the lender on stuff that only devalues in time. Save for these before you spend the money. Buy them with money you already have, not with money you hope to have the future.

 

Money is for joy.

Money is a resource, not only necessary to operate in this world, but for channeling need, helping you to fulfill your purpose on earth and making dreams come true. Money isn’t just for spending on what the world wants you to spend on. Money isn’t only for living. When you have money, you are the channel for where it will end up, the steward of this resource. It comes with responsibility and freedom. You will soon see on the family farm how water flows through the furrows to where the gardener wants the water to go. Then, when he wants the water to flow to a different vegetable patch or lane of fruit trees, he closes and opens the sluice gates. This is my enduring picture of channeling resources into the areas where you want it to go. With intention.

You are free to spend it as you please, on make-up and clothes, cars or your career but it won’t necessarily give you joy. Joy comes from living within your means. Joy comes from spending your money on the things or experiences you value. Joy comes from using your money to help other people or the world.

 

How much money you have, does not determine your value.

How much money you have in your bank account or investments, does not determine your value. You determine your value. Value yourself. You will determine how people treat you and how much they value you. You are inherently valuable, just for being a wonderous and unique human being. There is a hidden jewel in every human being. Never forget that. Do not let anyone destroy or diminish that value. Expect to be treated like someone who is wearing that jewel in a crown. With respect and dignity. Do not let anyone devalue you. Do not even let anyone make you feel unsafe. Protect yourself.

People like employers and customers will try to pay you less than what you are worth. If you do not believe in yourself and claim your worth, people will get away with that. Do not let that happen. Work hard to add value but then claim what you are worth. I hope that by the time you reach working age, there will no longer be a pay gap. Yes, unbelievably, in 2018 the world still pays women less than men for doing the same job.

 

Money is power.

I know I have just said that money does not determine your worth. But money is a powerful tool to help you get what you want. The cold hard reality is, that those with money, have more resources to get what they want. Money buys education. Money buys opportunities. Money buys access. Money buys privilege.

Even in relationships, the person with more money mostly has the advantage. This will be a tricky traverse in your relationships. Every relationship of your life. There is always power at play and money contributes to power. When you are dependent on your parents, they have the power. When you are dependent on your husband, he will have the power. When you are dependent on your children in your old age, they will have the power. It is not necessarily bad, it’s just tricky and you need to negotiate for yourself.

It brings me to freedom.

 

Money buys freedom.

Money buys you the freedom to make choices. If you want that freedom, then look to earn enough, save enough, invest enough so that you can make your own choices now and in the future.

 

Be grateful.

What a privilege to welcome you – this little miracle into our lives. All new life is a miracle but not all children are welcomed into the world by parents who thought they they would never have the privilege of holding a daughter. Already know that you are privileged even just to have that. Millions of little girls come into this world unwanted. Unloved. And born into abject poverty with little hope to escape it. You have a head start and you are likely to stay ahead. For my own girls, this is also true. I hope that we raise you to realise the enormous privilege of your childhood. But also, to be grateful for all the good things in your life and even the suffering. All these bring gifts to your life.

There will always be someone who is better off than you. You will always find reason to feel ‘not enough’. However, life is so much better, when seen through the lens of ‘enough’. There is enough for everyone. Enough money. Enough opportunity. Enough of everything. Live through this lens. It starts with being grateful for what you have.

Wishing you a life of enough, little Julia and all the girls in my life.

 

If you want more practical advice for your younger family members follow our series for young adults by Thiart van der Merwe. You can also book a financial wellness check-up for them with one of our young financial planners.

 

 

Words Worth Reading

Women and the financial industry

Previously we wrote about the difficulties that women face with the financial industry. The industry’s predominant client base has been men, specifically older men. Now there is a wealth transfer on the go and the industry is waking up (at last). This is good news for women, especially younger women. It may all just feel more familiar in the future.

Read the article here.

 

“What does wealth mean to you?”

A recent article in the New York Times, ‘Balancing the Benefit and the Burden of Wealth’, discusses what money means to different people. Independence. Freedom. But also regret and loss. What is the balance?

Read the article here.

 

 

The Finance Series for Millennials: #2 Property Investments

-By Thiart van der Merwe

 

In this series of articles, we’re giving you the advice you need on how to set yourself up for financial freedom. Our aim is to give you practical steps each month – action points that you can take immediately. Follow these steps over the course of the series and you will be set up for financial wellness.

Our second article focuses on property and the investment case. Most of you have probably been advised something like: “Property is the only investment you will ever need to make. Buy a flat, it’s passive income. The flat will pay for itself if you rent it out. Property is always a great investment because you have a physical building.” We could go on but you get the idea. We believe it is not that straightforward. No investment is a certainty and no investment is that simple. Here are some insights and potential pitfalls you should be aware of.

Before we start, here’s the most important piece of advice and action you can take this month: For any type of property or in fact anything you financed, we implore you to adjust your payments annually by your pay increase. Right away, don’t wait for a month. Assuming you only get an inflationary increase (5%), bump up your monthly installment by the same percentage. On a R1 million mortgage at 10% the graph below shows that you can pay off your loan in just under 12 years – that’s 8 years faster than sticking to the original installments.

 

 

 

For those out there who struggle to save a portion of their income – buying a house is probably the best thing you can do. Not because of its investment prowess, but mainly because it forces you to SAVE. Not a lot of people will skip a mortgage payment as the bank will be there soon to take your property back. In that sense, the forced discipline created makes for a great investment tool.

If you are one of those who have managed to portion out a part of your income to save, I’d suggest a more diversified approach to investing. You don’t want all your eggs sitting in two flats in Rosebank Johannesburg because it’s the next best thing.

Below we state the case not to buy an investment property.

 

What is an investment property?

A property you bought in order to generate an income (through a tenant) or by selling at a later stage for a profit (capital appreciation) – is considered an investment property.

In our example you buy a property and borrow R1 million at the prime lending rate (10%). You will pay off the bond over 20 years at roughly R9 650 per month.

The counter scenario would be to invest R9 650 monthly into a very conservative fund such as an income fund. This fund has a 92% allocation to income generating instruments (cash & bonds) and 8% to property – a conservative, low risk fund just to make this point.

The South African Housing Index shows that since January 2000 house prices have grown in real terms (after inflation is taken into account) by only 3.2% per year. The fund in our example grew 5.4% above inflation since its inception date (July 2001). View the performance figures here.

Investing R9 650 monthly into the fund would mean that your investment in 20 years would be worth R4.1 million in today’s money. Paying off your bond would mean you own a property worth just under R2 million in 20 years’ time.

Let’s assume you get a tenant. You use the rental income after levies, maintenance and potential months of vacancy to furnish your bond. In most instances there will be a shortfall, which you will need to cover. Let’s assume the shortfall is R3650, which means your net income from the property is R6000 a month.

Investing only R3 650 a month would leave you with R1.6 million after 20 years (in today’s money).

We are trying to illustrate that property is not the only investment that is worth your while. You might argue that the monthly net income is higher than R6000 or that property growth in the right areas is much higher than that. We will argue that we did not take into account transfer costs or taxes and could have used a higher risk equity fund with a return of 7.5% above inflation.

Saving into a diversified unit trust fund or even Exchange Traded Funds (ETF’s) can be just as effective as buying property. It is also much less stressful and easier to access your money than selling a physical building.

There are guru’s out there that know how to pick the right property in the right location with the right tenant. However, most young people will have one shot at buying one investment property. This is risky – a high rise building could block your sunny flat, tenants could wreck your property or economic fundamentals in your area can deteriorate for reasons out of your control.  If you really want property, rather look at buying into a property fund. Professionals who invest in property for a living. Some of them have yielded exceptional long-term results.

 

Source: Stanlib Weekly Focus

 

Action points for the month

  • Increase your bond payment with the same percentage as your salary increase as soon as it happens.
  • If you do decide to buy a property, do your homework and ensure you get the best price.
  • Ensure that you lock down a decent interest rate for your bond – shop around with different banks.
  • If you are hesitant about property, open a flexible investment. You will reap the rewards in the long term.

In closing some advice from the one and only Warren Buffett that could be applied to property as well: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” Eloff Street, the most expensive piece of land in the famous Monopoly game has deteriorated significantly in value over the last 20 years – not a lot of people saw that coming.

 

Foundation Family Wealth now offers a consultation service for young people who are serious about money. Contact thiart@foundationsa.com to find out more.

 

 <Foundation Family Wealth is an Authorised Financial Services Provider>