This article was first published in the third quarter 2016 edition of Personal Finance magazine.
When I became a mom in 2015, I started obsessing about saving for my son’s education, at the same time worrying that I’m not saving enough for my retirement. If a good education is the greatest gift you can give a child, then the second-greatest gift must be to make sure that you will never be financially reliant on him.
Before baby, my lifestyle was not dissimilar to Bridget Jones’s, and while the prospect of living on cat food in my old age wasn’t appealing, if it did end up that way, it wasn’t like I would be an embarrassment to anyone. Well, that’s changed – along with everything else in my life. Getting enough sleep and managing my money are suddenly my greatest challenges.
“Managing money” sounds like work because it is. It’s much harder than finding time to sleep. And it’s so wide ranging, covering everything from the basics, such as budgeting (although I don’t know many people who have mastered this) and saving (also simple, but not easy), to the more complex aspects of managing money, such as estate planning. I suppose I have plenty of knowledge about both the basics and the complexities of financial planning, but applying it wasn’t a priority – until my son came along.
So, at the beginning of the year, at the tender age of 40-something, I set new goals to save and got serious about budgeting. I started using 22seven, a free budgeting and investing app. You link all your accounts to the app – from bank accounts, home loan, credit card and clothing accounts, to investment accounts – and it tells you your net value, what you owe, and how much you can borrow. I’ve not used it to its full potential, but have appreciated the accurate account it has given me of how much of my money is going to my expenses. I have found myself asking friends how much they spend every month on groceries, electricity and petrol. While expenses are relative to your needs and what you earn, comparisons get you thinking. Two expenses struck me as excessive: my banking fees and my car insurance.
I was shelling out R230 a month in banking fees (made up of a fee of R179 for my account bundle, plus R30 a month for an overdraft facility that I rarely used, and R20 a month to belong to a very average loyalty programme). Car insurance was costing me R780 a month.
In case you don’t regard these expenses as high, let me explain. I drive a 2013 Ford Figo. This is a bottom-of-the-range cheapie. Car thieves aren’t partial to these cars. I use it mainly to get from home to work and back. At night I park it in the street, where most of the cars in my suburb are parked at night. But above all, I have an impeccable claims record. My point is: I’m a good risk and the high premium had irked me for some time. I even called my insurer in response to one of its adverts sporting an Audi A4 (or some such luxurious vehicle) with the caption “Driver: stay-at-home mom. Premium: R560”. It made no sense to me that someone who ferries children in traffic day in and out, in an expensive car, could qualify for a lower premium than I do. I appealed to them to review my premium, but they wouldn’t budge.
As for my banking fees, it felt like daylight robbery. I’m a savvy customer: I use a debit card for everything I possibly can; I hardly ever draw cash, and when I do, I draw from my own bank’s ATMs only; I do all my banking online or using an app, and the only time I set foot in a branch is to collect a card. I have a small number of debit orders coming off my account and I’ve never had one declined. Why was I paying a monthly fee of R179? If there was a party in this relationship that was “moving forward” (the bank’s payoff line), it was the bank, and it was at my expense.
So I switched banks and insurers (see “Pause before switching”, below). In my first month of banking with my new bank, my monthly fee was a paltry R8 – a saving of R222 a month. And I’m now paying R620 a month to insure my car, which is a saving of R160 a month. Plus my new insurer offers me rewards, in cash, for good driving. Instead of spending the cash (I’ve accumulated R720 in five months), I’ve opted to save this money in my “Excess Funder Account”. This is an “account” set up by my insurer to ringfence my excess, so that in the event of a claim I’m not out of pocket; very helpful considering my excess is R3 250.
By switching banks and insurers, I saved almost R400 a month. Suddenly, my goal to put away R500 a month for my son’s education was within reach. Finding the remaining R100-odd would be easy – 22seven had revealed to me that I spend R320 a month, on average, on take-away lunches and coffee.
I know I didn’t need advice about where or how best to invest R500, but I decided to seek it in any case. I approached Bruce Fleming, a financial planner with the Certified Financial Planner (CFP) accreditation at Citadel Wealth Management in Cape Town. Fleming has since been named Financial Planner of the Year for 2016, an award presented by the Financial Planning Institute of South Africa (FPI) in association with Personal Finance.
The truth is, I wanted more than a bit of advice. I wanted a plan. I believe it when the financial planning industry says “failing to plan is planning to fail”, yet I’ve never had a qualified professional draw up a plan for me. I think that for some people, the failure to plan stems from a sense of hopelessness – we succumb to believing that it’s too late or that we don’t earn enough to save, let alone earn enough to pay for advice. Yet I felt I had to do it, whatever the cost. Getting it wrong – and failing in my duty to be a good provider – would be far more costly.
“You’ve got to cut your coat according to your cloth,” my mom used to say. I don’t think she ever explained what it meant. But at last I get it. You have to work with what you’ve got, no matter how much or how little you have. She’s half-Scottish, so I also took it to mean that you shouldn’t waste, either. (She would take a dim view of what I fritter away on lunches and coffees.)
The big reveal
After two meetings with Fleming, he produced a proposed plan. Although I knew I wasn’t saving enough for retirement, the numbers came as a shock: even if I work to age 65, I will be penniless before I turn 74 – and apparently I should expect to live to the age of 95. That means I will outlive my money by about 20 years.
Fleming says another problem is that I have no discretionary savings; all my savings are tied up in retirement investments, such as a company-sponsored pension fund and a retirement annuity (RA). He says I need discretionary investments too, and that I should use some of these to make provision for any income shortfalls in pension or annuity payments (in my case, savings to cover the 20 years from age 74 to 95). “This is because cash provides you with liquidity in retirement and is far more tax efficient than drawing income from a living annuity,” he says.
Discretionary investments, such as unit trust funds and shares, give you absolute freedom as to how much or how frequently you invest. So you aren’t contractually obliged to contribute X amount for X number of years. The bigger benefit of these is that you are not constrained in the way you invest (more specifically, in your asset allocation), as you are when you invest in a retirement fund. Regulation 28 of the Pension Funds Act limits how much retirement funds can invest in the various asset classes. With discretionary investments, you can be more aggressive and invest more heavily in equities and offshore funds, for example.
Fleming recommended I invest R2 000 a month in a discretionary investment. Another recommendation in his plan is that I save R1 000 a month for the next 18 years to make adequate provision for my son’s tertiary education. Since I managed to find only R500 in my budget, on the face of it, it looks as though I’m R2 500 shy of what I need. But this is where an adviser can be like a clever tailor, cutting your coat according to your cloth.
I have a piece of land in a little holiday town not far from Hermanus. I bought it 12 years ago and there’s a small amount owing on the bond. (Had I not been using the bond as an emergency fund, it would have been paid off years ago, but that’s another story.) The point is, the land has hardly appreciated in value over the past decade. Not only did I pay too much for it, but property prices in the area have plummeted and vacant stands are a dime a dozen, so it’s permanently a buyer’s market.
I’ve been holding on to it like a dog with a bone, as one tends to with a bad investment. Fleming says I should sell it because it’s costing me in bond repayments and rates and the opportunity cost has been enormous. I would be far better off if I had invested the sizeable deposit, plus all the bond instalments, interest and rates, in a portfolio of unit trusts over the past 12 years. Knowing this has liberated me from my stubborn determination to hold out for a good price.
Fleming says the R500 I found in my budget, plus the R1 500 that I spend every month on bond repayments and rates gives me the R2 000 that I need to put away in a discretionary investment for retirement. Of course, this plan works only if I am able to sell the plot, but I’m hopeful I can do so now that I’m willing to lower my asking price. Whatever proceeds I make from the sale of the plot will be invested in the same investment policy.
But where will I find R1 000 to put away for my boy’s education? I’m currently paying more than that every month into an RA that hasn’t done very well. It’s a life assurance RA, which is costly (I’m paying a management fee of four percent a year, before VAT) and becoming unaffordable – the premium has been escalating at 15 percent a year for the past 14 years.
Fleming has advised me to switch to a new-generation unit trust-based RA, which is not as expensive as my old RA and the penalties of moving the RA are low enough to make it worthwhile. The big benefit of the new RA is that it gives me the flexibility to stop and start payments without attracting any penalties. He says I should stop making contributions to the new RA until I can afford it, because I am already contributing to an employer-sponsored pension fund and so that I have money to save for my son’s education. I was concerned that the costs of the RA would eat up the benefits if I were to stop making contributions, but I’ve been assured that if I target an above-inflation return, I should get this return after costs.
What I like about this plan is that it covers both my goals of saving for my son’s education and my retirement. It’s a bonus that the net effect is that I come out with R500 more every month, which I can channel towards an emergency fund. I finally have peace of mind about selling my plot and investing the proceeds for my retirement. I’m excited about saving for my son. After 18 years of saving, we will have close to R600 000, which should cover four years of tuition fees at future rates.
The other great thing about this plan is that it’s a debt-elimination plan: by offloading the plot, I will become debt-free. Fleming says that, with my budget as tight as it is, eliminating debt – even a relatively small debt – is my best move. “Debt is a monkey on your back, because you are paying the bank interest at a rate of nine percent, which you could be earning in interest, and because we are in a cycle of increasing interest rates,” he says.
Key lessons
Raising a child on one income is tough, particularly if you don’t get maintenance. It’s even harder for women, because we earn, on average, about 25 percent less than our male counterparts. My circumstances aren’t entirely unique: according to Stats SA, most South African households are run by single mothers. But unlike most single mothers in South Africa, I’m financially literate and have the benefit of belonging to a company-sponsored retirement fund. While I appreciate this benefit, it doesn’t help me when it comes to handling financial shocks.
I realise that for people in the lowest income bands, saving is impossible. Survival is their goal. Fortunately, I’m not in that category. I am able to save, but I have to be savvy about how I do it. I’ve seen the benefit of consulting a financial planner. Without a plan, it’s all guesswork and worry.
PAUSE BEFORE SWITCHING
Switching banks or insurers is not a decision to be taken lightly, and while you might be moving because of cost, it shouldn’t be your only consideration.
Whether you’re comparing banks and their fees, or insurers and the premiums they are offering, you need to understand the bank or insurer’s product offering and your needs, so that you can find an appropriate product.
For example, if you need a credit card or an overdraft facility, it might not be in your best interests to switch from a bank that offers you a bundled account that includes the cost of a credit card – and sometimes an overdraft facility at preferential interest rates – to Capitec, the low-cost bank that offers only one account at a cost of R5.25 a month*, excluding the cost of transactions, and doesn’t yet offer a credit card.
You may qualify for a stand-alone Virgin Money credit card, which doesn’t attract a monthly or annual fee, but you need to find out what interest rate Virgin would offer you before you take the leap.
All the top-end, bundled accounts offered by the “big four” banks include the cost of a credit card. They are First National Bank’s Premier account (R199 a month); Nedbank’s Savvy Bundle account (R180 a month); Standard Bank’s Premier account (R179 a month); and Absa’s Platinum Value Bundle (R159 a month).
If you were to move to Capitec and opt for a stand-alone credit card from one of these banks, it would cost you, depending on how much credit you need. Stand-alone credit cards start at R24 a month (for Nedbank’s Classic credit card) and can cost as much as R160 a month (for FNB Private clients) if you’re a big earner and want a big credit limit. The cost of the credit card plus the transaction costs of your new bank could still be less than what you are paying on a bundled account. It all depends on how you bank.
The insurance market
When shopping for insurance, the cheapest insurer isn’t necessarily the best insurer; you need to look at the cover provided by the policy, the excesses, and the insurer’s history of paying claims.
Comparing the various elements of cover is easier than establishing an insurer’s claims-paying ratio.
To get a sense of how insurers deal with claims, take a look at the latest annual report filed by the Ombudsman for Short-term Insurance. On the website you will find reports dating back to 2002. They carry statistics supplied by the Financial Services Board showing the number of claims received by each insurer. The figures are presented in a table with an explanatory note which states that no adverse conclusions should be drawn about any insurer based purely on the number of complaints against them received by the ombudsman. Larger insurers issue proportionately more policies.
The more important statistic is the number of complaints per thousand claims received by an insurer. “Where an insurer receives a high number of complaints to the ombudsman per thousand claims, this may be an indicator that claims are dealt with unfairly by the insurer. However, this statistic should be considered in conjunction with the overturn rate,” the report says.
The overturn rate shows how many times decisions by the insurer were overturned by the ombudsman with some additional benefit to the insured.
*All rates quoted are from banks’ 2016 pricing guides.