The Upper Hand

This is one New Year’s resolution you will be keeping. It will only take you a day, but the benefits will last a lifetime. Start with a balance sheet. This is going to become your personal yardstick of where you are financially, where you’ve come from and where you’re going. First, list all your assets, from your house and car to every investment and policy you have, not forgetting your current pension balance. Apart from providing a clearer idea of how much you’ve accumulated, it’s also a helpful list for your beneficiaries should you ever get run over by a bus. Next, list all your liabilities, from the outstanding balances on your car and house to your credit card and overdraft facility. Now you can determine your net financial worth and set financial goals to both reduce the liabilities and increase the assets. Each year, you will see your financial balance sheet improve and you can notch it up along with your children’s heights on the door.

Set a date for when you plan to be bond-free. Pay an additional amount into your bond each month to make the liabilities shrink faster. And have a financial plan in place to boost the asset side of your balance sheet. What do you want that asset column to reflect in five years’ time? Set annual targets so you know if you’re on track. Calculate how much you will need for retirement. Do you need to increase your retirement contributions? Remember, you’re likely to live 30 years post-retirement. Your broker should be able to provide you with a spreadsheet to calculate your savings requirements. Alternately, Old Mutual provides an online retirement calculator. Go to oldmutual.co.za, click on “personal”, look for the “retirement planning” heading and click on the retirement calculator. If you’re saving for your child’s education, know the target. How much is his or her education going to cost? If you’re looking at private education, take today’s school fees and increase them by 12 percent per year.

Have there been marriages, divorces, births, deaths? These all have an impact on your financial plan. Do you need to amend your will? According to Berrie Botha, CEO of Sanlam Trust, if you die three months subsequent to a divorce without changing your will, your ex-spouse will still inherit your entire estate if she was your sole heir throughout the marriage. You also need to adjust your estate planning in line with tax changes. For the 2007/2008 tax year, the primary deduction for estate duty increased from R2.5-million to R3.5-million and the capital gains tax exclusion for estates increased from R60 000 to R120 000. Do these changes impact on your list of life cover and pension fund beneficiaries? Do you have enough to provide for your dependants now that you realise how much school fees will set you back? If you’ve had a promotion, do you need to adjust your retirement funds as a result? Have you bought expensive electronic equipment or made renovations to your home that will affect your insurance premiums? According to Santam, up to 40 percent of shortterm insurance policyholders are underinsured by up to 45 percent and are putting themselves at risk. Caroline da Silva, head of portfolio management at Santam, says this means that a policyholder will only receive partial compensation after submitting an insurance claim. For example, the replacement value of your house’s contents is R200 000, but the sum insured is just R110 000, and during a burglary R20 000 worth of goods is stolen. Because you are underinsured by 45 percent, only 55 percent of the loss, that is R11 000, will be paid out. “Due to the fact that crime is top of mind when insuring,” says Da Silva, “we often only insure for what we think may be stolen in the event of a burglary.” But insurance is comprehensive, so you need to insure for what it would cost you to replace everything you own should your house burn down in a fire. The couch you bought five years ago for R1 500 might now cost R3 000 to replace. The contents of a house are insured at replacement value (vehicles are insured at market value); so, you have to revise your policy at least annually to ensure your cover remains adequate. When insuring the actual bricks and mortar of your home, bear in mind the current-day building costs since it is these costs that will be incurred when repairing damage. Draw up an inventory yourself or employ the services of a professional broker who can assist in a valuation.

Do your investments reflect your current needs and risk profile? Tony Barrett, head of wealth management at BJM Private Client Services, says that people are assessing their risk incorrectly. In addition, their advisors are often too conservative in their fund selection. If you’re under 40, you can afford to take a higher risk portfolio because you have time before you retire, which lowers the risk of equities. Equities are the best way to keep up with inflation, yet some brokers tend to be too but, if we’re losing money, we hold onto it in the hopes that it will recover. Speak to your brokers and, if they give a thumbs down, cut your losses. It’s also a good time to review your investment advisor. If you’ve been unhappy with their service or performance, get a second opinion.

Consolidate your investments and your debt. You’ve picked up several RAs, unit trusts and life policies along the way. Review them and consolidate into a few key investments. By having more than one RA, you’re not only paying additional debit order costs, but also more admin fees. The same applies with life cover. Flexible funds are a good option as the fund manager takes care of asset allocation decisions when they become concerned about market volatility. Consolidating also makes it easier to keep track of your returns. Consolidating debt is a buzzword at the moment, but if used effectively it can help you pay off your debt faster. If you owe less on your house than what it’s worth, you can increase your bond and settle expensive short-term debt like your credit card and car payments. The key is not to spread your payments over 20 years. On a car loan of R100 000 at one percent above prime (15 percent), your repayments will be around R2 350. Over five years, that would cost you R140 980. If you took R100 000 from your bond (at 12.5 percent) to settle the loan and still paid off the R100 000 in five years, you would reduce your payments to R2 230, saving yourself over R100 a month, but the cost of the total loan would be R133 600, a saving of over R7 000. If you paid the R100 000 off over 20 years, your monthly repayments would fall to R1 124, but would cost you R269 860 in total.

Are you getting a good deal on your home loan? In the UK, people view their mortgages as commodities and review their rates every year. As your salary increases along with the value of your house, you could qualify for a better interest rate. If you’re looking to consolidate, it’s an opportunity to shop around. The drawback is that there are costs involved which the mortgage provider can capitalise into the loan and you need to ensure that switching cost doesn’t negate the benefits of the lower rate. According to Simon Stockley, head of new mortgage provider Integer, you shouldn’t consider switching if you’re not going to be in your existing property for a period of three years as it generally takes 18 months to recoup the costs of the switch. Finally, do your homework before committing to a new lender.

Posted by The Correspondent on 03:58. Filed under Time-Money . You can follow any responses to this entry through the RSS 2.0. Feel free to leave a response