This article was first published in the fourth quarter 2016 edition of Personal Finance magazine.
The first, simple goal of gift-giving is instant gratification – you want it for yourself, in the form of appreciation, and for the recipient. If you get the desired reaction, job done. But the effect is fleeting.
It takes far more courage to set the goal further and higher: a gift with benefits that are not immediate, but become more apparent as time goes on.
* Instead of cash to spend, give the potential of “money in the bank” in the form of an investment that holds the promise of long-term rewards.
* Instead of a toy that might be a one-day wonder, give a child a book that helps her to understand where money comes from, or a set of money boxes to help him organise his pocket money.
* Instead of a material gift that loses its lustre quickly, give knowledge that will last a lifetime in the form of a course in money management.
Peter Dempsey, the deputy chief executive of the Association for Savings and Investment South Africa (Asisa), has been trying to convince South Africans for years to think long term when it comes to gift-giving, whatever the occasion. “Instead of frivolous spending on presents,” he says, “why not consider things that will improve the financial prospects of loved ones well into the future?”
According to the 2016 Old Mutual Savings and Investment Monitor, those prospects are worsening each year. It found that 57 percent of us did not have enough income to cover our living expenses on at least one occasion last year and that our average debt-to-income ratio is getting worse: the percentage of our incomes used to service debt has gone up to 16 percent from 12 percent in last year’s survey.
Derick Ferreira, the head of product management at Old Mutual Personal Finance, says this indicates that, “when expenses exceed income, households are increasingly taking up loan offers and accessing credit lines, rather than curbing their spending. This shift was particularly noticeable among middle-income households, seriously hindering their ability to save, and thus diminishing the potential for medium- to long-term wealth creation.”
So you can’t do better for someone you care about than give them not just a valuable present, but one that will leave a lasting financial legacy of one kind or another.
Gifts of money
No cash in an envelope this year; now is the time for your hard-earned money to give back over the long term. Although you can’t escape the requirements of the Financial Intelligence Centre Act and will need the co-operation of the gift recipient (or a parent or guardian, in the case of under-18s), you can, with a little imagination, create a pledge to set up an account worth a certain sum of money, and package it beautifully. As a gift, it might lack spontaneity, but you can trust that the returns will roll in for years to come, for both you and the recipient.
As Sue Torr, the managing director of financial planning consultancy Crue Invest, puts it: “In a nutshell, long-term investing has enormous financial, psychological and emotional benefits attached to it that we should not underestimate. Although there is seemingly nothing exciting about investing, the freedom that invested wealth buys a person is immeasurable. The biggest return of any long-term investment is the ability to make choices with your own life.”
When it comes investment gifts and you’re the over-generous type, don’t forget that any amount over R100 000 a year will attract donations tax.
Tax-free savings accounts
These accounts were introduced in March 2015 to boost the very low level of saving in South Africa and make ideal long-term savings vehicles for children and young adults. They are free of all taxes on investment returns (interest, capital gains and dividends) and although the account-holder will see the benefit only once he or she is a taxpayer, until then, a child will witness the dramatic effect of compound interest, which is a key financial lesson and motivator for saving.
Barry O’Mahony, the founder of Veritas Wealth Management and the 2013 Financial Planner of the Year, believes that compound interest is the foundation of all financial planning.
“My whole job is compound interest,” he says. “It’s what I call the ‘big secret’ of financial planning: are you on the right side of it or the wrong side of it?” You’re on the wrong side of it, he explains, when you have credit card debt that is growing as a result of compound interest. The sooner a child grasps this concept and sees the dramatic positive growth that is possible in an investment, the sooner he or she will see the potential in saving and be excited by it.
There is no age restriction on having a tax-free savings account (TFSA), so all the children in the family can have one from birth, but a parent or guardian is responsible for the account as long as the child is a minor (under 18). Each person can invest up to R30 000 a year or R500 000 over a lifetime in a TFSA.
There are no restrictions on withdrawals, but withdrawals from TFSAs are not deducted from the annual or the lifetime total, so you cannot replace amounts you withdraw without having them added to the annual or overall total. In the case of a TFSA in the name of a child, funds may be withdrawn only if they are deposited in another account in the name of the child, to protect the child from having his or her lifetime tax-free savings allowance depleted by withdrawals.
TFSAs are available in many forms; they are simply designated accounts offered by financial institutions.You can choose the amount of money you want to invest, from a large one-off lump sum to a small monthly deposit via debit order, and the level of risk to which you want your investment to be exposed, from a low-risk fixed deposit with a bank to a high-risk equity portfolio.
Fees must be reasonable, according to the regulations, performance fees are not allowed, and the money must be accessible with seven days – the maximum notice period for withdrawals. Early withdrawals from fixed-term investments are subject to penalties (albeit restricted by regulation).
The website savetaxfree.co.za, developed by financial research and media firm Intellidex, is a great source of information and has an excellent “investment selection tool” to help you choose an account according to your goal, the size of your investment, the risk you are willing to take and the term. The site has a directory of TFSAs, and at the time of writing in August 2016 featured a useful round-up of the interest rates offered on simple, low-risk cash deposit TFSAs available through the banks.
A unit trust investment
Anyone with a savings horizon of at least five years can benefit from a unit trust investment, which makes this the ideal investment for teenagers, Dempsey says. They have time on their side, but are beginning to manage money and become aware of the financial responsibilities that go with approaching independence.
You can invest in unit trusts through a tax-free savings account (TFSA), and there are many options, depending on how much you have to spend, your term, the risk you are prepared to take, and so on.
Old Mutual’s website has all the general information you need. These are some of the benefits it lists:
* You get access to the stock market without needing knowledge or experience of investing in equities.
* The ability to diversify (spread) the investment across markets sectors and economies greatly reduces the investment risk.
* Money invested in unit trusts is easily accessible for emergencies.
* Unit trusts are tax-efficient, thanks to the tax exemptions on interest income and because capital gains tax (CGT) is levied only when you sell the fund and not on each transaction in the fund. Individuals under the age of 65 get an an exemption of R23 800 a year on interest income, and those aged 65 or over, R34 500 a year. The annual tax exemption for individuals who are liable for CGT is R40 000 a year.
* Unit trusts can offer exciting capital growth over the medium- to long-term.
You can invest as little as R250 a month. As with TFSAs, the investment can be made in the name of a minor child, but if you are not the child’s parent or guardian, you will need a parent or guardian to support your gift by accepting responsibility until the child is 18. Then all the teenager has to do is watch his or her investment grow – and hopefully get hooked on the sensation of having money saved for the future.
You can give the most important gift of all to a child who comes from a household with an income of less than R180 000 a year by contributing to an education fund via Fundisa (www.fundisa.org.za).
The concept was launched in 2007 by the triumvirate of Asisa, the Department of Higher Education and Training and the National Student Financial Aid Scheme, and has proved a huge success.
The incentive is the bonus system that is built into the scheme: an investment from R40 a month (R480 a year) earns a 25-percent bonus for the beneficiary, up to R600 a year, which is reached with an investment of R2 400 a year. And since the funds invest in unit trusts, the bonus is supplemented by the overall investment returns achieved by the fund.
Dempsey explains that Fundisa applies a means test to the families of the beneficiaries, but not to the investors, to ensure that high-income earners can invest on behalf of children from lower-income families, such as the children of domestic workers.
The investor can withdraw the money invested, but is not entitled to the bonuses paid; those are available only to the beneficiary and only to pay for tertiary education.
“To gain maximum benefit from Fundisa, you would need to invest R200 a month, or R2 400 for the year,” he says. “But with the rising cost of education, any help you can offer could be profound for the child, as well as the family.”
A retirement annuity (RA) fund that invests in unit trusts is a gift beyond price for anyone who does not have the benefit of a workplace retirement fund. RA investment returns do not attract tax, are exempt from estate duty and are protected by law against claims by creditors, making them attractive investment vehicles.
You can invest monthly by debit order or invest lump sums, and the amount and timing of your investments is entirely in your hands; there are no fees or penalties. Of course, as Dempsey points out, the investor forfeits the tax benefit that would have come from putting the money into his or her own retirement fund.
The beneficiary can access the money only after age 55, and can withdraw up to one-third as a cash lump sum before investing the balance in an annuity.
“The future is uncertain; by making an annuity investment in your partner’s name as soon as possible, you will be giving the gift of financial independence,” Dempsey says. “Even if you become insolvent, or your relationship ends, your partner will have financial security in later years. An annuity may not be particularly romantic, but it does demonstrate more meaningful thought and care for a loved one’s future.”
For more information about RAs, go to www.allangray.co.za > “What we offer” > “Save for your retirement”.
Exchange traded funds
An investment in an exchange traded fund (ETF) makes an ideal gift, says Mike Brown, the chief executive of etfSA: low cost, easily understood by the uninitiated and fully transparent. As an example, he says R1 000 invested 10 years ago in the Satrix Indi 25, an ETF that tracks the FTSE/JSE Industrial Index, would be worth more than R60 000 today.
etfSA offers a choice of three tax-free accounts that invest in portfolios of exchange-traded products: a balanced portfolio of bonds and equities, a South African-equities-only portfolio and a foreign-equities-only portfolio.
The minimum lump-sum investment is R1 000 and for that, Brown says, you’ll have a slice of a multi-asset, diversified portfolio of exchange-traded products reflecting the full returns of the investment market. Fees on the account will be just one percent (R10) a year, and the recipient of your gift will reap the benefit in future free of all taxes.
If you want to make small, regular investments, instead of a lump sum, the etfSA Investor Plan, which is not tax free, will accept investments from R300 a month (also payable per quarter or per annum by debit order) in a single ETF. R300 a month invested in the Satrix Indi 25 ETF 10 years ago would have grown to about R100 000 by now, based on actual returns for this product over that period, Brown says.
RSA Retail Savings Bonds
If you are looking for a safe, government-backed investment with no costs attached, an RSA Retail Savings Bond may be the answer. There is no age restriction on owning retail bonds, so they can be issued to children under the age of 18, subject to a parent or guardian signing the consent clause on the application form. They are available for fixed terms of two, three or five years and there are two interest options: fixed and inflation-linked.
The two interest-rate options need careful consideration, Warren Ingram, the director of Galileo Capital and a past Financial Planner of the Year, says. He believes fixed interest is likely to deliver a better return in the short term (two or three years), while the inflation-linked bond will provide protection if inflation is likely to rise over the five-year period.
Interest can be paid out or reinvested at the same rate to make the most of compound interest.
So far, the government has not taken the extra step of making retail bonds tax-free, but bear in mind that every taxpayer under 65 is entitled to an annual interest exemption of R23 800, while taxpayers over the age of 65 get R34 500.
If you (or the recipient of your gift) want the investment to continue after maturity – for a second period of five years, for example, so that a gift given to an eight-year-old is available on his or her 18th birthday – you can call the helpline at National Treasury and arrange a rollover of the entire amount, including the accumulated interest.
Effectively, you will be buying a new bond at the interest rates that are offered at the time. The same applies if you want to increase your investment: each additional amount creates another bond, issued at one of the interest rates on offer at the time.
The bonds are available from National Treasury at www.rsaretailbonds.gov.za, or you can buy them at the Post Office or any Pick n Pay store. The minimum investment is R1 000 and early withdrawals are allowed after 12 months, but subject to a penalty on the interest only.
An educated choice
Give a present of a course in money management at a turning point in someone’s life: graduation, divorce, a significant birthday … or just when your gift coincides with the recipient taking on new financial commitments or planning to start a business. It will give the recipient new confidence and authority when it comes to handling money, from budgeting and managing credit to setting up the financial framework for the future.
Managing your personal finances
Johannesburg-based Norcaz Training Academy is accredited by the Services Sector Education and Training Authority (SSETA) as a provider of business-oriented training courses and workshops. This one-day workshop is offered around the country at various times of the year at a cost of R3 192 (including VAT), which sounds steep, but, as a single investment that could have a life-long effect on someone’s financial well-being, it might be worthwhile. The fact that it’s all over in one intensive day might appeal to the beginner who needs a bit of persuading to do the workshop.
The course covers eight modules, starting with an analysis of participants’ real-life spending habits and going on to deal with the importance of budgeting, the role of planning and saving, the various forms of credit and the contractual obligations involved, the cost of using credit to buy consumables and clothes, the risk of indebtedness, and how and when to harness credit to finance a home and/or a car.
For more information, go to www.norcazacademy.co.za > “Training/workshops” > “Financial/legal programmes”.
Course in personal finances
Imsimbi Training (www.imsimbi.co.za) is SSETA-accredited and has an impressive client list across business, national and local government, academia, industry and financial services. It offers courses and seminars in Johannesburg (its base), Cape Town and Durban, and its basic personal finances course is available in each centre twice a year.
The day-long programme aims to provide participants with the tools to take control of their money, understand how financial products work, avoid indebtedness and understand their obligations and rights. It covers all the essentials of budgeting to live within your means and saving for the future, but it also thoroughly explains the framework that exists around money – for example, bank charges, finance terminology and regulation, including the National Credit Act. It deals extensively with debt, including how debt counselling works and how emolument attachment orders (better known as garnishee orders) may be used.
The cost is R2 350 for a day on which many monetary mysteries may finally be resolved.
Short course in basic financial life skills
This correspondence course is one of two short courses offered by Unisa and presented by the university’s head of personal financial management, Nico Swart. Swart has been teaching and writing books on financial literacy and personal financial planning for more than 30 years, and is a campaigner for financial literacy training as a basic human right and a fundamental requirement of economic development.
This course is aimed at adults from school leavers to teachers, aspiring brokers to entrepreneurs, and there are no admission requirements – anyone can do it. Over six months (two terms, from early February to July) participants get a beginner’s grasp of financial planning and budgeting, learn about the risk and consequences of indebtedness, and have financial products and services demystified. They emerge knowing how to protect their income and assets, how to choose the right investments and avoid investment pitfalls, how and when to buy a car or home, how to go about planning for retirement, and what is involved in starting or buying a business.
The cost is R1 450 plus the price of the prescribed book: Manage Your Money: Basic Financial Life Skills for South Africans by Nico Swart (Van Schaik). For more information, email email@example.com
Course in personal financial management
This is a more advanced and comprehensive course in financial planning from Unisa, available to anyone with a senior certificate or an equivalent NQF level four qualification. Like the basic financial life skills course above, it takes six months (the first and second terms of the year), and is supervised by Swart.
The focus is on financial goals and how to achieve them, from taking command of the present, to ensuring a secure financial future. It starts with an exercise in measuring and assessing financial performance and goes on to cover what Swart calls “total financial planning”: health care, retirement planning, estate planning, protection of income and assets, income tax planning, credit planning, investing (including investing in property and offshore), and the financial intricacies of starting a business or buying a franchise. Finally, it deals with the financial implications of emigration.
The cost is R1 500 plus the price of the prescribed book, Personal Financial Management: the South African Guide for Total Personal Financial Planning by Swart (Juta). For more details, email firstname.lastname@example.org
Packages of ideas
Books that tap into the long experience and accumulated wisdom of financial experts can be surprisingly effective, even life-changing. Look at the following Robert Kiyosaki has … the author of Rich Dad Poor Dad advertises seminars on wealth creation all over the world and people flock to them, despite the disclaimer that he will not be there in person.
Whether they are motivational in the broadest sense, or manuals to work through, books can be a companion, so the recipient of your gift can refer back, refresh, revise, review and research further. They can help ideas to become practical and good intentions turn into action. And they can be shared.
You’ll find a huge variety of practical and motivational books in the bookshops and online … these are just a sample.
Rich Dad’s Cashflow Quadrant: Guide to Financial Freedom
By Robert T Kiyosaki (published by Plata, paperback, R132, available through www.takealot.com)
Kiyosaki’s second book continues his theme of motivating people to take control of their financial future. According to the bookseller Amazon: “Robert believes that the reason most people struggle financially is because they’ve spent years in school but have never been taught about money. Robert’s rich dad taught him that this lack of financial education is why so many people work so hard all their lives for money … instead of learning how to make money work for them. This book will change the way you think about jobs, careers, and owning your own business, and inspire you to learn the rules of money that the rich use to build and grow their wealth.”
Wisdom from Rich Dad Poor Dad for Teens: The Secrets about Money – That You Don’t Learn in School! aims to get the message across at a more impressionable age, in a condensed form. Your teen may be bemused or dazzled, but whichever it is, the reaction will be revealing.
It is available from www.takealot.com as a paperback (R181) or a CD/MP3 (R142).
Personal Budget Kit
(Book and CD, US-based legal/business self-help publisher Enodare, R442, www.takealot.com)
This DIY guide to gaining control of your cash-flow comes with the positive message that budgeting is not about limiting your spending so much as maximising your resources. Worksheets and spreadsheets are supplied, so there’s nothing to stop the reader from launching the step-by-step process of identifying and understanding his or her spending habits, identifying ways of reducing expenses, taking control of credit and debt, setting goals, preparing a personal budget and then monitoring progress.
How Much is Enough? Maximising Wealth and Well-being
By Andrew Bradley, Arun Abey and Andrew Ford (Zebra Press, R200, Exclusive Books and others)
This is a 2015 South African adaptation of a very successful book by Australians Abey (a financial planner) and Ford (a marketing man). Bradley, the former chief executive of Old Mutual Wealth and chairman of Acsis, brings the local expertise to this edition of the book. The concept is to bridge the gap between where the reader is and where he or she could be with the right financial plan and a long-term, equities-based investment strategy. There is nothing particularly new about this, but the book is refreshingly committed to linking financial goals with values and outlook, making the point that there is such a thing as “enough” if you are capable of taking pleasure from things other than the race for riches.
My Money – A Financial Planning Guide for Ordinary People
By Gerald Mwandiambira (Sugar Creek Publishing, paperback or ebook, R199, www.askgerald.co.za)
As a Certified Financial Planner and a down-to-earth guy, Mwandiambira is well qualified to talk to ordinary South Africans about mastering their finances. From anyone else, “mastering” might sound unattainable, but Mwandiambira keeps things practical and focuses on the money decisions we all have to make at various life stages, such as preparing for the future of a new baby or buying a car. He looks at the financial impact of these events and the planning that we need to do to ensure they are manageable.
He addresses the overall financial goals of creating wealth and investing for retirement, but doesn’t ignore the financial setbacks, such as a period of unemployment or indebtedness. For inspiration, he includes stories from his own experience and throws in biblical references that obviously mean a great deal to him.
This is a friendly, accessible book about money for people who need everyday solutions, rather than high finance and technical investment advice. And for those who feel they are picking their way through the financial minefield, the explanations of financial terms and products will be invaluable.
Personal Financial Management (third edition)
By Nico Swart (Juta, paperback, about R490, from Juta or www.takealot.com)
If you can’t give Unisa’s course in personal financial management as a gift, you can give the book on which it is based (see the course description above for details). It is a textbook, but don’t be put off by that. After 30 years of financial literacy teaching, Swart knows how to communicate with students and where to begin: at the very beginning. He has long been a campaigner for personal finance to be part of the school curriculum and a compulsory subject at universities and all higher-education institutions.
This is a book you can trust to cover all aspects of financial planning and to be consulted again and again as the person you give it to embarks on different stages of life.
What Color is Your Piggy Bank? Entrepreneurial Ideas for Self-starting Kids
By Adelia Cellini Linecker (ebook, R171, wwwtakealot.com)
Written for preteens and young teens, this entertaining book challenges kids to make money for the things they want by doing things they enjoy doing. There are quizzes to help them identify their goals and abilities, fun facts, quotations and success stories to keep them interested, plus tip sheets on enterprises such as babysitting and craft-making. The excitement of earning is balanced by down-to-earth advice on saving, spending and giving to charity or the community. As any teacher of grades six to eight will confirm, the experience of managing money is invaluable, but what children learn about themselves and about co-operation, discipline, time management and the rewards of work may be truly life-changing.
Mrs Spiggles and her Money Tales – Taylor’s Birthday Surprise
By Jean Archary, with illustrations by Cathryn Gordon. (Staging Post, a division of Jacana Media, R100 plus postage, from the author email@example.com)
Archary, who works for Old Mutual Wealth and is a certified workplace coach, is passionate about starting children’s financial education early – as soon as they are conscious of money being part of family life. She developed the cute and cuddly flying female piggy bank, Mrs Spiggles, while teaching her daughter about money, and working out what resonated with her and what did not.
Mrs Spiggles visits Taylor on her birthday and uses the opportunity to prompt her to think about where money comes from and what it is used for – apart from birthday presents. Focusing on the child’s bedroom and toys, she prompts her to question the source of these precious things and where parents get the money to buy them. It explains how bank cards and ATMs work, how careful her parents have to be not to spend more than they have, and encourages her to value her pocket money and keep a money journal to record what she spends it on.