Archives for April 26, 2018

If you have R150 in your bank account once all your fixed monthly expenses have been paid, would you typically spend or save this extra amount? If you are like many South Africans, you’ll feel that R150 is just too little to make a dent in your home loan or retirement savings so you’ll end up spending it instead.

André Wentzel, Solutions Manager at Sanlam Personal Finance, begs to differ. “R150 can seem like such an inconsequential sum that people would rather use it for a few cappuccinos or to treat themselves to a takeaway dinner. But doing this means missing out on the opportunity to turn a relatively small amount into a larger long-term investment.”

Wentzel says, “It really helps to be able to visualise short-term rewards versus long-term pay-backs to understand the effect of compound interest and how small sacrifices now can make a big difference later.”

To practically demonstrate this, Wentzel decided to do the maths. Here’s what would happen if a person decided to invest the extra R150 in his or her future rather than on instant gratification:

1. Towards your retirement

If you save an additional R150 per month towards retirement, this will accumulate to between R400 000 or R500 000 in 30 years’ time, depending on what you assume the investment return to be. For example, an 8% return will yield R405k and a 9% return will yield R473k, after investment costs. (This also assumes that you increase the R150 per month in line with inflation each year.)

2. Towards your home loan

On a R700 000 home loan, assuming an interest rate of prime (10.25%), the monthly instalment for a 20-year loan will be R6 608 per month. When contributing an extra R150 each month, the loan will be paid off in around 19 years instead of 20 and you’ll save approximately R70 000 in interest over this period.

3. Paying off your credit debt

Paying off a credit debt of R15 000 over three years works out to a repayment of R525 per month (at an interest rate of 18% per annum). An extra R150 per month means you can pay it off nine months earlier, saving approximately R1 100 in interest.

Now, here’s what R150 could get you in the short-term:

• 16 California rolls
• 6 cappuccinos
• 2 basic T-shirts
• 2 movie tickets
• 1 gigabyte of data

Wentzel says that practical exercises like this make the longer-term gains more concrete, “The trick to switching people’s thinking from a short-term bias to a longer-term one is to better articulate long-term goals and find ways to make these seem attainable.”

According to Wentzel, people with longer-term mind-sets typically have more retirement savings and are often better at managing credit. Additionally, being clear on their goals means that they’re frequently more active in finding ways to save and avoid expense creep.

TIPS ON LONG-TERM PLANNING

Wentzel’s three tips for shifting to a longer-term mindset are:

1. Take the time to really consider what you want to achieve financially in the next five, 10, and 20 years. Compile a list of long-term goals and order these in terms of priority. Consider the potential trade-offs you’ll need to make for each goal. Then chat to a financial adviser.
2. Use FinTech to budget better, track your expenditure, and visualise and articulate your longer-term savings and investment goals – and monitor these. If your investments aren’t performing, chat to your financial adviser and make a change, if necessary.
3. Pick an appropriate savings vehicle for each goal based on how long you plan to save for, the likelihood that you’ll need to draw on those savings before the end of your planned savings term, and your tax circumstances. You also need to consider whether you can afford to consistently save the extra amount or whether you’ll contribute more erratically when funds are available.

More tips to save an extra R150 (or hopefully more) each month:

• Wait 30 days before buying a non-essential item that’s over a certain amount – e.g. R500 or R1000 – to see if you still want it. If you don’t buy it, consider saving the money you would have spent.
• Only buy what’s on the shopping list and consider online shopping for easy price comparisons between providers and to avoid the temptation of the mall.
• Pack your own lunches and save what you would have spent on a meal.
• Cancel unused club memberships and subscriptions and consider saving what you were spending.
• Monitor your data usage, ensure you have a suitable data plan in place and reduce your consumption when possible, especially when you have regular access to free WiFi.

If you’re going to write a book about personal finance, Job One is to say something different than the hundreds of books already covering the topic. Novice author Gordon Stein aced this test.

“Most personal finance books say save 10 per cent and invest it,” the author of Cashflow Cookbook told me when I met him recently for a coffee. “But most people would say, I don’t have 10 per cent. My book shows how to carve out money for saving, without being cheap.”

Mr. Stein is a sales executive in the tech industry, an MBA and an engineer. Appalled at the financial mistakes he’s seen people making, he has written a book with 60 “recipes” for saving money in all aspects of everyday life. Car repairs, grocery shopping, the daily commute and home maintenance are among the subjects he tackles. .

Some of the ideas were inspired by the financial moves of people he’s worked with over the years. “People buying lattes when we have a perfectly good coffee machine in the office, and then buying a snack of chips and coke in the afternoon. You could be leasing a Honda Civic for the price of all that.”

That’s sort of the idea of Cashflow Cookbook. Find a bunch of different ways to save and then use the money to improve your finances. Mr. Stein suggests paying down debt first and then investing for the future.

Mr. Stein’s book is available from Amazon.ca as well as his website, where you can also find free spreadsheets for tracking debt, net worth and the long-term wealth you can build by saving money every month. He’s also started a blog where he’s recently covered topics like dividend stocks and how parents can help financially launch their adult children after graduation. One recent post looks at whether budgeting may actually be damaging your finances.

When Danielle Town found herself burnt out and even starting to get sick from her work as a corporate attorney, she knew she didn’t want to keep laboring at the same breakneck pace for much longer. So she started brainstorming ways to retire faster.

“I started to think, ‘What else can I do to support myself without being dependent on my salary?’” Town tells CNBC Make It.

Although she was reluctant to turn to the stock market, she eventually called up her dad, an investor who had written two finance books, to walk her through the basics of investing. Town spent the next year developing a weekly practice and learning the basics of ‘value investing,’ a system Warren Buffett and Charlie Munger employ in their own lives.

Value investing means you “buy a wonderful company when it is a bargain and only when you are certain that it will be worth more 10 years from now than it is today,” Town writes in her new book, “Invested: How Warren Buffett and Charlie Munger Taught Me to Master My Mind, My Emotions, and My Money (with a Little Help from My Dad).”

She continues: “Be so confident that you now own a great company that — even if the stock prices goes down — you don’t worry and you stay with it until it goes back up, and, ideally, you never sell.”

To follow this advice, Town decided she needed to be dedicated to researching and tracking companies she believes in, rather than putting her money into index funds or a target date fund and calling it a day.

In addition to following Buffett’s No. 1 rule, “Don’t lose money,” Town also studied Charlie Munger’s four guidelines for picking winning companies. Here’s how she breaks them down:

1. It must be a business you are capable of understanding

First and foremost, choose companies that make sense to you. “This is an extraordinary principle because it doesn’t say, ‘Understand it right now,’ it says, ‘Once you put some time into it once you put some research and some practice into it, I know that I can figure this company out,’” Town says.

In fact, once you start looking around, you’ll realize that you’re actually an expert on a multitude of businesses and products. Try looking around your house, Town suggests. “There are a lot of companies we encounter every single day in our normal lives and we already have opinions about those companies and what kind of products they make,” she says.

Anything from the brand that makes your toilet paper to the place you buy your groceries to the most-used app on your phone could be a potential investment.

A 36-year-old who learned to invest like Warren Buffett explains how saving can actually cost you money A 36-year-old who learned to invest like Warren Buffett explains how saving can actually cost you money

2. It must be a business with a durable competitive advantage

“In industry parlance, this is called a ‘moat,’ like the moat around a castle,” Town says.

A company’s moat is what sets it apart from its competition. “If a business has a good moat, it’s going to be hard for competitors to breach the moat and take the castle,” Town writes in her book. “Not impossible, but difficult. So difficult that they won’t try. So difficult that if they had all the money it would cost to buy the whole company, they still couldn’t compete with it.”

Examples of moats include a strong brand, such as Coca-Cola or Kleenex; proprietary secrets, such as the drug patents Pfizer and Merck hold; or when it’s prohibitively difficult to switch to another, similar company, the way it would be for a long-time Apple user to convert their phone, laptop, tablet and everything else to non-Apple products.

Warren Buffett’s partner Charlie Munger: Avoid these 5 things that can make you miserable Warren Buffett’s partner Charlie Munger: Avoid these 5 things that can make you miserable

3. Ideally, the business’s management has integrity and talent

Munger and “Warren Buffett have both talked a lot about how they want to make sure they have a company that can withstand human error, because eventually someone’s going to come along and try to screw this company up, and you want a company that can handle that and get back on its feet within a few years,” Town says.

The first company Town invested in was Whole Foods, because she respected its CEO and loved its emphasis on conscious capitalism.

However, it’s important to remember that this isn’t completely necessary, because no company is immune to human error. “We’d like to have good management but we are aware that sometimes people screw up,” Town says.

Buffett’s partner Charlie Munger shares his advice for living a rich life Warren Buffett’s partner Charlie Munger shares his advice for living a rich and successful life

4. It must be a business you can buy for a price that makes sense

Time your purchase well to make sure that you’re getting a good deal. Although this principle might seem the most obvious, Munger lists it fourth for a reason.

“First of all, you find the company and that’s wonderful, then you look at the price,” Town explains. “And only when the price is right do you then buy — with a margin of safety — so that in case [you’re] wrong, there’s still a margin of safety on that so that it can go down it can go up and will still make money.”

Having started from scratch once, it’s not surprising that many self-made millionaires and billionaires think they could succeed again if they lost everything overnight. Even if they couldn’t reach the same level of wealth they have today, they believe they have a good plan for how they’d try to succeed.

Here’s what Mark Cuban, Richard Branson and other successful individuals would do if they had to start over.

Mark Cuban would bartend and work in sales

If the self-made billionaire and “Shark Tank” investor lost everything, his first step would be to go out and get two gigs. “I would get a job as a bartender at night and a sales job during the day, and I would start working,” Cuban said in an episode of the podcast “How I Built This.”

While he’s confident he could succeed again, he’s not sure he could become a billionaire again. “To be a billionaire, you have got to get lucky,” Cuban said. But he’s certain that he could turn at least seven figures. “Could I become a multimillionaire again? I have no doubt.”

Richard Branson would start another business

If the 67-year-old billionaire entrepreneur had to reboot, he knows exactly what he would do: Launch a new business he hasn’t tried yet. A devoted note taker, Branson would “go through all my notebooks, find the best ideas that had fallen through the cracks and start them up,” he writes in his autobiography, “Finding My Virginity.”

While a lot has changed in the business world over the past several decades, the fundamentals of building a strong business have not, he says: “Once an entrepreneur, always an entrepreneur. I know I’d find a gap in the market somewhere.”

Barbara Corcoran would get a job as a waitress

The self-made millionaire says she is still “worried about all of a sudden losing everything.” If that happened, Corcoran would go back to waitressing, which is the one job, out of the 22 she worked before age 23, that most prepared her to build a successful company.

“You learn more in waitressing than you can in any other job, and I had every kind of menial job you can imagine,” the self-made millionaire tells CNBC Make It.

If she had to start from the bottom again, it wouldn’t affect her happiness, either, she adds: “I was happy before I made any money and I guess I’ll be happy again.”

Marcus Lemonis would sell cars

“If I lost everything today and I had to start over, I would go sell cars,” says the self-made millionaire and star of CNBC’s “The Profit.” “Because I’m working with somebody else’s inventory, I control my own pay plan. I control my schedule. I can get up at 5 in the morning and work ’til 10 at night. And I enjoy it.”

Jim Koch would take a month off

The Boston Beer Company founder nearly did lose everything, he tells CNBC Make It. About 10 years ago, after discovering a defect in its bottles, the company had to recall 25 million bottles of beer.

His dad asked him, “What do you think can happen here?” Koch recalls. “And I said, ‘Well, we could lose everything. This could be the end.’ And my dad said, ‘Don’t worry. It’s been a great ride and I’m proud of you.’ And I thought, perfect, I’m going into it with that attitude. If I lose everything, it’s OK. It’s been a great ride. You did some amazing things. What’s next?”

As for the next project, he has no idea what it would be. “The first thing I would do is take a month off,” says Koch. “Take a deep breath, take a month off and think about it.”