PowerPoint Presentation

08 April 2014Young Adults Finance Talk

I am a Financial educator and not a Financial Planner or Advisor. Christo is a Certified Financial Advisor.The fact that you are here tonight is already a sign that you would want the financial knowledge towards building wealth and financial freedom.

1Marshmallow Savings Test

How hard is it to save?Challenges facing the savings culture?Principles: Set Goals, Pay yourself first, Start early, Understand Finance, Understand Compounding, Understand risk and investments,

2Common Young Professionals MistakesI dont earn enough to save:I dont earn enough to buy my own propertyI am young and healthy and dont need insurance:Retirement is for old people:I will pay off my student loan at a later stage:Finance is for big people:I wont qualify for a home loan:South African Statistics

Lets start by looking at whats been happening to household income. According to data from the Reserve Bank, household disposable income (that is, gross income less taxes), has grown strongly over the last few years, albeit with a dip around the 2009 recession (see chart one).disposable income with total credit extended to households. As you can see, the moderation in the household-debt-to-disposable-income ratio is more a function of rising income than falling debt. Over the last few years, the absolute amount of debt that consumers are carrying has been increasing steadily, but their disposable income has increased faster consumers are borrowing more, but theyre also earning more

4South African Statistics

South African Statistics

South Africa Prime Overdraft Rate

Prime Interest Rate is the interest rate that commercial banks utilise when issuing interest rate loans to applicants.Current Prime Interest rate is 9%Create a New Budget Spending PlanDiet vs Eating PlanBudgets have a strict control (less flexibility)Spending plan = GuidelineProvides flexibilityEfficient allocation of moneyIndicator of money availabilityMaintain control of expensesDebt controlAdvantages of a Spending PlanGain control of your own financesGet out of / stay out of debtCreate a nest egg for unforeseen expensesResist the urge to spend impulsivelyAchieve goals that you have set for yourselfA step towards Financial Freedom9Spending Plan: Total IncomeSpending Plan: ExpensesSpending Plan: Expenses Cont.Spending PlanIncome Savings = Expenses13Spending Plan*SavingsIncome Savings = ExpensesTraditional Model = Income expenses = savingsLearn to pay yourself first14Balancing Act?What you spend vs What you earn?Rule of ThumbRule of ThumbAs Debt Savings Balancing Act?What you spend vs. What you earn?Good Debt vs Bad Debt

Good DebtHouse: BondLong term investmentWealth and Asset GrowthAppreciates in ValueBad DebtVehicle FinanceDepreciates in ValueNot an AssetOverdraftHigh interest rateCredit CardHigh interest rateStore AccountVery high interest rateDebtPay off the Bad Debt (Quick Money) ASAP = Can cost up to 20% more in interest Dont miss any intalments = Negative Credit RatingIf you cant pay the full installment, speak to the company to make debt payment arrangementsConsolidate all debt and repay one amount monthly

Value Added Option ProductsBank Rewards ProgramFNB (Ebucks)Standard Bank (Ucount)Benefit ProgramsMultiply (Gym discounts, Etc.)Discover (Gym discounts, Etc.)

NegotiationNegotiate a Salary increase at Interview stageNegotiate Interest RatesPrice of What you see is not necessarily the price you have to payShop aroundInternet PurchasingBe Indian & BargainPurchase CouponsCheckers (Mobile App)

Financially Fit and Money WiseEvery bit of savings count

What to do with my savings?

Common mistakesSavings AccountLow interest earning account (+/4%)Inflation (+/-5.9%)Interest earned Inflation = Interest gained = -1.9%Your money is therefore depreciating year on year due to Time Value of MoneyR100 today is not worth a R100 next year this time, due to factors such as inflation and the exchange rate.What to do with my savings?To ConsiderBuild up an emergency fundDo not use a general bank accountInflation Eating Effect (5.9%) -IEEUnit Trust/Savings Acc (Interest Rate > 5.9%)Retirement PlanningInvestment VehiclesUnit TrustsSharesPropertyFixed Deposit

Remember:Interest earned > Inflation RateTime Value of MoneyInvestmentsInvestingPrinciple Numero Uno Invest for the Long Term Warren BuffetDiversify your portfolio

HousingTo Buy or To Rent?

AdvantageOwnershipLong Term stabilityCornerstone of Financial PlanGood start to life & family raisingYour HouseLong-term Saving CommitmentLong-term InvestmentRetirement PlanningYou dont want to be paying off debt or rent when you are retired.Once the Debt is repaid, the monthly bond repayment becomes savingsInterest not paid is more tax efficient than interest earned

Factors to ConsiderMaintenance of the propertyAdditional costs such as rates, taxes, insurance and possibly levies.Long term investment & commitment

Buying a House

AdvantagesMost cases lower than bond repaymentsStart saving differential as a deposit for a houseFlexibility to give 30 Days notice at end of rental contract

DisadvantagesRent paid is seen as an expenseRent paid wont be seen againAny investment in the house will be at your own expenseIf ownership is changed, then whatNo Asset Wealth creationRenting a HouseOpinionsTheres a general shortage of residential rental properties and as a result, rent is rising - an average of 10.8% last year, according the latest figures from PayProp. As such, many young tax-payers are finding that monthly repayments on their own property are lower than rent. - Chas Everitt DepositRenting Currently: Start saving for a DepositBenefits of a Deposit: Reduces the Interest portion of Home Loan repaymentReduces the Risk towards the Bank & More credibility in application Greater Affordability100% home loans are not 100% guaranteedCan be difficult & Depends on your financial situation

Property Portfolio:

Your not restricted to a city/town if you have bought a house.Could be used as an investment propertyWhen applying for your next property, utilise the lease agreement as additional income which could offset the bond of the investment propertyStrategy should be purchase your residence property and pay it off.While gaining access to additional funds, build up your property portfolio.Use other peoples money to pay off your bondUse other peoples money to build your asset base

Property PortfolioThe earlier you start the better, due the compound interest effect.Pay off your bond as soon as possible:Put a portion of your increase into your bond.Strategy to every year add 10% of your salary into your bond:

Process of Home loan House PurchaseParties InvolvedAppointed by the Seller to transfer the property into Your NameAppointed by the Bank for the Granting of the Home LoanAppointed by the Bank for the cancelling of the Home Loan of the SellerBargain Tip: Buying directly from the Seller cancels out the middle man & therefore bargain a better price as a commission is earned by a property agent.

Homeowner Home Work

Choose your Home & Location, Location, Location:

House Hunting:

Start off with a decent sized house, do not go lavish, with a dream house not within your meansNeed to have an interest rate buffer to be able to ride an interest rate increase or decrease.37Make an Offer:

Download Property Value reports off property24.comMake an offer & Negotiate a PriceBenefit of purchasing from a developer, is that there are no transfer fees attachedSubmit your OTP38Apply for your Bond:

Documents RequiredProof of income: your latest salary advice. If you earn commission or overtime, provide the latest 3 salary advices Latest 3 months personal bank statements Personal Assets & Liabilities Statement for loan amounts over R1 500 000. Copy of your ID document (for both applicants if applicable). Copy of Marriage Certificate or ANC Contract (if applicable). Copy of the Purchase Agreement.* Latest 3 months bond statements.** Latest rates/Levy Statement/Utility account statement.**

Easy as ThatTransfer Process Begins:

Youre a Homeowner:

Important Factors in a Homeloan ApplicationAffordability: not the amount of money you earn, but how much you can afford.Fixed vs. Variable Interest Rates100% Home Loan vs 80% Home loanSaving for a DepositBanks will also look at your credit record

Additional Costs:Attorney Fees Transfer FeesWater & Electricity Account Deposits

Interest Rates 101Prime Interest Rate fluctuates and correlates to the Repo RateRepo RateAny change to the repo rate results in a change in the Prime rateWhich therefore affects the homeloanHigh Risk loans = Higher Interest RatesE.g. Credit Card, unsecured loansLow Risk loans = Lower Interest RateE.g. Home Loan, Vehicle finance

Interest Rate swings affordability44AffordabilityThe Bank looks at an applicants:Income & Expenses as well as funds left after all expenses have been paid to work out if the applicant can afford to repay the loan or not.Affordability refers to the applicants ability to honour their obligation within the homeloan agreement to repay the homeloan amount granted by the bank, through monthly instalments which includes the interest rate over a set period.Use an online Affordability Calculator for a rough estimate All bank websites, as well as fin24.com or property24.comHome Loan Example

Home Loan Example

Home Loan Example

Attorney CostsBond TermsHousing SummaryPurchase a Property as young as possibleEarlier in the property market = more time to repay.Long Term InvestmentLook for BargainsStay within affordability rangeStick with starting out small.New Developments:Less Maintenance in early yearsCan benefit form no transfer feesPurchase another Property for rental incomeUse this rental agreement to gain access to another home loan.Use other peoples money to build your assets.Market Analysis: NelspruitInterest Rates are still relatively lowHousing market is still in the buyers favourNelspruit has a large demand for propertyHigh Demand for Rental PropertyHousing Prices in Nelspruit has shown year on year increaseNelspruit is one of the fastest growing cities..Better to jump in while prices are low & affordableEg. Think of what your parents paid for their house in comparison to what the going rate for that same property is today.Diversified Province and therefore significant opportunities..Tourism & Business Development boomEffect of Renting If your current rent is:1 Year5 Years10 Years15 Years 2,000 24,000 120,000 240,000 360,000 2,500 30,000 150,000 300,000 450,000 3,000 36,000 180,000 360,000 540,000 3,500 42,000 210,000 420,000 630,000 4,000 48,000 240,000 480,000 720,000 4,500 54,000 270,000 540,000 810,000 5,000 60,000 300,000 600,000 900,000 After 15 years = Large portion of a bond could be repaidTenant pays off your bondConstraint when renting & raising a familyYou would struggle to rent during retirement

Rent vs Buy:

Break TimeWhy?????You have no started your Financial Careers:What about your Debt:Homeloan PaymentsCar PaymentsSuretyship signed?ChildrenYou are your own BusinessYou get paid for your time, services, skills, etc.You market yourselfYou Need CoverYour Income Needs CoverYour Health Needs CoverWhy is your Car Covered but you aren't?ProductsMedical AidHospital PlanST Insurance:Car; Household; Moveable'sLT Insurance:Life CoverTrauma Cover/ Dread Disease CoverAccidental Injury CoverFunctional Impairment CoverSickness BenefitIncome ProtectorDisability Cover

Need for InsuranceWeekDatesAmount to Save:Total Cumulative1Jan 1- Jan 510R102Jan 6 Jan 1220R303Jan 13 Jan 1930R604Jan 20 Jan 2640R1005Jan 27 Feb 250R1506Feb 3 Feb 960R2107Feb 10 Feb 1670R2808Feb 17 Feb 2380R36052Dec 29 Dec 31530R14,31052 Week Saving Challengehmitha87@gmail.comTax Principles

Types of IncomeSalaryCommissionRental IncomeBuying and SellingHousesMerchandiseRendering a Services

Taxable IncomeRate of Tax (R)0 - 174 55018% of taxable income174 551 - 272 70031 419 + 25% of taxable income above 174 550272 701 - 377 45055 957 + 30% of taxable income above 272 700377 451 528 00087 382 + 35% of taxable income above 377 450528 001 673 100140 074 + 38% of taxable income above 528 000673 101 and above195 212 + 40% of taxable income above 673 100How much Tax should I pay ?60RebatePrimaryR12 726Secondary (Persons 65 and older)R7 110Tertiary (Persons 75 and older)R2 367AgeTax ThresholdBelow age 65R70 700Age 65 to 75R110 200Age 75 and overR123 350How much Tax should I pay ?SalaryMedical Aid DeductionsRetirement ContributionsPension FundProvidentRetirement AnnuitiesIncome Protectors #

CommissionSame as Salary PlusOwn Cell phone costsOwn vehicles costs Marketing CostsEntertainment ExpensesFoodWhat deductions are allowed?What happens if I do not pay tax?Not submitting a return - The penalty amount imposed depends on a taxpayers taxable income and can range from R250 up to R16000 a month for each month that the non-compliance continues. SARS WebsiteWhat Happens If I Dont Pay and I should? Its a criminal offence not to pay income tax and if youre caught you may be heavily fined or sent to jail. Also, you cant cheat SARS. Its like Big Brother; always watching! So if you dont make a full and honest disclosure of your annual income (in other words, if you dont declare all your earnings), this is considered fraud or tax evasion and its punishable by fines or jail time.

If you earn under R250 000 for a full year from one employer (thats your total salary income before tax) and have no other sources of additional income (for example, interest or rental income) and no deductions that you want to claim (for example medical expenses, travel or retirement annuities), then you dont need to submit a return.What do they mean I have to submit my tax?SARS WebsiteWhat benefit is there in for me? The key changes that will be implemented on T-Day are: You will be able to deduct both your and your employers contributions to a pension fund, provident fund or retirement annuity fund of up to 27.5% of your remuneration or taxable income, whichever is greater. There will be a cap of R350 000 on the total amount that you may deduct from your taxable earnings in a tax year. This is to prevent the wealthy from claiming excessive deductions. Contributions in excess of the annual cap may be rolled over for use in years when your deductions do not reach the R350 000 cap. You will be able to add the nominal value of any unclaimed additional amounts to the tax-free lump sum at retirement. Any new contributions made to a provident fund will be subject to the same annuitisation rules that apply to pension funds. This means that at least two-thirds of the savings must be used to buy a pension at retirement. Bruce Cameron

Retirement PlanningWho has talked to their parents about RetirementWho knows if their parents will be able to retire sufficientlyHave your parents talked to you regarding saving and was there a culture of saving in your family

60% of all pensioners interviewed as part of Sanlams BENCHMARK retirement survey told the interviewers they did not have sufficient funds to live on.

Of these, 64% had to cut back on their living expenses and 31% had to carry on working.This is a shocking statistic because these retirees mostly come out of the defined benefit environment where the company made provision for their retirement based on the number of years of service.

They are not the current working generation that has changed jobs seven times on average and cashed in their pensions along the way. This next generation of retireesthose people between the ages of 45 and 55are facing, quite simply, a train wreck.

Dawie de Villiers, co-author of the survey and chief executive of Sanlam Structured Solutions, estimates that the number of people who have sufficient retirement funds will fall to 10%. This means that nine out of 10 South Africans who belong to a retirement fund will not have enough to retire on.

But perhaps what is even more concerning is that people have no idea how bad their financial situation is. The survey, which interviewed pensioners, working pension-fund members and pension-fund companies, found that half (50%) of retirement fund members interviewed believe that they are on track for their retirement planning, yet the average contribution from members monthly salaries is well below the recommended provision of 15%, indicating a general lack of awareness of the actual situation.

The total employer and employee contributions was shown to be an average of 11,7% (average employer contribution of 10,8% and employee contribution of 5,8%), falling short of the recommended average of 15%. Self-employed people showed that their retirement contributions are significantly less, at an average of 3,6% of their salary per month.We also know that about 80% of the time people cash in their retirement funds when changing jobs.How do I Retire ?Personal InvestmentsPropertyHousesCommercial PropertyInvestment PortfolioPensionProvident FundRetirement AnnuitiesPractical look at Time value of moneyAny person that is 18 years old

Any Person that is 25 years oldWho will have the most money?18 year Old PersonPaying R100 per month until age 25 (that means for 7 years) and then leaving the money until age 55Growth of 10%

25 year old personPaying R100 per month until age 55. That means for 20 years non stopGrowth of 10Who will have the most money?18 year old PersonAt age 55 this person will have R89 371.94At age 60 this person will haveR147 034.4425 year old personAt age 55 this person will haveR76 569.69At age 60 this person will haveR133 789.03Case StudyName: JohnAge: 22Income:R15 000Retirement Age: 60Wants to retire with 80% of his current Income I.E. R12 000WHAT should he put away per month?Case StudyClient's nameJohnCurrent age22Retirement age60GenderMaleExpected investment return on portfolio (p.a.)10%Inflation rate7%Expected total income tax rate at Retirement18%Current balance of existing retirement fundingR 0Current monthly savings for retirementR 0Yearly growth rate of contributions10%Current monthly need (after tax):R 12,000Current value of one-off need at retirement:R 0Case StudyCALCULATIONS - OUTPUTCalculations are set to give the client income for 10 yearsProjected monthly net income (after tax) required at retirementR 156,951Projected monthly gross income (before tax) required at retirementR 191,404Required lump sum at date of retirement, to fund gross post-retirement income and one-off requirement R 39,950,503Total expected proceeds from existing funding, at retirement dateR 0Total expected deficit at retirementR 39,950,503Extra monthly contribution required to fund the expected deficit at retirementR 2,446(16%)Biggest Problems found Cashing in PensionStop paying PensionNever Joining a pension fundSickness reducing term that can be workedProcrastinationI will do it in few years I currently want to enjoy myselfI will but not know, I have to take care of my children(Will your children take care of you?)Our advice to youMake sure you start saving early in your life and commit yourself towards the spending plan and you will enjoy the fruit of your labours.Make sure you teach your children saving principles from a early age. They are never to young to start savingMake use of piggy banksMaking use of savings/Investments in their names and guiding them on setting saving goals.