Monthly Archives: October 2016

Saving for the short term

In this advice column Kyle Wakelin from PSG Wealth answers a question from a reader who wants to know how to invest a lump sum that may be needed on short notice.

Q: My husband has been working in the UAE for the past six years. However recently a number of expats were sent home without notice and he is worried that he may be next in line. He sent R320 000 across to South Africa so that we would have money here in the case that he did have to relocate and there was a delay in having his final salary paid out.

We want to know how we should invest this money so that it is available within 30 days if we should need it.

He also has a small pension with Old Mutual, worth around R110 000, and earlier this year he also invested R120 000 with FNB in case of emergencies.

I am unfortunately not able to assess your specific needs based on the limited information we have available. However, I will make a few assumptions to provide some focused advice which should, at least, steer you in the right direction.

Investors clearly need to differentiate between their short-, medium- and long-term requirements and invest in suitable investment vehicles. This means that short-term capital should be allocated to secure and accessible investments, while medium- and especially long-term capital can be invested in the type of investments that should generate inflation beating returns.

It is clear that the amount you wish to invest now may be called upon in the short term and for that reason it needs to be held in a conservative and accessible investment. I would recommend doing a budget exercise to determine what your actual expenses would be in the event of your husband being sent home on short notice. This figure should be a multiple of a chosen number of months – in other words work out six to nine months of expenses.

For this money I would recommend cash funds, such as money market funds. The rates are currently quite attractive and capital can usually be withdrawn within 24 hours. The money you have with FNB money may even serve this function.

You may want to be less conservative with any additional amounts, especially because there is no clear indication that you may need it. In this case you may want to consider investing in an income fund, which is still deemed low risk. There is slight risk of volatility, but with the opportunity of outperforming cash investments by 1% to 2% a year over longer periods.

Your remaining capital, which could be considered a longer-term investment, should incorporate higher-yielding assets including bonds, preference shares, property and even a small portion in equity (shares). The nature and extent of how much you allocate to these different asset classes can only be determined by sitting down with a suitably qualified, independent financial planner.

Multiple bond applications affect

There is a view among many South African consumers that applying for a bond at more than one bank will have negative consequences. The belief is that these enquiries will impact on your credit score and therefore hurt your chances of getting a loan or push up its cost if you are successful.

Many people only apply at their own bank for just this reason. They think that they are taking a risk if they shop around.

This raises some obvious concerns. After all, you are only exercising your rights as a consumer to compare prices, so why should you be penalised for it?

Footprinting

What is a given is that every time you apply for a loan of any sort, this will be recorded on your credit profile. This is called footprinting, and credit providers may use this information to assess you.

“Credit providers consider a multitude of factors when vetting applications for credit, one of which would be demand for certain types of credit,” explains David Coleman, the head of analytics at Experian South Africa. “A sudden surge in demand for unsecured or short term credit, linked with signs of stress building on indebtedness and repayment capacity of the consumer, would result in the credit provider taking a more cautious approach in extending further credit to such a consumer.”

However, short term credit is not the same as long term credit like a home loan in this regard. In fact, Nedbank says that it views multiple applications for a bond made at the same time as a single enquiry.

The head of credit for FNB retail, Hannalie Crous explains that they also make a distinction:

“From an FNB perspective we do not look at number of bureau enquiries pertaining to home loans as a key determinant of a credit score,” she says. “The handful of credit bureau enquires associated with a bond application will have no effect, however  a consistent trend indicating that a consumer is taking on multiple loans could influence the outcome of a credit application.”

Not all bureaus will see you the same

In other words, the banks don’t see it as a negative if you shop around for a bond. A number of credit bureaus approached by Moneyweb also took the same line, although with a caveat:

“Each credit bureau and each credit provider that has their own in-house score will score consumers using their own criteria,” says Michelle Dickens, the MD of TPN. “It’s not a one size fits all. As a result there will be a higher weighting towards different aspects of data that will improve or decline the ultimate overall score.”

Anything from a tax free account

Last month Intellidex released research that showed that a total of R2.57 billion had been invested in tax-free savings accounts (TFSAs) in the first 12 months that they were available. A total of 262 493 accounts were opened over this period, showing that there has been fair uptake of these new products.

The study also noted that an estimated 21% of these accounts were opened by first time savers. The initiative has therefore had some success in encouraging South Africans to save.

While this was a positive picture, there was an area of concern. That is that 59% of all TFSAs were opened at banks and the majority of the investments were held in cash.

The problem with this is that it will take years for investors to see any advantage from a TFSA if they are only using it to make a bank deposit. This is because tax payers already receive an interest exemption every year.

Currently this exemption is R23 800 for anyone under the age of 65, and R34 500 for anyone 65 or older. Any tax payer would have to earn interest above that threshold to pay any tax on it.

The best rates currently available on bank deposits in TFSAs are around 9%. So for anyone under the age of 65 to earn more than R23 800 a year in interest and therefore benefit from a TFSA, they would need to have R265 000 in their account.

Since you can only invest R30 000 into a TFSA every year, it would take a minimum of around six and a half years to build up that amount, even accounting for compound interest. It is therefore fair to assume that most people who have opened TFSAs at banks are actually not seeing any benefit from them.

Are you paying too much in bank charges

In South Africa’s somewhat peculiar banking system, monthly charges for transactional accounts are a given. But is the few hundred rand you’re paying per month (if you’re lucky!) the best possible deal?

The first question you need to answer is whether you value having a ‘platinum’ or ‘private clients’ account with all the “value-adds” these offer?

Things like lounge access, bundled credit cards and a ‘personal’ banker are must-haves for some in the upper middle market. On the other end of the scale are basic, no-frills bank accounts (like Capitec’s Global One (and the clones from the other major banks)), but the truth is that most people need something a little more comprehensive than that. There’s likely a home loan, almost certainly vehicle finance and definitely a credit card.

So, do you need a ‘platinum’ (Premier/Prestige/Savvy Bundle)-type account? Do you actually use or need those value-adds? Or, do you enjoy the ‘status’ of having a platinum or black credit card? (Here, emotion – and ego – comes into the equation….)

This is an important question to answer, because the difference in bank charges between a more vanilla bundle account and ‘platinum’ is easily 50%!

While banks try to shoehorn you into product categories based on your salary or profession, there’s nothing stopping you from moving to another product (or refusing those ‘upgrades’). From a personal perspective, the only reason I have an FNB Premier (i.e. platinum) account (not gold) is because I do actually make use of the ‘free’, albeit diminishing, Slow Lounge access. And, the eBucks rewards I earn on this account are the most lucrative of the lot, based on the products I use, my transaction habits and spending patterns. (‘Upgrading’ to Private Clients is a mugs game because the thresholds for ‘earning’ rewards are significantly higher, to match one’s status and earnings, of course!)

Once you’ve answered this question – which is more important than most people realise – the next step is to figure out whether a bundled account or pay-as-you-transact one makes the most sense. Most of us enjoy not having to ‘worry’, so we readily sign up for the all-in-one package without actually understanding the differences in pricing.