If you are earning money, you probably know you should have an idea of where your money should go and why. Most of us avoid drawing up a financial plan because we think we don’t know enough to make good decisions. For some reason, the head-in-the-sand approach is the only comfortable thing about money when we start out.

In this episode we argue even a terrible financial plan is better than no plan at all. Without a financial plan, it’s so easy to fall prey to noise. Sometimes the events that inform our financial decisions have nothing to do with money. In these moments we make emotional decisions that could very well destroy our wealth over time.

You are welcome to copy my financial plan until you come up with your own. Here it is.

1. Get assets

An asset is something that can earn more money in the future. Since I’m only at the start of my journey, my brain is my biggest asset, because that’s what I use to earn an income. Educating myself is a further investment in this asset.

The income that I earn is a consumable until I turn it into an asset. I do that by buying shares. Shares are assets that will bring in more money in the future by going up in value. They also pay dividends as long as I hold them.

I buy shares using my retirement annuity and through my EasyEquities account. In my EasyEquities account I’m buying the Ashburton 1200. You can find out why here.

2. Protect the assets

Accumulating assets is what wealth creation is all about. Once you manage to get your hands on an asset, you want to hold on to it so you can earn an income from it. Most of the time, you need to protect your assets from yourself.

I protect my hardest-working asset, my brain, by having a medical aid and dread and disability cover. Should something bad happen and I can no longer earn an income, I have insurance that can take care of me.

I protect my income by managing my tax burden. I do this through my retirement annuity allocation. Because I pay less tax, I have more money to turn into assets.

I protect my shares with my emergency fund. I want to sell my shares on my terms at a price that I find acceptable. If I need to sell my shares to take care of myself in an emergency, I have to accept whatever price I can get in the market, which means I might lose money. Selling shares can also trigger a tax event.

I further protect my shares by using a tax-free account. All the income and profit from selling shares at a higher price than I paid for them goes directly into my pocket, tax-free.

That’s my entire strategy. This strategy holds up, no matter what’s going on in the market or in politics.

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Win of the week: Gerrie

When I realised every R300 in my hand on the day I retire gives me R1 per month for the rest of my life! Screw the 300 rule. Don’t see it as a rule. Make it practical. Even better... Since I'm a good few years from retirement the number is even better. Every R200 I put away today will get me R1 per month from age 60 till I check out much much later. I now check all my non-critical expenses against that number. Servicing my car last week was necessary, but it stole R25 per month from my retirement. So my next car should be simpler and cheaper to service.

See the full conversation here.

Dirk

I recently became a US citizen, I have a 401(k) and a small equity portfolio with some single stocks that pay divvies, some ETFs and flyers I took on recent IPOs.

The rest of my family is still in SA and unfortunately my dad is sick so I’m thinking about coming back to the Republic at least semi-permanently or chasing the summer months between the Northern and Southern Hemisphere.

I have zero assets in SA, not even a bank account, but I’m fo’ sho jumping in on the TFSA. I’ll still be working for a US company remotely from SA, earning dollars.

Will SARS come after me for money I earn while living in SA for less than six months out of the year? Should I skip the advantage of a TFSA to remain “off the books” for SA tax purposes and just be liable to Uncle Sam? I suppose a tax pro will help but I’m trying to tap into the wisdom of the crowd here with your excellent podcast.

Adam

Quick one on one of your adages on working towards financial independence. Make sure you are well covered for medical expenses - at the very least have a hospital plan.

My son was recently admitted to hospital - he ended up in the NICU for almost a month. Throughout the process I continually checked with the clinic about our "tab" just to make sure things were fine. He was diagnosed with a very rare blood disease (1 in millions) and passed away after fighting for four weeks.

We were left with all the invoices to start making their way through and the bill ended up around R1.3 million. Thankfully Discovery (who have been very cool throughout everything) paid over 95% of that. Small blessing, especially when one of your frequent reminders of his fight are the bills that come afterwards.

Just wanted to put things into perspective for the larger crowd. These things DO happen.

There's an organisation called Rare Diseases which acts as a support group for parents with children diagnosed with a rare disease. But within that organisation is something called Rare Assist who support parents (for a small monthly fee) with the administration of dealing with medical aids. I kid you not we were getting around 10 daily notifications when my son was in hospital and eventually you just left it to white noise.

Anyway, this organisation helps ensure all the invoicing was done correctly, all in-hospital expenses are carried out accordingly and they even motivate for additional costs to be paid. Such as the 200% / 300% scenario where they motivate the gap to be paid. In our cases they recouped close to R15,000 for us. Not bad for a R270 monthly fee. Also, they can support even typical households - it needn't be rare disease.

You never knew such organisations exist unless you are caught up in that world. Call this part testimonial / advice for parents out there.

Lloyd

I’m not a first-time buyer. I’m selling a property that will give me R1m in my pocket to invest.

A crappy house costs R3m and entry point is closer to R4m. These same houses can be rented long-term for R15-20k per month, vs the R22k a bond would cost.

I’m trying to work out if it is better to invest the R1m or to put this down against a bond of R3.5m on one of these expensive houses.

If we rent for R15k and invest our cash elsewhere, we have flexibility and save a whack on maintenance and property taxes, which can be as high as R2k in these areas.

It seems like a no-brainer, except you eventually end up with a "valuable asset" at the end of the bond where I am not sure my R1m will grow as well?

Mbasa

I have a preservation fund that can wipe out my home loan.

Would it be wise to take a tax knock to pay off my home loan and use the free money to add to my TFSA account? I want to contribute the full R33k and max it out as quickly as possible.

Riaan

Until now I’ve been maxing out my TFSA in a savings account at Investec earning 8.62% per year. I didn’t know anything about ETFs,  but still wanted to save TFSA money.

I then discovered your podcast, stopped contributing monthly towards my Investec TFSA and started contributing to an EasyEquities TFSA (Satrix Rafi 40 and Satrix MSCI World).

Do I leave the money with Investec or transfer it over to EasyEquities to buy ETFs? Do I stick with the Rafi 40 and MSCI or do I diversify a bit more?

We don’t recommend jumping into your first investment before you have your financial house in order. The humble emergency fund is at the heart of any good financial strategy, followed by insurance.

At the beginning of your financial journey, you don’t have many assets. When you’re starting out, whether it’s getting a handle on debt or starting from zero, your ability to earn an income is your biggest asset. You need to protect that asset first. Your emergency fund covers your expenses while you find new work, should you lose your job. Your medical aid helps you take care of your body so you can show up for work. Your dread and disability cover replaces your income should an accident or illness render you unable to work.

Once those risk management strategies are in place, insurance to protect you from having to cash in your assets (once you start building those) become important. Car insurance and insurance on things that allow you to work, like your laptop and cellphone, are recommended.

The purpose of insurance is to protect your assets. Once you start investing, you want to remain invested for the long-term. If an emergency could put you in a position where you have to sell your investments to pay for the emergency,  you want to make sure insurance covers you for the emergency.

However, on your personal balance sheet, insurance remains an expense. It protects you from needing to destroy your assets, but it doesn’t build your asset base.

As you accumulate more assets, your wealth can pay for emergencies. This is called self-insurance and it’s wonderful. You can take care of yourself without destroying your asset base. Once you stop your insurance contributions, that money goes towards building your asset base even further.

This is a delicate dance. Over-insurance means your money goes towards an insurance company, not towards your asset base. Under-insurance puts you at risk of losing the assets you already accumulated. It’s worth keeping your finger on the pulse of this issue all the time.

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Sebastian

Once you reach financial freedom would you cancel your current life, income protector and disability policy? I do have 3 rugrats, hence the current need for the insurance.

John

I know you guys always say people without dependents don't need Life Insurance. My broker said that while this is true, I am still young and healthy with a low monthly premium ~R150 a month. He said that should my health status change in the next few years it would be way more expensive to get life insurance then. (I know he would be getting a kick back but that’s ok). I get returns into my PPS profit share account which is expected to have enough capital after 7 years to pay for the cover itself. What are your thoughts on this?

Paulo’s son qualified as a dentist last year.

He needs to 'insure his hands' for obvious reasons and he needs to insure himself against malpractice. What route or products would you guys suggest he use?

Hickley Hamman: MacRobert Inc Attorneys

"Insuring his hands" is maybe more specific than he needs to go. Most income protection/disability policies cover you for an inability to practice your chosen profession. If his chosen profession is dentistry, that should do it. An insurance broker would probably be better placed to advise him.

On the malpractice insurance front, again a broker is always a good idea. He can also contact the South African Dental Association at 011 484 5288, although I think they may be allied to a particular indemnifier. There are a number of good players in the market, the main ones are probably Dental Protection (UK based but big presence in SA), Natmed and EthiQal.

Professional Indemnity insurance is one of those things you think and hope you'll never need, but it happens. He should make sure that the cover he receives is for the costs of a legal team, damages (probably minimum R500k) and also covers matters before the HPCSA.

Some of the insurers will also offer benefits beyond all that and will provide advice on general ethical issues, and also cover for criminal proceedings (it happens). Generally speaking in an increasing litigious environment, I think it's a good idea to get broad cover.

Win of the week: Bongani

Today I had a conversation with mom about retirement. She doesn't have pension fund at work and her salary is not enough. I still look after her, she’s never had a proper job.  I had convinced her to save R150 a month and I will add R200 a month. I want to open easy equities account for her. She is 50 years old, which ETF I can pick for her? I know R350 being invested for 15 years it will make a huge difference, better than not putting money away.

Boitomelo

Suppose I have already contributed R66,000 into my TFSA account and I happen to receive a lump sum. Is it possible to "pay in" the R434,000 and thus max out the TFSA? Or is it a case of, once you start the annual thing, you must continue that way until you reach the limit?

Hugo

I belong to my company’s Retirement fund. It is by far the biggest contribution I make to my retirement, combined with a generous allocation from my employer.

The default Balanced fund I am in has a EAC of 0.75% (Not bad for one of the largest fund managers in the land?!) The Umbrella manager of the Retirement Fund gives us the choice of several funds, some the same cost, some more expensive, all Reg 28 compliant of course – just with different strategies.

Now I noticed they have a “Passive fund” – with a cost of just 0.35%.

They say:

Its asset allocation is directly comparable to the Specialist LifeStage Range (Which I currently invest in), but instead adopts a passive multi-manager investment approach where it selects skilled managers that can passively replicate the exposure to these asset classes.

Sounds like they use ETFs to replicate the more expensive actively managed funds. It almost sounds too good to be true. The benchmark asset allocation is very similar to my current fund. Based on fees alone, it seems like a no brainer. Wonder what you think?

Jonathan

I used to hold a handful of stocks, most performed crap, and I just bought ETFs. I'm holding on to Shoprite and Discovery. I back both companies in the long term, so I'm not worried about the awful performance (I'm down 15% and 20% respectively). I was wondering though if Simon and you could comment on the price movements.. Discovery swings wildly, while Shoprite has more of a constant movement (down).

Why does Discovery swing much more than Shoprite and why does the market hate them?

Next one - you made a comment that you're paying 11.5% on your house. Surely you can do a percent better somewhere else, given your in financial sector? Or are you impacted by the fact that you're "self employed"?

Santosh

I have a lump sum to invest and my options are cash or stocks.

With the performance of these classes over the past three years and instability in the global markets it appears that wherever an investment is made, it either all moves up or down.

No longer are bonds the hedge it once was - it also moves with stocks. Asset classes are no longer decoupled the way it was in the 1980s.

What I find particularly frustrating is that the efficient market has become very efficient in efficiently taking away in one week what it had given the previous week.

Last week I lost R130K overnight over three days and made R30K back by Friday, which saw me end off the week about R85K poorer, through no fault of my own!

I have noticed is that the Allan Gray Stable Fund does not suffer the wild swings given the performance of the JSE, MSCI World and X-Rate (ZAR/USD)

Does this not strengthen the case for a Stable Fund or portfolio structuring to mirror a typical stable fund by way of asset class allocation ?

Mbali

I have an RA and Investment for my son’s education with an additional life cover with Liberty. I’m pretty happy here.

I have a money market fixed deposit account with Investec. I got this 5 years ago. I feel like I should be looking into the interest I’m getting, but honestly I’ve been saving into this account for so long I’m not sure what I need to be looking out for. I don’t remember there being a tax free element.

I’m looking at opening a dollar account, can you share some insight on what the benefits and disadvantages of these are for saving? Noting that the dollar is pegged to the UAE Dirham. So this is very good for me.

I’m looking to get a tax-free account through Standard Bank to build a future emergency fund. I’m sure you’re asking what the hell is this? Well I figure that I might come home in the next 5-10 years. So I would like to come home to an emergency fund in case I really struggle to get myself back on the market and my business up and running.

Questions:

1. How do dollar accounts work, who provides the easiest and best dollar rate? What are the tax implications for me as an expect after the dreaded changes in 2020?
2. Should I be worried about having so much of my financial planning in South Africa (operating in Rands)? Dubai is not really an option for me to save as interest offered is so low (between 1%-2.5%).  I’m only comfortable with South African’s financial regulatory framework.
3. I won’t make the R1m a year mark for 2020 tax, but I’m wondering if I will be hit with any of the above financial instruments I do have and the ones I want to get?
4. I would like to dabble in the ETF market, reading a lot and listening to you guys a lot. Just a question for you guys:  Am I adding too much to my portfolio? I am willing to be aggressive with a small amount to start off. Where should I go?

Get Down Adam

Donate your relatives to science! Ka-ching!

My gran died and we gave her to Wits medical school to use as a cadaver. They collect the corpse and take it to Wits. The Med students do their thing and then at the end of it, they wrap the cadaver up in - I guess what you would call it is gauze. Anyway, long story short, a year and a half after the death Wits sends you an email to come and collect a little box of ashes from their anatomy department. Cue the triangle sandwiches! Wallet remains fat!

Before we begin, please take a moment to complete our survey. It would really help us out.

Investing is daunting because there are no clear answers to basic questions like, “How much money do I need?” or “Am I on track?”

To make matters worse, financial institutions like to exploit our limited knowledge on the subject by making promises that aren’t exactly false, but not exactly true.

If you’ve been investing or listening for a while, you know the market has been struggling for years. As a result, we are getting a growing number of emails from investors who are concerned that their lacklustre portfolio growth is the result of either the products in which they are invested or the institutions managing their money. Two weeks ago we talked about when poor performance is the result of bad management. Find that episode here.

This week we help you think about what your performance actually means. My tax-free account is up by 17%. However, I started investing in my tax-free account in 2015. Inflation for the period is 21%. I am 4% poorer, even though I have more money. My discretionary investment account paints an even bleaker picture. That account is 5.6% in the red. Since I started that investment in 2013, inflation has been 32.8%. My investments need to gain 38% for me to be back where I started. If I didn’t understand the impact of inflation, a 38% growth in my portfolio would seem like payday.

As it happens, our friend Stealthy wrote a blog about the effect of compounding, not only on your investments, but also on your costs. He made a compounding calculator that will bring a tear to your eye, which you can download here.

You might enjoy running your own numbers.

The discussion was inspired by a discussion on The Fat Wallet Community group. Join here.

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Win of the week: Carl

Perhaps you're just Starting Out on your Journey, a 21 Year Old with Too Much Bad Debt & a Small Investment Portfolio, receiving a Few Hundred Rand in Dividends every other Month, Thinking, 'this is gonna Take Forever & I'm Never gonna make REAL Money so why bother'.

Perhaps you're a Financial Genius and the rest of us are just a 'Cautionary Tale' to you.

Perhaps you're a Lowly BlueCollar just like I am... and the Only Time you get to See the Inside of the Boardroom is when you're Cleaning it... and Nobody Ever Asks about your Ideas or Opinions, in Fact, Most don't even know your Name even though it's Printed on your Uniform.

LIFT your Vision for your Salvation is at Hand - and who's Coming to Save you from yourself? YOU! Which is GREAT because that Means Complete Control is in YOUR Hands!

I Feel I have Absolutely NO Reason to Boast, because I only Managed to Start Investing at Age 38... after Making Sure I Squandered every single Opportunity Life threw at me..

For Most of my Life I Thought the Best Plan was to Spend my Last Cash on the Day I Receive my Next PayCheck…

As you Grow Older you'll Realise that Time isn't Important, it's EVERYTHING - because of the Compounding Effect.

So, are you Going Laduuuuma! - or are you Constantly Scoring Own Goals?

How about Setting Small, Incremental, Reasonable, Realistic, Attainable Investment Goals - BabySteps, because your Personal Investment Journey is Probably a Daunting Sight...

When I Started Investing ALL I Dreamed about was Receiving my First Dividend... and the Golden Egg was R130 Laid by Country Bird on 21/11/2011- Because everyone Likes Chicken, Right?

It was the ONLY Dividend I Received in 2011... but I was Ecstatic with Joy because I Reached my Initial Investment Goal - I Felt like a Millionaire, like I wanted to Buy Drinks for Everyone!

Then I Started to Dream about Receiving a Dividend EVERY Month... and 2015 was that Year.

Yet Again I Felt Immortal, because I had Reached my Goal.

Then I Started to Dream about how Cool it would be to Receive R10K in Dividends in a Single Month...Well, End July 2019 WILL be that Month - and yet another of my 'impossible' Dreams WILL be Realised! - and this Time I WILL be Buying Drinks for Everyone - because Everyone Loves Bubbles, Right?

Now I'm Starting to Dream about what I Need to DO in Order to Receive R10K in Dividends EVERY Month, of EVERY Year...

I'm Thinking about WHY it Took 9 Years to Reach this Goal.

I'm Thinking about HOW to make it Happen Again.

I'm Thinking about How to SHORTEN the Period - Perhaps Halve it to 4.5 Years...

If you're NOT Dreaming - START!

If you ARE Dreaming, NEVER Stop!

If you Give Up, the Outcome is Predictable & Guaranteed, so Start Climbing that Mountain Standing between You & F-I-R-E.

Don't Start Tomorrow, don't Start Today, START Right NOW - and ADD another Zero to the BottomLine!

Khwezi

I just turned 35 and came to the realisation that I don’t have money to retire on, let alone to leave for my wife and child, in 15 years (as I plan/ planned).

Would it be possible to structure my portfolio as follows:

3 Defenders (those that provide cushion/ prevent loses, giving +/- 15-20 year returns)

4 Midfielders (a champions league great mix of conservatives, and aggressors giving returns in about +/- 10-15 years)

3 Strikers giving returns in 5 - 10 years.

I recently joined the Just One Lap community and before your shows have been tip-toeing around in the dark with no clue whether I am going forward or sideways to a cliff.

S’fundo wants to know what homework he should do before investing. He’s 22.

I recently started my investing journey, and I am looking forward to investing for long term returns (15 - 20 years) so I can take full advantage of compound interest.

Which are the most effective due diligence processes to undergo when valuing a company or ETFs to determine if they are worth buying for the longer term? How can someone with no prior knowledge of the markets or finance world learn going through those processes effectively?

The sad thing about the work we do is that it has a 0% sexy rating. Once you understand the five financial concepts we keep harping on about, it becomes easy to figure out the rest. The things we invest in won’t make you rich overnight. If it did, we would be sipping champagne cocktails on a beach, not talking about the five financial concepts a hundred times a day.

However, the work we do here will hopefully help you identify poor financial choices before you make them. This week, Karabo shares the story of her grandmother’s funeral cover. All hell broke loose on Twitter after I posted about it. The feedback was either, “If her grandmother had died in the first month it would have been a great idea to get funeral cover.” Or, less kindly, “Funeral cover is a scam.”

This week, we offer ways to think about funeral cover. It’s an insurance product, and insurance plays an important role in financial management. However, like all other short-term insurance, there comes a time where you have to stop paying for it. The sunk cost fallacy makes that much harder in funeral cover.

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Karabo

My grandmother passed away recently. I found out from my mom that for the past 13 years she's been contributing R250 towards a funeral policy that paid out R10,000.

When I do my own calculations, if she had simply saved without any interest earned, she could have saved R39,000.

She's trying to convince me to get a funeral policy but I'm not buying the maths as a funeral policy would only work if a person dies in a few months.

Is there a way of saving money that can earn good interest as a death insurance for family members without taking out a funeral policy? How can I convince my mother to consider alternatives to funeral policies?

Andy

Was listening to your "What the Fee" episode (March 10th) and wanted to let you know that Ucount rewards can actually be redeemed as cash. (Nothing against Playstation VR, but I am an XBOX guy)

I racked up about R9,000 worth of Ucount over five years and received an expiration notification. I redeemed R8,000 and put it into my investment properties bond.

What you have to do is redeem the points into a pure save account (terrible savings account), from there you can transfer it where ever.

I see they also have options to put it directly into a TFSA etc. They can only be redeemed in R2,000 increments.

I currently contribute a total of 10% of my salary to my RA which is compulsory at my work. (my work pays 50% of my contribution, so 5% myself and 5% company).

My company has chosen to use Allan Gray and we have some Durban-based advisors.

The actual Annualised return since inception has been 1.72% and over 3 years 1.74%.

The admin fee, platform fee and advisor fees comes to 2.66%.

I would love to max out the contribution to 27.5% but I don't want to put it into that RA. What options do i have here? Do i have to negotiate this with my company or can I open a separate RA and contribute 17.5% to ETFs?

Lalitha is 59 and she has a nice lump sum to invest. She thinks she’ll probably retire at 65. She already has a tax-free account. Where should her money go?

Beyers

What is your opinion about keeping a portion of your emergency fund in Kruger Rands as a currency hedge?

How are Kruger rands taxed when you sell them?

Milan

On Sygnia's platform you are able to buy Sygnia ETFs in a RA wrapper. The net result is one of the cheapest RAs you can get at the moment. I have attached a breakdown of my fees. The EAC is just 0.41%

There is also a check to make sure you are Reg 28 compliant. You do not have to invest in bonds or cash to be Reg 28 compliant. Your portfolio can comprise of just Equities and Property. If your custom portfolio breaches Reg 28 allocation rules you have 12 months to fix it.

Anne

I am trying to teach my kids to save money and buy shares with their savings. My son insists on buying gold shares. Is there any etf with the word “gold” in that could be a good long-term investment?