I’ve only ever known debt as the wrathful destroyer of wealth and happiness. Lately, however, I’ve come to realise debt can be a powerful tool in your financial arsenal - if you treat it with respect. Someone recently explained the logic behind maxing out his child’s tax-free account instead of saving for her education.

If a single year’s tax-free contribution can cover much of your child’s living expenses in retirement, imagine what 15 years’ worth can do. Giving a tax-free account time to grow will have greater benefits in the long run than if she started contributing when she started working. Instead, she can use her starter salary to pay back low-interest study debt with her retirement taken care of. It’s genius.

This conversation got me wondering whether I’m making the most of the debt I have available. My home loan is currently the dumping ground for all my savings. This brings down my repayment period and guarantees a higher interest rate on cash savings than any bank can offer me. In this episode we discuss how low interest debt instruments like student loans and home loans can be used to inch us forward financially. We discuss why cars and clothing accounts won’t form part of this strategy and try to figure out when a credit card can help.

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Alexander

My studies are financed by my parents’ home loan that has an interest rate of 9%. This interest rate is still currently better than student loan interest rates I could obtain (10%+). The idea is that I’ll start to repay my parents as soon as I start working. I calculated that I’d most likely graduate with R350,000 to R400,000 student debt owed to my parents.

Should I use the very little free cash I have from my monthly allowance, vacation work and mentoring remuneration to:

1. Contribute to my all-ETF TFSA at EasyEquities?

or

1. Contribute to my savings account with TymeBank (at a 10% interest rate) to pay off my student debts sooner when I graduate?

I know the amounts I’m investing/saving now might be insignificant relative to the massive amount of student debt. But I’d still like to know what is better: investing in your TFSA or attacking student loan debt as soon as possible?

Clarke

My wife and I are in the process of finalising plans to build our dream home. We’ve saved up about 50% of the funds required, which is sitting in a money market account.

We hope to get close to 90% building loan from the bank which would enable us to use very little of our own cash in the initial stages of the build. Hopefully we can pour that money into the loan as required in order to keep interest payments to a minimum while having access to the bond if required.

I’m currently working on an exact schedule of cash flows, but I would require to draw down our investment periodically over the next 7-9 months in order to keep the loan amount to a minimum.

Which investment would you advise I could look into apart from money market accounts or fixed deposits that might yield greater returns without substantial additional risk?

Siphathisile

When I did my articles 2017-2019, I went to the SARS website and answered questions to see if I need to file a tax return. The website said I didn't need to, I'm guessing because I earned too little. Now that I am a qualified professional I know I will have to and I have no clue where to begin...stories about long queues at the SARS offices make me keep procrastinating on going there.

My company offered to pay half my medical aid. Should this affect my PAYE tax amount? Am I paying tax on my gross amount or on my (Gross plus medical benefits) ? I asking because the difference in the amount is nearly R500 and that hurts.

Am I liable to pay UIF since I am not a permanent resident and I am not a citizen of south africa? Will I be able to claim if I was ever unemployed in South Africa?

Shaunton

Do you think it would be more beneficial to add more contributions to my RA or do you think I must open an easy equities ETF account if I want to save more over and above my TFSA and RA?

Steve shared an excellent article.

• Reduce your tax bill in the current tax year
• Reduce your tax bill in the next tax year or in future tax years (any unused portion carries over indefinitely)
• Reduce your tax bill when you withdraw or retire from a retirement fund
• Help you to get tax back from SARS on your living annuity income when you file your tax return
• Reduce the tax bill on cash your beneficiaries may choose to take from your retirement fund or living annuity on your death

Francois has an idea for a calculator to work out how much money you have left until you die.

It should show you how your savings grow on a daily basis!

So what must it do?

1. You tell it how old you are and when is your birthday.
2. You tell it to what age more or less you intend living. 8, 90,100
3. You tell it what your balance is of all your money and assets.

It then works out how many days are left from your current day to that age and it calculates how much money you can spend per day up to that age. If you don't spend any money today, tomorrow your daily spend automatically increases since you did not spend anything today or you received interest overnight or whatever.

You see your balance grow NOT monthly, but daily! Later you add on expenditures and it automatically calculates your new daily balance and so on.

MacGyver

I have a TFSA through FNB. I max it out every year, it's the first money I put away.

However, it sits in cash in this FNB TSFA. How do I go about transferring this to Easy Equities Tax Free account so that I may invest in ETFs instead of it simply sitting in cash in my FNB account?

Register here to attend Stealthy Wealth’s meet-ups.

I learned a lot of important financial concepts from the FIRE (financially independent, retire early) movement. The most useful is the difference between retirement and financial independence.

The days of companies supporting retired employees in retirement are a distant memory. If you are plugged in to your finances, this is great news. It means there’s no correlation between your age and how long you have to work. We focus instead on financial independence.

All of us have a magic money number. The great news is that our number is entirely in our control, because it’s based on our spending. Simply put, your monthly spending times 300 gets you in the ballpark of your FIRE number.

That formula works because of the 4% rule, which our friend Stealthy Wealth lays out in this post. Basically, 4% is how much of your portfolio you should be able to cash in every year to allow your capital to grow by inflation. That means your portfolio never shrinks, so you never run out of money.

If you accept the 4% rule, you have to reject some age-old ideas about asset allocation as you approach retirement. In retirement planning, we are often advised to deduct our current age from 100 or 120, depending on what you suspect about your longevity. The number remaining is the percentage of your portfolio that should be in equity. Unfortunately that means a person who is 50 years old will have half their portfolio in low risk, low growth assets.

The 4% rule is unlikely to apply to such a conservative portfolio, since it’s unlikely to yield high enough above-inflation returns. Remember, you can only use whatever you earn above inflation to keep your capital in tact. If inflation is 6% and your portfolio only grows at 7%, you can only use 1% of your capital. Unless you have a huge amount of money, that won’t be enough to sustain you for a year.

In this podcast, we brainstorm new ways to think about how to set up a portfolio as you approach financial independence. We work on the premise that you need between five and 10 years’ worth of living expenses in low-risk assets on day one, so you have the option of not drawing down your portfolio during a market crash.

We offer more questions than solutions in this one. We are excited to hear what you have contribute.

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Colin

I signed up for a Just One Lap's ETF portfolio subscription account over two years ago and have been using the recommendation for my TFSA. There are supposed to be subscription fees payable after the first free year, but I have never been approached to pay any fees to keep my subscription account active and my login still works!

I am concerned however that the portfolios I see when logged in are perhaps not the most current, because I have not paid subscription fees! This concern is brought about by comments I have heard on the Fat Wallet podcasts, that make me wonder whether the current  > 10 year portfolio (that has holdings: CSEW40 40%, SYGWD 40%, PTXTEN 20%) is the current recommended portfolio. For example Simon often mentions on the podcast that the Signia MCSI World ETF have much higher costs that the Satrix equivalent, and given Just One Lap's emphasis on watching and reducing costs where possible, that makes me wonder why the SYGWD is still in the >10 year portfolio and whether I am seeing updated portfolios.

Margaret

The recent discussions about CoreShares changing their index made me want understand more of the underlying methodology of the underlying index.

Indices for one country seem relatively simple (e.g. S&P 500, our Top 40 index), but if you want to go for the one ETF to rule them all strategy you have to have more complexity. I see there's the Ashburton 1200 and the MSCI world that track the global markets. Could you explain how these indices are created?

Are there any indexes that track emerging markets over the world? BRICS? Latin America and Africa?

Kristia’s ETF analysis checklist:

• Asset classes: are you buying shares, bonds, property or a combination?

• Regional exposure: where the companies in the index operate

• The investment universe: is it the whole market or only a sub-sector of the market, like technology

• Methodology: how the index is weighted.

• Sector exposure: what types of companies are in the idex

• Cost: at the moment TER is the most universal indicator

Philip

A financial adviser suggested we take out life insurance on our parents as a future investment. My parents agreed and I have a little under R5m cover for about R2750 p/m.

The policy is now eight years old and the payment amount only adjusts for inflation. So does the payout.

1. a) It's my understanding that I will not pay tax on this payout.
2. b) I hope I don't lose my dear mother for the next 30 years! And even if she lives until 90, my calculation is that the contribution will never exceed the payout.

To me this seems like a good investment as part of a bigger portfolio (RA in addition to my Work pension, Standard Securities -started trading on the lazy system {yay me! I'm a trader!} etc).

Are there any pitfalls I am missing, or can I tell my sister to consider the same type of policy?

I guess I just want a sanity check here.

NC van Heerden

Over the past year I’ve listened to all of your podcasts since inception-sometimes obsessively. Luckily I started listening only a year after I started working before I had the time to make poor financial decisions. Following the great advice you have been giving, I have:

-          Started a maxing my TFSA which I spilt 70/30 between STXWDM and STXEMG

-          I have created a sizeable emergency fund, which already saved me on one occasion

-          Started some discretionary investments in the ETF space

-          Moved my RA from a advisor-fee stacked unit trust to 10X. I’ve stopped contributing to this fund to keep the opportunity to move overseas without Mr SARS having his cut – these funds are currently going into my discretionary investment (thank you to everyone who did all those calculations about if the RA vs discretionary)

I currently have a contract until the end of 2019. Thereafter there is a high possibility of hopefully only a few months of (f)unemployment. At that time I am hoping to cover my expenses by working as a locum while waiting for a post to open up. Luckily I have no debts – thank you just one lap.

In preparation I want to try saving a bit more money into my emergency fund this year. I’m currently using FNB’s money maximizer account (decent-ish) interest rates but 100k minimum and monthly fees, but it has easy access via the FNB app (which I use anyway) and I can move money immediately).

Since I will be adding some more money into my emergency fund I was looking at  at saving it somewhere with a better interest rate. According to tigersonagoldenleash.co.za at the moment the best interest rate seems to come from Tyme Bank (10% after invested for more than three months and taking a 10 day notice on withdrawal – downside is a maximum investment of 100K).

Does that seem sustainable on business grounds? I always have the uncomfortable feeling that something seems too good to be true (looking at you Absa with 13.5 percent interest and then fine printing it as simple interest). I’m also considering African bank as it seems a bit more established.

Please also advise if you think there would be a better place to park some extra emergency fund money for the next few months.

Rudolph

Do dividend yields rise or fall in a boom or a recession?

Hannes

You’ve mentioned a few times already that buying your house was a mistake and you'd never do it again. I would love for you to elaborate exactly the reasons why you believe it was a mistake, in as much detail as you can.

I find it difficult to believe its a financial mistake when you are planning on paying it off in five-ish years, paying very little interest because of that, and having the benefit of not having a rent / bond payment after said five years. To me the pros of this far outweigh the cons.

I apologise to Four Cousins for saying they probably add bubbles using a SodaStream machine. I've learned my lesson and vow to buy a bottle should I see one in store.

Investing in listed companies is a great way to learn about investment risk. It teaches us that sometimes the market isn’t rewarding at all and that individual shares can do better or worse than the average. We also accept that bad market periods are generally followed by periods of growth. We develop respect for the fact that no company operates in a vacuum. The economy is a complex system that can impact the performance of individual companies in surprising ways. We learn all of this while also thinking about the companies or products we invest in. We have to keep it in mind, because we are stock market participants from the moment we buy a single share.

When it comes to unlisted investments, the risks change. The biggest risk is not being able to find a buyer for the investment. In addition to providing a secondary market to buy and sell shares, the stock exchange requires a degree of due diligence from companies, adding a further layer of security. While unlisted companies can be good investments, it can be hard to keep track of the market in which they operate, to be sure that they comply with the law and to get truthful information at regular intervals.

The case of the Highveld Syndication Scheme that Liezl invested in is a great example of the types of risks we take in an unlisted environment. While the company initially operated legitimately and offered great returns, a management change resulted in great losses for investors. Was there any way for an individual to predict this change? Unlikely.

In this episode we discuss some options when you’ve made a bad investment. We talk about some of the risks of unlisted investments and how to know when to get out.

Read more about the Highveld Syndication Scheme here.

Liezl

I invested in the Highveld Syndication Scheme (HS22) when I was still young and dumb.

We opted for a settlement arrangement a couple of years back to get at least 55% of our initial capital back over a 3-year period. That did not materialise.

In the beginning of March we received a letter offering us APF (Accelerated Property Fund) shares to the value of 25% of our initial capital amount as a final settlement by Nic Georgiou.

The catch (of course there is one) is the shares are offered at NAV price (R7.50) and not market value which is around R3.40. The highest ever price recorded in 2016 was just under R7.00

A second catch is the CEO of APF being Michael Georgiou.

I also believe the share price will even drop further once these shares are allocated and everyone hits the sell button on day 1.

One tiny silver lining is the anticipated opening of the Fourways Mall this year which forms part of the property portfolio.

I'm thinking of just taking the settlement, get it over with and play a bit of monopoly?

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Win of the week: Jonathan

Thank you for such an incredible podcast. I feel on top of my financial life, and it is truly because of the idea of "don't get financial advice, get financial education". I'm happy to say that your podcast has been the cornerstone of my financial education and continues to reinforce the principles that I need to focus on.

This question is something I've wanted to ask you for a long time. You always say we don't talk about Japan, and it truly is the single area which I feel you and Simon fail your listeners in. One of the most important financial principles is to confront the truth and then deal with it. Basically, I think you owe it to your listeners to TALK ABOUT JAPAN.

This video sent by Dhiraj explains a bit of the economics of Japan. 

Mike

We bought a townhouse and were lucky enough to afford to keep it when we bought a house when we had our kids.

While it has appreciated 40% in value in the six years we've owned it, beating SA equity markets over the time, it's been pretty flat the last two years.

I am wondering whether we should sell it, settle the bond (we don't pay any tax on net rental income yet), and invest the R1m or so we'll have left after fees into low-cost ETFs.

The property is located in a great suburb, but it's only 1km from our current house, so I worry about concentration risk.

The net yield after all costs is also not great at around 6% based on current market value (9% on original purchase price), but what's nagging me is that at some point the property market must bottom out and Newlands would be one of the first areas to start growing well above inflation again.

Brecht

I’ve had a Momentum RA policy since 2002. The fees are 2%. The penalties on a R160,000 policy are R30,000 if I want to move to another provider. Do I move this fund or just stick it out because of the high penalty? My thinking is I will make that loss back and some more if I can move this fund to a better growth product and less fees?

I’ve had a Discovery RA for the last 10 years. It has only brought me growth of 1.89% pa and the fees are in the range of 2.5% - 3%. I am expecting a fee payback in April which will at least boost it a little, but the returns will still be shocking. On top of this I have 2 other preservation funds with Discovery that have done around 6.5% pa respectively over the last 10 years. What shocked me even more is that 60% of my combined Discovery portfolio is in cash. I haven't found out the penalty cost of moving the RA as yet but definitely need to move them and especially into a more Equity driven fund.

Is it possible to combine the two RAs into one fund?

Is it possible to move different preservation funds into one and is it wise to that?

Brandon

Are there rigorous studies (literature) available that address your premise that advisors add approximately zero value. I'm asking because it seems logical to me that your conclusion rests on that premise being true.

My concern is that if there were say, a number of comprehensive global studies that arrived at the opposite conclusion, would that not have a significant impact on the financial advice that you deliver on your platform? Are there global studies that examine the question, do advisors add so called alpha -- put simply, would an average individual working alongside a professional competent advisor, outperform that same individual, operating on their own in a parallel universe.

If it were true that the net effect (after fees) of working with an advisor were positive, the compounding arguments you make in your podcasts would work in precisely the opposite direction.

We mention the SPIVA reports, the Morningstar research, as well as the Berkshire Hathaway newsletter: Berkshire Hathaway letter on fees

Theo doesn’t agree that a home is just a lifestyle asset.

When staying in a paid up home you are not paying rent, so your paid up property is saving you the equivalent rental. It is indeed an asset, although you are not earning a yield you are saving opportunity cost of paying rent. The rent also increases every year which makes the benefit of owning your own asset even more beneficial.

Sandile

Heading into 2019 I've set serious objectives around how manage my money, which has been a lovely journey so far. I've become the biggest cheapskate, focusing all my efforts on saving as much as possible.

My next step is building a long-term investment strategy, I've received pricing from my advisor. I am beginning to question every piece of his advice due to the insurance matter. He is suggesting I invest in Allan Gray Balanced fund and Coronation Balanced Fund. Last year he recommended Allan Gray and the Investec opportunity fund.

I have looked at each fund in detail and the confusing element is 1) fees and structure. For someone who is new to the game it definitely is overwhelming. 2) Most of these fund invest in the same companies?

I'd also like to invest in ETF funds but I see there a plenty options to choose from.

Bruno

Would it make sense to duplicate the same investment strategy for both of us in a TFSA? In other words, purchase the same ETFs for both of us.

Money is inextricably linked to every aspect of our lives. Every milestone and setback is either helped or hindered by our financial situation. When we plan for life events like weddings, babies, retirement or death, we also think about their financial impact.

Most of us fall short in planning for things we don’t like thinking about. When our nightmares become a reality, the last thing we want to worry about is money. This is normally what insurance is for. Sadly the insurance industry is a flakey ally.

In this week’s show, we discuss the financial impact of debilitating sickness. We talk about the preparations you should think about when you’re healthy, as well as some options for people who are already dealing with this difficult reality.

Louis

Over the last couple of years I went from buying a new, heavily financed car every one or two years, to (almost) owning one car for four years and the other for 10+ years.

I scaled down after parting ways with a major client. I decided to pay off all debt except my house. I saved the R8,000 I would have paid on my car each month and in 2.5 years had the money earning interest in my bond. I started investing in the stock market and also have a number of ETFs, including a CoreShares tax free account that actually gave me a good return over the last three years.

We adopted at the ripe young age of 45, which changed my outlook on money. My wife was diagnosed with MS last year. Suddenly all the insurance policies and annuities became important as we had to become a single income family.  

We took out a combined policy with life cover and LIVING LIFESTYLE COVER (with all the PLUSES, which Liberty say they gave us for free). According to what my current broker and I could deduct - upon diagnosis we should receive 25% of our insured value.

This is not the case, though. Liberty has their own definition of MS and you should tick a number of boxes. Even though my wife had several problems relating to MS, we were not entitled to any payment. Not once did Liberty make contact with my wife’s neurologist, doctor or anyone else.

My wife had a relapse during the year. At first Liberty again refused any claim without making contact with anyone. Eventually they paid 25% according to their sliding scale. Now that my wife stopped working, I’ve had to employ a neurologist to advise me in order to decide on further action.

In our situation we will survive on my income, taking into account retirement provision might be a problem. What do other people do when the sole breadwinner is in the same situation?

Secondly I checked the annuity we have been paying for the last 15+ years and realised that the return was just over 6% for the period after cost.

The obvious thing to do was to cancel, for which the charge is 5%. They say that after 15 years they have not recovered all their cost. There is a contribution charge of 4.5% and then they charge a management fee of almost 2% on top of that.

I wrote to the pension fund adjudicator and after waiting almost seven months and requesting feedback a number of times, I received feedback basically saying they can charge up to 20%. I am moving the money in any case as I am sure we will be able to do better somewhere else. R14,000 on a R280,000 value. If you deduct the R14,000 my real growth over the period is probably very close to 0%.

What is the best fund with a moderate to high risk to try and make up for lost years? We already have investments in Allan Gray Balanced and similar funds.

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Gareth

The problem with dread disease cover is the companies’ definitions of their sicknesses. I unfortunately had the same claim disappointment when my wife was diagnosed with Crohn’s disease, I then only found out that they pay out 25% of the dread disease assured amount. The same goes for MS and most autoimmune diseases.

We pay discovery R12,000 pm on the top Medical aid so they can pay R30,000pm for her medicine.

Liberty should’ve asked for medical reports etc from the doctor as part of the claim process.

I always say that dread disease is a nice to have, same as capital disability, but the most important benefit to have is income protection. The income protection doesn’t look at your illness but more at your ability to do your specified occupation. It is more expensive but will pay out in a lot more cases.

Win of the week: Riani, who is 13, and her sister Juané, who is 7. Their mom tells me they already know what the ALSI is.

Brendon

I’m able to invest R15,000 a month. Should I go down the ETF or individual share route? Do I incorporate property ETFs too? Should I open an EasyEquities account or with another company?

Steve

I’m still left wondering what to buy, especially for my TFSA. There just doesn’t seem to be any right or wrong answer?

All things considered, what would be your preferences if you wanted exposure to the following:

US Markets?

World Market - Developed?

World Market - Developed & Emerging?

South Africa?

My understanding is that the US leads the world economy so what are the chances of their markets slowing down while the rest of the world starts ticking? If that’s unlikely, surely one could just as well stick with the US?

Donal

I did a spreadsheet to work out the tax for the two scenarios and I then backtracked and worked out the present value. There's not a huge difference. The tax man would get almost the same amount of tax from me eventually even if I leave the pension alone!

I've listened to you guys saying many times we should clear our debt as fast as possible.

I currently have a large car loan at prime + 0.9%. I change my car approx every 2.5 years. In that time I'll generally only have paid off half the loan. My trade-in value usually just covers the outstanding amount and then I need to get a new loan for the full value of the next car and the cycle starts all over again.

I commute to work and drive approx 1,000km per week. So after 2.5 years I've clocked up around 120,000km. That's around the time that things start to go pear-shaped with a car.

I could pay extra into the loan and reduce the capital quicker. Let's say, for example, instead of paying into my TFSA I put R2750 per month into my car loan. So, like I do, I've run a spreadsheet and I've found that after 18 months (which is when I will change again) my capital balance will be R60k less than if I didn't pay in the extra. So the loan on my next car will be R60k better off. This sounds great, but the problem then is that my TFSA capital doesn't grow! And if I continue to do this every time I buy a car I'll then my TFSA will always suffer.

Eventually I'll be in the situation where my initial loan amount will be small enough that I'll be able to pay off my car loan before I have to change my car again. In that period I can catch up on savings for a few months. But I reckon it's going to take about five more car changes to get to that stage! By then I would almost have my TFSA maxed to R500k and I should be sitting back with my feet up watching it grow and grow!

The thought of not investing in my TFSA for the next 10 years is extremely painful and seems to be counter-intuitive. But should I just suck it up and rather focus on clearing my car loan every month?

Sabata

You guys were slagging retirement annuities as if they are lepers!  Any unused contributions to an RA can be carried forward, which you mentioned somewhat unconvincingly.  

This is not a 'small benefit', as you stated.  These unclaimed contributions can be carried forward all the way to retirement.  By then you probably won't be investing for retirement. You can use these to increase your tax-free lump sum you're allowed to withdraw, or to reduce the tax payable during retirement.

Say you retire with R 50,000 per month. Tax payable would be R 12,582.25 per month.  Let's say you have enough unclaimed contributions banked. You could then claim your 27.5% of taxable income as an RA contribution. This would reduce your taxable income to R 36,250 even though you will no longer be making these contributions.  Your tax would be R 7,521.25, a saving of R 5,061 per month! That's worth a lot of bubbles, especially if you drink Four Cousins!

About your diplomat who is based in Botswana, is she exempt from RSA tax because she is out of the country for more than 183 days, or is it because of her occupation?  I think it's the former.

Rieneke

I have a slightly different take on the issue. Use life cover as life cover when you need it, but change the purpose to inheritance when you no longer need it.

You often take out life cover with a young family as you have to provide for them should something happen to you. As the kids then leave home or you no longer have dependants, the life cover is cancelled. Especially older folks who might no longer be able to afford the cover. In that case, offer it to your children as an investment. You have low premiums, having started young.

Taking it out with the purpose of inheritance when you're older is too expensive and taking it out with this purpose when you're young is also expensive due to time and as your fortunes change, might also not be able to sustain it, in which case it was wasted.

Ros

I'm keen to move my emergency fund from a Money Market account to TymeBank. This seems like a no-brainer - If I understand their Ts & Cs correctly, once your money had been in a GoalSave account for 90 days, you get 10% interest for a 10-day notice period, up to a maximum of R100 000.

I mentioned this to my Mom and she was very concerned that the bank could go under, a-la African Bank or VBS. What are your thoughts on this?

Stealthy Wealth’s FIRE-people are organising get-togethers in Durban, Cape Town and Port Elizabeth. Find out more here.