What is buy-and-sell insurance?

A buy-and-sell insurance arrangement protects the partners, members or shareholders of a business from threats to the continuity of the operation when one of them dies, becomes disabled or retires. The agreement is that, when one of the members die, their stake in the business is sold to the remaining members. Buy-and-sell insurance is the manner with which this arrangement is normally funded.Buy And Sell

What often happens when a partner dies is that their stake in the business has to be liquidated to satisfy cash needs in the deceased Estate. This means the business may have to be sold to satisfy these cash needs. The remaining partners could also be stuck with an heir or new business partner who does not share their work ethic or vision of where the business should go.

A buy-and-sell arrangement, funded by insurance, is a great solution to the problem because:
* cash is available immediately when it is needed
* the heirs know exactly what their share of the business is worth
* the surviving partners immediately own the whole business
* there is no need to borrow
* the business’ capital resources are not drained

The arrangement is normally set up by each partner figuring out how much their stake in the business is worth. The other partners then take out insurance for that amount, according to their partnership percentages.

One drawback is that premiums paid are generally not tax deductible. Setting up the arrangement may be complicated, because provision has to be made for possible Estate Duty and other taxes that have to be paid. It is best to seek professional advice from a licensed Financial Advisor to ensure that the arrangement is concluded correctly.

A buy-and-sell arrangement is an excellent way for partners to ensure the continuity of their business and provide certainty to their family members if they were to pass away or become disabled. Any small business will do well to think of setting up this arrangement.

Kevin Mzansi

What are the different aspects of a Personal Financial Plan?

Everyone needs a Financial Plan, but what does a Personal Financial Plan actually involve? A comprehensive Personal Financial Plan has five main  aspects: Financial Management, Investment Planning, Risk Management, Tax Planning, Retirement Planning and Estate Planning. Let me explain what each of these are, in turn:

Financial Management:
Financial Management deals with Assets and Liabilities, Income and Expenses and cash flow. The Financial Planner will look at your budget and see if your income exceeds expenses or if you are making up the spending gap through use of debt. She will look though Credit reports, bank account details and statements and check for important detail. If you were over-indebted, for instance, a plan would be drawn up to get you out of debt and into a more financially secure position.

Financial Planning

Investment Planning:
The financial adviser will look at your goals, needs and priorities and draw up a plan to meet these goals. Examples could be saving for kids’ education, covering a shortfall in your future retirement needs or buying a holiday house. The financial adviser will check whether your assets are diversified and whether your ability and willingness to take risk actually match. It is not a good idea, for instance, to have your money in Options or other risky investments when a loss in these instruments would leave you bankrupt.

Risk Management:
The Financial Adviser will check existing insurance coverage, Medical Scheme coverage and Health Insurance. They will look at different risks and advise on improvements in areas where risks are inadequately covered. Such areas could be Income Protection, Buy-and-sell insurance for business interests, Disability Insurance and other products.

Tax Planning:
Taxes are a major expense for all of us. Just check your paystub if you have any doubts. By having a professional look at your tax position you can harvest significant tax savings and gain greater insight into the taxable nature of assets, liabilities and income.

Retirement Planning:
Most of us will get to a time when we are not able or willing to work. We all hope that some day we will have the funds to be able to retire comfortably. A Financial Planner will look at your current situation, project forward to when you plan to retire and check whether you have a shortfall in funds. If there is a shortfall, the financial advisor will create a plan with steps you can take today to fund the shortfall in the future. This can be done either through insurance, savings or investment products.

Estate Planning:
A Financial Advisor will help you to make provision for your wishes to be honoured regarding the distribution of your Estate. The last thing you want is your least-favorite relative assigning themselves as the Executor of your Estate and bagging the bulk of your riches. Estate Planning is accomplished through wills, prenuptial agreements, medical power of attorney agreements and possibly through setting up companies and trusts. You estate plan will also make provision for the payment of Estate Duty and provide liquidity in your Estate, in case your assets need to be sold off unnecessarily to meet debts of the Estate. The last thing you want is for a family heirloom to be sold to pay off the bond on your house, for instance.

Everyone needs a comprehensive financial plan to reach financial security. Find a competent Financial Adviser today to put you on the right financial course.

Kevin Mzansi

Do I really need a Financial Advisor?

You only need to open a newspaper to see stories of Financial Advisors who run away with people’s money. Couple this with the public perception that Financial Advisors just ram insurance down your throat and that the financial services industry is seen by many as just a giant Pyramid Scheme and you may wonder: Should I just skip talking to a Financial Advisor altogether?Financial Advisor

The title “financial advisor”, is thrown about way too easily, in my opinion. All one needs is a school-leaving certificate, a possibly unrelated degree, a couple of weeks of training on how to sell financial products and someone looking over your shoulder for three years to be called a “Financial Advisor”.

These days it only takes a couple of hours of browsing around the interweb to compare insurance quotes, find out about all the different savings accounts, different Investment options, how much your car payment will be and check the fee schedule of your bank. Your work provides you with a Pension fund and Medical Aid, your home loan payments and credit cards are under control and you have a monthly budget that you stick to.

Why do you need a Financial Advisor then?

Financial Advisers are specifically trained in areas that most of us don’t know much about.

Here is what a Financial Adviser will look at:

* Will you be able to afford the car payment and home loan payment when interest rates go up by 1% or more. Your bank may say you can afford it, but can you really?

* Will your pension be enough to live on when you retire? Your pension may not be linked to inflation, so your fixed pension payments may be worth much less a couple of years down the line. At South Africa’s current inflation target of 6%, your pension will be able to buy only half of what it could at the beginning after 12 years. (see the “rule of 72“)

* Is the source of the investment advice credible? (see the “pump and dump” post) Is the investment option suitable to your ability and willingness to take risk?

* Do the insurance quotes you compared have the same benefits? Some policies may provide complimentary car rental when you have an accident while some may not, for instance. Do you have enough insurance?

* Do the savings accounts have penalties you should know about? What happens when you have to withdraw your money for an emergency. One savings account may have the highest interest rate, but have the highest penalty when money is withdrawn before the end of the lock-up period.

* Does your Medical Aid provide the benefits your family use most? (see this “medical aid reader question“)

You should think of a Financial Advisor as your “Personal Finance Coach”. You are still responsible for your own financial affairs, but you have someone who can look at the big picture, chart a course for you to reach financial security or look over your shoulder when you are about to make an important financial decision.

Being destitute in retirement or leaving your family with no assets if you die are much too important to leave to chance. Find someone who you can trust with the necessary expertise to ensure you can provide for yourself and your family now and in the future.

Kevin Mzansi

What is Value Investing?

Value investing is the investment philosophy where stocks are chosen based on the belief that the price quoted on a stock exchange is different from its real or “intrinsic” value.

Benjamin Graham, who is considered the father of Value Investing, used to contend that world markets are like a really moody person. He called it “Mr. Market”.Sometimes Mr. Market is grumpy: prices go down and you can buy assets at a steal. Sometimes Mr. Market is happy, prices go up and you have to pay a lot to buy anything. These are exactly the same assets that are being bought or sold on a good day or a bad day!

The market prices of assets on a stock exchange vary regularly. These prices are determined by the forces of supply and demand – the amount of money that a buyer and seller are willing to exchange to gain or dispose of the asset. The price at which buyers and sellers are willing to trade can be quite arbitrary, at times.Value Investing

Warren Buffett, one of the most famous Value Investors provides an example:

“The Washington Post company in 1973 was selling for $80 million in the market. At the time, on that day, you could have sold the assets of the company to any of 10 different buyers for $400 million, probably appreciably more. The company owns the Post, Newsweek, plus several television stations in major markets. These same properties are worth $2 billion dollars now (1984)”

Then most important phrase in value investing is: What is the business really worth?

Value investors believe that if you buy $1 of assets for 40 cents, there is far less risk than if you buy $1 of assets for 70 cents. Modern portfolio Theorists believes the opposite – the $1 asset selling for 70 cents is less risky than the $1 selling for 40 cents.

This contrast in philosophy is due to the concept of “Beta”. “Beta” is the price variation of the stock compared to the market it trades in. Modern Portfolio Theory is definitively against any form of uncertainty. They prefer a certain gain or loss of 2 cents to an uncertain gain or loss of 40 cents. A Beta of 1, would be a stock, that, if the market goes up by 1%, the stock goes up by 1% (1 X 1). With a Beta of 2, if the market goes up by 1%, the stock goes up by 2% (1 X 2). This also applies to the downside: if the stock has a Beta of 3 and the market goes down by 2%, the stock will go down by 6% (2 X 3).

This is why Modern Portfolio Theorists contend that $1 of assets that sells for 40 cents would be more risky than the same assets that sell for 70 cents. For them, Variation = Risk, therefore this Beta or “variation” in price (40 cents to $1) is double the variation of the second instance (70 cents to $1).

The value investor does not follow this logic: the $1 of assets that you can buy for 70 cents would be riskier than the $1 of assets that you can buy with 40 cents…. Really?

The trick with value investing is to leave yourself a safety margin. You’d rather buy the $1 of assets for 20 cents than 93 cents…

There are two big risks with value investing:

The price may take a long time to catch up to intrinsic value. If you buy the asset for 50 cents and it goes up to it’s intrinsic value, $1, in one year, you would have doubled your money (100% return per year). If the price of the asset rises to $1 in a 100 years time, the return per year will be close to 0% and you should have put your 50 cents somewhere else.

The price may never reach its intrinsic value. The $1 of assets may be selling for 50 cents, because one of the sellers knows that the products the company sells may become worthless very soon.

Value investing is an investment discipline that has been shown to be a very effective and profitable. Don’t think that it is easy, though. Determining the “intrinsic value” of a company can be a very complex process.

Kevin Mzansi

How to take advantage of your own laziness

We are all naturally lazy. Even if we are excited or energetic about something, we revert to laziness once the thrill has worn off. This is the principle behind the behavioural finance concept of “Status Quo bias”.

Advertisers and Marketers trap us with this every day. How many of you have ever signed up for a gym membership? What generally happens is that we go for a while and then stop. We think: “I’ll start again once …(fill in the blank)… occurs. In the meantime, we continue to get billed for months before doing anything about it.laziness

I have a rather embarrassing story myself, from when I started an Internet store. I paid a SEO company to do Search Engine Optimization to help with search engine ranking. I was billed every month, for a couple of months without any Sales or change in search engine visibility. Basically, I was depositing money into their bank account every month for doing nothing. Took me a while to stop the service, but in that time, they had been filling their coffers with my hard-earned money. This is “Status Quo bias” hard at work.

How can we make this work for us?

Status quo bias can also be turned around and used to our own advantage. The basic principle is to set up something that would have a positive effect on our lives and then make it mildly annoying to get out of.

Here is an example:
Have your employer direct-deposit 5% of your take-home pay into a savings account. You will notice that after a while you will not even miss the deduction. If you really need to, you can reverse the transaction, but this generally never happens because it is a pain in the you-know-what to do. Meanwhile your savings are merrily growing into a significant amount. You can do the same trick with investment and retirement accounts.

What other ways can you think of to use Status Quo Bias to your advantage?

Kevin Mzansi

Ladies: Do you know everything about your family finances?

Today we celebrate Women’s day in South Africa. For this post I conscripted the help from the amazing women in my family. Ladies: do you know what is happening with your family finances?

Women live much longer than men. Any financial missteps taken in early life (on your behalf) could leave you destitute when you are least able to work. It is everyone’s responsibility to make sure that whoever is in charge of the family finances does not take too much risk in their retirement portfolios. Couple this with ensuring that you, as a family unit, save enough for retirement and you have a winning strategy.

The risk of financial ruin at the end of a relationship is usually disproportionately skewed towards the wife or main care-giving partner. Are you prepared if your relationship ends, either in the divorce court or in the coffin?Family Finance

When approaching this exercise, make sure to go at it the right way. Your actions may be interpreted as a sign of mistrust. You don’t want to cause strife in your relationship by looking like you’re trying to find something! Make sure to approach it from a point-of-view of education and self-examination – just in case something bad were to happen…

 

Are you aware of all your accounts?

Sit down with your partner and pull both your own and your partner’s credit report and copies of recent tax returns. This will tell you about all credit accounts open, sources of income and deductions. You will also be able to ascertain the existence of investment accounts, retirement accounts and business accounts. If you do a budget, compare the income with expenses to check your cash flow if you were to land up in an emergency situation.

Do you know what happens if your partner dies?

Do you know where the will is? Are there emergency accounts that can be tapped for funeral expenses or living expenses for a couple of months? How can you access these accounts if your partner is no longer able to? Do you have life insurance and where is the paperwork? Have you spoken about a living will or medical power of attorney (to pull the plug or not?) Are you aware of the insurance you have and what it covers?

Gather all this information and store it somewhere securely, be it a safety deposit box at the bank or online with a service like Dropbox. If you have concerns after this exercise it may be a good idea to contact a Financial Planner who specializes in handling family finances.

The time for women to trust and hope that everything is OK with their family finances is over. Whether you are a homemaker,single or part of a dual-income family, it is the responsibility of both partners to take care of their finances. Empower yourself today and get involved!

Happy Women’s day, South Africa!

Kevin Mzansi

How long does adverse credit information stay on your credit report?

If you are late on a credit card payment, installment loan or a home loan, for instance, there will be consequences to your credit score.  Any late payment, judgment or other credit event will be reflected on your credit report. This may lower your credit score and make your interest payments more expensive, as well as make it more difficult for you to access credit.Credit Report

Here is a list of negative credit events and how long they remain with you:

* Late payment: 24 months
This can be a late payment of a day, months or longer. On your credit report there will be a grid with all your payments for the last 24 months. Each of your payments will reflect on the report and, if it was late, how late your payment was. Every month, the oldest record (from 24 months before) drops off your credit report and the newest payments will be recorded.

* Judgments: 5 years
A judgment is when a court of law instructs you to pay a debt. This normally happens when you ignore multiple notices from the lender and the lender goes to a court to force you to pay.

* Notices:
Administration orders: 10 years
Rehabilitation orders: 5 years
Sequestration orders: 10 years

“A notice is a legal action that has been taken against you after you have failed to pay a debt or outstanding account.” (source: transunion)  If you have notices on your credit report, you should consult with an attorney or legal representative for help to deal with the notice.

* Default:
Enforcement action listings: 2 years
Subjective action listings: 1 year

These are when the credit provider has listed you for non-payment and is planning to take legal action. The first instance is when legal action has been taken and the second is where you are deemed something like a “slow payer”, for instance.

If you have been liquidated, there is no limit on how long the record can remain on your credit report. Individuals in debt counseling will have this information recorded on their credit reports until they are issued with a clearance certificate.

Credit enquiries stay on the report for 2 years. Too many enquiries could be a red flag. It normally points to an individual taking out loans to meet the payments on other loans. If you don’t recognize the institution who made an enquiry on your credit report, it can point towards identity theft or fraud.

How does one dispute records on your credit report?

Contact the credit bureau. The credit bureau will contact the credit provider and if the credit provider cannot prove the information that is disputed by the consumer, the credit bureau must remove the information from its records within 20 days and let all the other credit bureaus know.

If you are still not happy about how the dispute was resolved, you can complain to the Credit Ombud by calling 0860 662 837 or emailing them at ombud@creditombud.org.za.

Kevin Mzansi

How is your credit score calculated?

Now that you have your free credit report, you may start to wonder about what your credit score means. Credit providers use your credit reports and credit scores to judge their risk when lending money to you. You can obtain your credit reports for free, but you have to pay to see your score. What goes into a credit score?

Each credit bureau actually has their own credit scoring system for you. They all use basically the same information, but differ on how much weight they put on different factors. Some may place more importance on your payment history than others, who may place more emphasis on the length of your credit history, for example.

Credit Score

The main components of a credit score are:

* Payment History
This is how prompt your payments are and if you have paid as you agreed. Information in this area may include whether you have past due items, negative public records (eg. bankruptcy), late payments and how late they are and how long ago negative credit events were.

* Amounts owed
This is the number of accounts you have, the account balances, how much of your credit you have used compared to how much credit you have available. The credit bureaus also look at the balances on different types of accounts – a big balance on a home loan/bond is viewed quite differently than a big balance on a credit card!

* Length of credit history
The longer your credit history, the better your credit score. If you keep everything current your credit score should improve as time goes on. The longer you have credit accounts open, the more “proof” you have that you pay everything on time and therefore the more creditworthy you will be. If you decide to cut up all your credit cards, but one, you should pick the one with the longest credit history to keep open.

* New credit
The more new credit you have, the riskier it looks to lenders, because it has the appearance that you are loading up on credit for a spending spree. The credit bureaus check on how many new credit accounts you have opened, how long ago they were opened, number of recent enquiries and whether the new credit lines actually point to a better credit profile after a period of payment problems.

* Types of credit used
The number of and variety of different accounts (for example, store credit, bonds, credit cards or installment loans). The presence of a home loan, for instance, could point to greater stability on the part of the client, compared to a long list of store credit cards, for example.

What is a good credit score? It depends on the credit bureau. Each have their own scoring system. They will, however, give you a range so you can judge whether your credit score is good or not.

How long does negative information stay on my credit report? Look out for my next post.

Kevin Mzansi

What’s on a Credit Report?

One of the most important things that you have to monitor in personal finance are your credit reports. You can get one free credit report per year from each of the credit bureaus here in South Africa. What is actually shown in your credit report? Let me explain the usual entries…Credit Report

Personal Details:
They get this information from any enquiries for credit that you have made. Generally, it includes things like name, identity number, occupation, employers, marital status, physical address and telephone numbers.

A credit summary:
This is usually above the personal details section, after the personal details section or at the bottom of the credit report. In this section they will show any adverse credit listings, such as late payments of accounts, judgements, enforced action or rehabilitation. This information is obtained from credit providers or is in the public domain.

Accounts:
A summary is shown of all you credit accounts. Normally it shows how long they have been open, payment history, the credit limits and the amounts borrowed. This is generally shown over a 24 month cycle.

Only judgements that are because of a credit agreement will show up on your credit report. You will not find late traffic fines on there for this reason.

Everyone actually has multiple credit scores, which are calculated based on the information in their credit reports. These provide an easy way for lenders to judge your creditworthiness. You are entitled to a free credit report, but you have to pay to see your credit score. In my next post I will discuss how your credit score is calculated.

Kevin Mzansi

You can view your credit report multiple times a year for free!

Yesterday I spent an excruciating couple of hours playing phone-tag. Why? My credit line on one of my credit cards was dropped because of an account that was sent to collections. It was actually an error – an account I had paid and closed was wrongly shown as delinquent. I could have saved myself a couple of hours of Sherlock-Holmes’ing about if I had just looked at my credit reports!Credit Report

Your credit reports are very important because
* it tells lenders how creditworthy you are and can affect how much interest you pay
* helps insurance companies in assessing insurance applications
* can help in tracing you if you have unclaimed benefits, such as pension or insurance claims
* can show fraudulent activity (for example, accounts opened that you know nothing about)
* can be used if you apply for a position that requires trust and honesty or involves handling cash

I don’t know about you, but I will feel very silly if I am denied an employment position or pay double of what my neighbour pays on his bond because of a mistake on my credit report!

There are 11 credit bureaux here in South Africa registered with the National Credit Regulator, but only 5 are full members of the Credit Bureau Association. Looking at your credit reports at these five bureaux (CompuscanConsumer Profile Bureau, Experian, Transunion and XDS) will give you a good overview of what is in your credit report.

You are entitled to one free credit report from each of the bureaux during a year. Something I do is get a free report from a different bureau every 2 months (so, 6 reports per year), so I have a good idea of what is happening with my credit and can catch identity-theft before damage is done.

How do you get your free credit report?
1. Click on this link of the list of Credit Bureaux in South Africa (the ones with full membership are linked, above)
2. Contact the specific Credit Bureau telephonically or go to their website (most have a big banner on the top saying something like “free credit report”

South African credit bureaux have records on 19.5 million credit-active consumers, approximately 9 million which are impaired! (1st quarter 2012) If you ask me, this is absolutely insane!

Only 120,000 credit reports were issued in the first quarter of the year – that is out of 19.5 million records! We, as South Africans are not taking advantage of this right given to us in the National Credit Act.

Do yourself a favour: Get a hold of your free credit report, regularly and have a look at what it says!

Kevin Mzansi