Prepare yourself in case of a property fire

About two weeks ago my father suffered the loss of his house through a fire. Through the experience I realized some things that I have never thought about before, but which were key for us. Let me share these with you:

1. Insurance

You have to insure yourself, both for the structure and contents. Think you have a bunch of junk in your house that’s not worth anything? That may well be true, but you still need to replace the items when they are lost or damaged. To save money on premiums, it may be worth your while to only insure the items that are expensive to replace, such as furniture, big appliances and computers. The balance for replacement purchases will then have to come from your emergency fund.Property Fire

2. Have an escape plan

Here in South Africa, we have a lot of crime. Most houses have burglar bars on every opening that someone can possibly come into the house. The drawback is that if you need to get out for some reason, you won’t be able to. Always make sure to know exactly how to get out in an emergency.

3. Keep all your keys in one place

When my dad ran out the door, he just scooped up all the keys from the side table as he was leaving the house. He could move the vehicles and open doors of buildings that were not affected.

4. Keep copies of important documents off-property

Wills, copies of identity documents, bank account numbers etc. can all be kept at a safety deposit box at your bank, for example. Also, if at all possible, scan your old pictures and store them electronically. A good way is to use a service such as Dropbox.

5. Let your loved ones know of neighbour’s telephone numbers

You may not have any interaction with the neighbours where you live, but it may be important if you need to find out what is going on. In our instance, we only had the house number and my dad’s celphone number on hand, both of which were in the fire. We suffered through a long, anxious period between when we heard about the fire to when we actually could get hold of someone to find out if my dad was okay.

6. Have some idea of what your insurance contract covers and relevant telephone numbers

One of my dad’s vehicles was damaged as it was moved out of harm’s way. We were calling towing companies to find out how to get the vehicle to the dealer to get it fixed. Halfway through the exercise my sister remembered that the vehicle was insured! After one call to the insurance company everything was organized.

During a traumatic experience like this one, it is very difficult to think rationally. Make it easy on yourself and your family by being prepared.

Do you have any things that you can recommend to get prepared for this kind of traumatic experience? Comments are always welcome…

Kevin Mzansi

Image by: Bruce Berrien

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Always remember what is important (part deux)

In the last post I started to explain about my crazy fortnight and how I was reminded of always remembering what is important to you. In this post I will complete the explanation of what happened.

Last Friday, my baby sister had a car accident. She was driving along one of the municipal roads when a hooligan driver rushed onto her like he wanted to drive right through her. She looked in the mirror to see if he was going to go past her on the right or the left. Unlucky for her, the driver in front of her braked at the same time. She tried to avoid the car in front of her, but was only halfway able to get out of the way and so had a partial collision. Luckily, she was okay, but the car ended up being written off.What is important

The other driver in the collision could see that she was still in shock and was so nice to her. My stepdad actually called him afterwards and thanked him. The other driver took off when he saw the accident in front of him.

We feel really lucky and blessed that she is okay. The car can be replaced, but she can never be!

The next day was the turn of my mom’s 60th birthday party.

The birthday party was organized by her brothers and sisters. The actual event was held at my aunt’s home. In total, there are nine siblings – three males and six females. My mom is the 3rd eldest. All but one could attend the celebration, so it was a great family reunion.

Everyone contributed something to the celebration, be it help with the decorations, preparing the venue or preparing food. Just over 100 people attended the party and fun was had by all.

The next day, the family gathered to go through old photos, birthday messages and recount amusing tales from younger days. The sense of family and togetherness was amazing and something that I will always remember.

I feel really grateful for my loved ones, friends, family and neighbours that stood with us during these tumultuous two weeks and all the “together-time” we could enjoy last weekend.

Always remember what is important!

Kevin Mzansi

Always remember what is important

It’s been a crazy two weeks in the Mzansi household. Firstly, my dad’s house burned to the ground, then my little sister wrote off the car in a car accident. The day after, my mom celebrated her 60th birthday.

I count myself very lucky: both my dad and my little sister are fine, physically, although my dad had to get a couple of stitches on his hand. The birthday party went well and was enjoyed by the 100+ guests at the party.

During times like these you really get a sense of what is important in this life. Stuff comes and goes – people are all that matter.What Is Important

My dad actually built our house himself, over 7 years. During that time we lived on the property in a granny flat that was built first. Lucky for us, the granny flat had no fire damage, so my dad could move straight into there, although it took a couple of days to have the water and electricity rerouted away from the main house.

I cannot stress enough the amazing support he received from neighbours, friends and family. Within a couple of hours, a neighbour had given him some cash, without being asked, to get a temporary ID and celphone. Another neighbour had driven with him to the regional Home Affairs office, around 45 minutes away, to go apply for a temporary ID and some family and friends had given him a bed, bedding, a microwave, kettle and other appliances and food.

We are all still very sad about the loss of the house. Especially poignant for us was the piano, which always provided us with endless entertainment over 25 years. The property was insured, so the insurance is doing its thing, but we all know that it will never be the same.

Above all, I was just grateful that my father was okay. All the “stuff” would not have mattered a bit if he was not. We managed to recover some photos and clothing, but it is just a bonus, after all.

In my next post I will chat a little bit about the car accident and the party.

Kevin Mzansi

Really Standard Bank? Take out a personal loan to go on holiday?

A week or two ago I saw a television advert for personal loans by Standard Bank. The premise of the advertisement is that the main character’s wife is invited by a friend to visit them in Switzerland. The gentleman tells the audience about how he went to the bank and received a personal loan to fund the trip. The ad finishes with pictures of the family playing in the snow.Standard Bank
This really irks me:

Since when is it good financial advice to take out a personal loan to go on holiday?

I understand that banks are in the business of providing loans, however, this advertisement just felt a little irresponsible to me. Debt levels here in South Africa are at record levels. Do we really have to encourage people to take out personal loans for luxuries?

What I’m particularly concerned about is the endorsement effect of this advertisement. Someone who is not financially savvy may think it is okay to take out a loan every time they need to go on holiday, because “the respected bank” says so.

How are the banks making sure that clients who walk into the bank don’t blur the line between “financial adviser” and “consultant”? Financial Adviser implies some fiduciary duty, for me. They are in a position of trust and should keep the client’s best interests at heart. A “consultant” gets a bonus when they close a loan. Since banks provide both the services of financial planning and loans, I don’t think enough is done to highlight this important distinction and the inherent conflicts of interest involved.

We should be encouraging a culture of responsible saving for big-ticket items, not finding someone to give us a loan every time we want to buy something.

This advertising angle of Standard Bank’s, for me, is not AYOBA!

Kevin Mzansi

You may as well swing for the fences! (Q2 update)

The time has come to revisit my goals for the year and make adjustments, if need be. As they say: the road to success is paved with goals.

To be honest, I felt a little self-conscious as I re-read my goals page. It feels a little strange announcing my big, scary, long-term goals in public. After some thought, however, I realized: I may as well put it out there and swing for the fences!FinancialGoal

As Van Goethe says:

“Until one is committed, there is hesitancy, the chance to pull back, always ineffectiveness. Concerning all acts of initiative and creation, there is one elementary truth, the ignorance of which has killed countless ideas and splendid plans: The moment one truly commits oneself, then Providence moves too… Whatever you can do or dream you can do, begin it! Boldness has genius, power and magic in it.”

Here is a refresher of my goals and how I am doing so far:

Financial:

* 4-figure Internet income by December
* $6,000 debt paid off

Still slowly working on these. My Internet income now sits at just over $10 for an article that was published a couple of years ago on Yahoo Finance. This month I will be growing my archive of articles to try to earn more residual income. My debt currently stands at $5,961.10. I plan on paying this off more aggressively starting at the end of July.

Professional:

* Pass the CFP Case Study exam
* Gain 6 months of experience as a Financial Adviser
* Write and publish 54 articles and blog posts
* Write and publish 6 guest posts

I started studying last weekend and things seem to be going at a good pace. The job search is ongoing. I have published 7 articles in this last month, so I am 10% there…Woo hoo!

Personal:

* Find a Ms. Mzansi
* Complete Mango Languages Mandarin Chinese course
* Try out yoga once
* Take 20 wickets in the first half of the cricket season

Have not really focused on these since my last update, a month ago. We are busy with winter training right now at cricket and looks like I will be going on a cricket tour at the end of August. I may reach those 20 wickets quicker than I thought!

At first I was a bit apprehensive about putting personal goals up for everyone to see, but in the end I decided that they should stay, as it makes things a little more personal and interesting on here.

Hope you all have a good second half of the year and are still industriously striving to reach your own goals for the rest of the year.

Kevin Mzansi

A look back at Youth month

Here in South Africa, we celebrate “Youth month” every June, to commemorate the sacrifices made by the youth of this country in building the freedoms that we currently enjoy. June the 16th has special significance for us, because it commemorates the start of the Soweto riots of 1976 that highlighted the brutality of the Apartheid system.Youth

26 years on, the challenges facing the youth today are of a different kind.

According to the Mail and Guardian newspaper, more than 50% of 18- to 25-year-olds are unemployed. Zwelinzima Vavi, General Secretary of the trade union Cosatu, says that 73% of people who are unemployed are below the age of 35.

This is truly South Africa’s ticking time bomb. There is a a clear lack of education, shortage of skills and the challenge of lack of experience that youth have to face up to.

The key to getting South Africa’s youth working is to instill a culture of entrepreneurship in them. Trying to find jobs in the formal economy is clearly not working. I applaud the government and other stakeholders for taking the right steps to alleviate the situation.

Here are some resources if you would like to join the movement:

National Youth Development agency:

This agency aims at creating and promoting coordination of youth development matters

Gauteng Enterprise Propeller (GEP)

The GEP is a provincial government agency which provides non-financial and financial support to Small, Medium and Micro Enterprises in Gauteng.

Y-AGE:

The Youth and Graduate Entrepreneurship Development program (known as Y-AGE) is a collaborative partnership which attempts to practically stimulate a sustainable entrepreneurial culture here in South Africa. The program involves training, financial and mentorship support for young graduates in taking their first steps in Entrepreneurship.

Small Enterprise Development Agency:

Seda’s mandate is to implement the government’s small business strategy. The aim is to design and implement a standard and common national delivery network for small enterprise development.

Let’s hope that the stakeholders are able to agree on the details of the Youth Wage Subsidy, to encourage businesses to get our youth into jobs and working and that the Education Department is able to sort out their difficulty in getting textbooks to schools.

On a lighter note, I would like to congratulate individuals who made the Mail and Guardian’s “200 Young South Africans” list. It is truly inspiring to see what the Youth of South Africa are capable of.

July, here we come…

Kevin Mzansi

Do you buy something when you need it or do you buy when it is on sale?

When living frugally within our own personal budget, we are often faced with certain dilemmas. Some of the dilemmas are subtle, like this one: Should you buy an item when it is on sale or only buy the item when you need it? This comes down to a trade-off between certainty-of-use and price.

Why would you buy an item when you don’t need it? This often happens when you think you may need it in the future or it may be a “want” that you always strived to fulfill. A key concept, however, is that you need to purchase according to your spending priorities, in other words, buy the most important or pressing things that you need.Buy On Sale

The advantage of buying an item on sale is that you get a good price for the item. The disadvantage is that you may or may not need the item at the time or there may be other items with a higher priority.

When you buy something on sale, you are generally playing along with the retailer. The retailer has put the item up for sale for a reason, either to get rid of some stock or to entice you to come into the shop and buy other things as well. Taking full advantage of a sale is not necessarily a bad thing. You must just be certain that the sale item will actually benefit you and that you do not fall for all the other enticing items on sale. You don’t want to take useless items off a retailers hands and then have it sitting at the bottom of your closet. Garages and closets everywhere are filled with things that were bought on sale and were only used once.

The advantage of buying something when you need it is that you know that you are going to use the item. You are not always certain whether you have received the best price for it, though – you may be buying the item when it is in high demand and therefore more expensive. Another key advantage is that you make purchases that are aligned with your priorities, since you really do need the item. This is especially important if you have an over-arching goal, such as paying down debt.

The best option for the savvy shopper is to combine the two points of view:

* Always keep a list handy of exactly what you need and how important it is right now
* Research the items so you have a good idea of quality and price
* Figure out the best time to buy them or when they are on normally put on sale
* Purchase the item when the time comes

Remember that, with most things, it is not a straight price comparison. The “cheapest option” generally could end up being just that: cheap. Take a pair of shoes, for example. You could purchase the cheap ones for $30, but they may end up lasting for only a year, as compared to the $100 pair that you end up wearing for 5 years. That’s $20 per year for the use of the pair of good shoes, as opposed to $30 per year for the cheap pair.

Keeping your personal and family budget balanced takes discipline. Take care that your love of sales does not slowly eat away at your financial freedom.

Kevin Mzansi

Are stocks safe or can you lose all your money?

Normally Google allows you to see the search terms that has caused someone to end up on your blog. This morning, I saw this question on my Google feed and thought I should answer immediately:

YES! You can lose ALL your money…

Let me explain how this happens…Stock market

When you invest in a stock you are investing in a share of the company with the hope of sharing in the profits of the company after all costs have been paid. There is no guarantee of a profit, or, if there is even a profit, that you will get a share of the profit.

The share of the profits of the company that you receive is called a dividend. The directors of the company decide whether or not to pay a dividend. This decision is normally made each year or sometimes, each quarter. The directors have the option of not paying a dividend and using the profits for something else, such as buying more operating equipment, for example.

If the company continues to reinvest the profits and the company goes bankrupt, liquidators have to decide who is entitled to the assets of the bankrupt company. These assets are sold and the proceeds are distributed between parties who have a stake in the company. Unfortunately, shareholders are paid last, after all debts and other commitments are paid. Most of the time, there are no assets left over to return any money to shareholders. Shareholders would have lost all their money.

In some countries, there is also something called a “reorganization”. This happens when the debtholders (the parties the company has borrowed money from) are not paid. Debtholders have priority over shareholders and can force a company to go into reorganization. When this happens, all the shareholders are “wiped out” from the books and the debtholders end up owning the company. You would have lost all your money from investing in this stock. This is the reason you should always check on how much debt a company has before investing.

Investing in stocks is a good way to build wealth, but it is also fraught with danger. If you are new to the field of investing, it is best to speak to a financial adviser or wet your feet with collective investment products such as ETF’s or Mutual Funds/Unit Trusts.

Kevin Mzansi

Not putting your eggs in one basket is only the first step…

In the world of Personal Finance, “diversifying your portfolio” forms part of the basics of investing. Diversifying your portfolio is only the first step, however. To effectively manage risk you have to rebalance your portfolio periodically to maintain the diversification benefits. Let me explain why:

There are three main benefits to rebalancing.eggs 1 basket

Let’s suppose that you have decided to diversify your portfolio by dividing it between 5 different sectors: Technology, Industrials, Pharmaceuticals, Banks and Oil.

For your pharmaceutical position, you have picked a highly speculative company that is in the process of conducting clinical trials.  The trials can either be successful and multiply the value of the company or prove dangerous and make your shares worthless. Let’s suppose they are successful and the company quadruples in value. Your pharmaceutical stock now makes up 50% of your portfolio.

The problem is that the pharmaceutical company is still high risk. When you decided on the allocation, you knew that 20% of your portfolio would be at risk if things were to go wrong with the company. Now, 50% of your portfolio is at risk. The overall risk of the portfolio is now much higher. If you rebalance back to the 20% allocation, you will control the overall risk in your portfolio, which is the first benefit of rebalancing.

When you rebalance, you sell positions that have gains and buy positions that have losses to get back to the allocation that you chose. This forces you to sell high and buy low– the essence of making money in the stock market. This is the second benefit of rebalancing.

The third benefit of rebalancing is that it maintains your desired sector exposures. Let’s say you don’t rebalance and your oil company does well. It now comprises 33% of your overall portfolio. A third or your portfolio is now vulnerable to the price of oil dropping, where you only wanted 20% of your portfolio to be at risk. Rebalancing would have kept your risk to the level desired.

Rebalancing does have costs, however. Every time you trade there will be transaction costs and normally taxes that have to be paid on capital gains. To control costs you have to decide on when and how often to rebalance.

In my next post I will talk about two rebalancing methods: “calendar” rebalancing and “percentage-of-portfolio” rebalancing and their benefits and disadvantages.

Kevin Mzansi

Trade often? Beware of those pesky taxes…

We have probably all heard the expression: “investing for the long term”. One of the main reasons why investing for the long term is generally considered better than trading, is because of the costs of realizing a gain and having to pay taxes. One does not really appreciate the full extent of the money lost due to taxes, however. Let me show you the numbers…

In the following example I will illustrate what the tax implications are of trading often. I assume that capital gains taxes are paid at 13.3% – the current South African Capital Gains Tax rate. The calculations are based on the growth of a R1,000 portfolio, growing at 10% for 30 years. I also ignore annual exclusions (the amount of capital gain that is not taken into account in calculations) to make the point clearer.Trade

Let’s assume the investment gains are not taxed, as our base case. This compares well to tax-deffered accounts, like retirement accounts, where you invest with after-tax funds and are not taxed on gains when you retire. We will compare investment gains lost due to taxes with this base case.

Our R1,000 investment will grow to approximately R17,450 over the 30 years, if no taxes are paid.

1st comparison: The investor turns over (sells and replaces) one-fourth of his portfolio every year:
The investment will be worth R15,940 in 30 years time
The investor would lose R1,510 (= 17,450 – 15,940) to taxes over the 30 year term
This represents a loss of 8.7% (= 1,510 / 17,450) of your total possible portfolio if no taxes are paid

2nd comparison: Turn over half of your portfolio every year over 30 years:
The investment will be worth R14,550 in 30 years time
The investor would lose R2,900 (= 17,450 – 14,550) to taxes over the 30 year term
This represents a loss of 16.7% (= 2,900 / 17,450) of your total possible portfolio if no taxes are paid

3rd comparison: Turn all positions once every year for 30 years
The investment will be worth R12,110 in 30 years time
The investor would lose R5,340 (= 17,450 – 12,110) to taxes over the 30 year term
This represents a loss of 30.6% (= 5,340 / 17,450) of your total possible portfolio where no taxes are paid

Yep, that is correct…Your 13.3% per year capital gains tax rate has turned into a 30% loss of your possible investment gains due to taxes. This effect gets even more pronounced as tax rates rise. Here in South Africa, if you trade above a certain number of trades per year, you are classified as a “trader” by the tax authorities. This means that you have to pay tax on capital gains at your normal tax rates. These marginal tax rates can go up to 40%.

Let’s take the example of a person paying a middle class marginal tax rate (35%), who is classified as a trader by the tax authorities and turns over his portfolio once every year:
The investment will be worth R6,610 in 30 years time
The investor would lose R10,840 (= 17,450 – 6,610) to taxes over the 30 year term
This represents a loss of 62% (= 10,840 / 17,450) of your total possible portfolio where no taxes paid.

You read that right: 62% !!!

Over the long term, trading often will cost you a HUGE amount in taxes! This is assuming that you are successful in getting a 10% gain per year consistently – a feat in itself…

It is important consider this illustration when you decide on “getting a quick gain” by trading in-and-out of stocks. I hope this opens your eyes, like it did mine, about the effect that taxes have on gains when you trade often.

Kevin Mzansi