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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Clean beeped show is as below.
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:
- 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?
- 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.
- 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?
- 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!
The Fat Wallet Show is a no-nonsense personal finance and investment podcast hosted by Kristia van Heerden and Simon Brown. Every week we answer questions by a growing audience of finance enthusiasts. Submit your pressing money and investment questions to ask@justonelap.com. Join the Fat Wallet Facebook community.
