Podcast: More money, more problems

It’s becoming increasingly clear that access to money isn’t always the best thing. In last week’s episode, Pieter explained how access to a free house and investments didn’t make him great at money. Fat Wallet bestie and newly appointed spy, Wilhelm, sent us news from the front line this week.

Wilhelm started sorting out his money and sharing his journey with us when he was still a student. It’s been such a pleasure witnessing his pre-income journey. If you can figure out your money situation before you actually have any, how much you earn becomes irrelevant. You’ll be a financial success.

Sadly, the opposite is also true. I certainly learned that the hard way getting into mountains of debt in my 20s. The difference between me and Wilhelm’s new colleagues is that I earned a junior journalist’s salary (basically just enough to make my engineering friends feel sorry for me). The amount of damage I could do to my financial life was artificially limited by the amount of money I earned. Thank goodness.

This week we talk about the dangers lurking behind the piles of money of high-income earners. If you’re a low-income earner, this is good news for you too. These are the traps to watch out for before the dineros start rolling in.

We are giving away a prize for the first time ever. Sam Beckbessinger is the author of Manage Your Money Like a Fucking Grownup. She donated a copy of her book to one lucky Fat Wallet listener. Find out how to win it in this week’s show. You can find out more about the book here.

Kris

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Wilhelm writes:

The government takes really good care of its young doctors. We get a good salary, but the lack of financial education means that a lot of that money simply gets wasted.

I know of three doctors living in my building who purchased expensive brand new cars (Mercedes Benz A class AMG, Audi RS3) before receiving their first salary (and without receiving any help from their parents). They bought cars on credit using only a contract from the department as collateral, where it has often happened that people do not get paid the first month due to the poor admin/payroll/HR abilities of the DoH. One is paying an interest of 13% over seven years.

In PE we get the opportunity to live in the doctors’ quarters. It’s an old apartment building in an old and rather dodgy part of town, but it is centrally located with adequate security, a brilliant sea view. We get to live here for R1100 per month. My flatmate and I pay R2200 for a three-bedroom apartment.

Many of the new doctors don’t want to live in the flats. They are old, the outside looks a little dilapidated and the first two floors had a history of cockroach problems (which has been sorted out). They justify their choice with, “I’m only here for two years, I’d rather live close to the beach.” They pay between R6,000 and R8,000 per month for two- or three-bedroom apartments. This often excludes water and prepaid electricity or 24-hour security. That is 300-400% more than we are paying.

The last thing I noticed is the absolute ignorance towards savings and investments. Of the 52 interns who started at Livingstone hospital, I’ve chatted to more than 40 of them and only two of us have TFSAs.

One of them even said his financial advisor told him that TFSAs are “only for poor people”. People blindly follow the advice from advisors from companies like Sanlam (which gets sold to us under the Abacon brand), Old Mutual and Liberty with very few people even knowing that 10X, Sygnia and EasyEquities exist.

People have private financial advisors that have them investing in Funds with TER > 3% with many hidden costs. When they asked them about TFSAs, they said “oh yes we can talk about those when you want to get serious about saving!”

From a financial point of view I’m on target to have my TFSA topped up for 2018 within four months. My emergency fund is also growing nicely, already up to three months of living expenses.

I’ve also done a bit of research and found that you can save quite a few rand every month on insurance if you increase your excess payments when you claim. You should only do this if your emergency fund is able to cover the amount of excess that you are taking on (maybe even two or three times over so that one single claim does not consume your entire emergency fund).

Mary-Ann wants to know if her emergency fund can do better.

I am currently keeping my emergency cash funds of about R100k in my OST account which currently earns me 5.638% – better than a Savings account.

I’ve been trying to figure out if it is worth putting that cash into something like the Newfunds GOVI ETF or Newfunds or Satrix ILBI ETFs.

It seems to me like I could earn closer to 8% there although would need to deduct the TER from that return.

I realise that the capital could fluctuate slightly, but is there significant capital risk to make it not worthwhile? It could get liquidated if required in a few days. I would probably continue to keep a portion as cash for immediate emergencies that could not wait a few days.

What are your thoughts on pros and cons of this strategy? Where might I do better? I hate having money laying around not earning its keep!

Milan has an answer for Georgie regarding her bond insurance. I think he’s going to save many of you a lot of money.

Georgie mentioned having trouble trying to reduce her credit insurance premium. There’s an easy way around this issue.

The new credit life regulations state the credit provider must allow the bond holder to substitute the insurance cover as long as it provides the same level of benefits.

In other words Georgie can look to other credit life insurance providers for insurance on her bond and get a quotation based on the outstanding balance of the loan.

Antoine (who shared their thoughts on RA penalties being like debt) has another pearl of wisdom. They say, regarding when to spend and when to save

I heard a good explanation for this on “Money Management Skills”, from the Great Courses series:

Think of your past, current and future self.

If you borrow money, your current self is taking from your future self.

When it comes to a home or study loan, you can argue that future self will also benefit from the house or degree, so it is not that bad.

When you save money, you are sending some money to future self. In this instance, it doesn’t make sense that your 30-or 40 year-old current self can’t do anything fun while you’re still young and active and your future 90-year-old self lies in bed with millions in the bank.

I recently bought a new bike. I am able to buy a very fancy bike cash, but at a certain price the marginal gains are not worth the money you spend at my level of cycling.

Instead of spending thousands extra on a bike that’s a bit lighter, I decided to get a good enough bike and shoot some of that cash to my future 70-year-old self, so that he can use that cash to go on a nice overseas trip.

Last week Keith Mclachlan took issue with ETFs on Twitter. We gave him an opportunity to share his views on our website. Paul reckons he hit the nail on the head:

Because we all wish to improve our knowledge and understanding of investments we should welcome Keith’s view.

I just don’t see any misunderstanding;

He uses ETFs when/if he doesn’t know/understand a market and doesn’t have the time to study/follow it. That’s what we all do. That’s the reason ETFs exist.

Glad to see my investment strategy mirrors his.

Denzel just discovered fees. He’s not happy. He has questions.

I’m sorry to get back onto RAs again but the fees these f*ckers have been charging me is absurd. Now I know why my FA drives the car he does!!

I have two RAs:

One is with 10X (very happy, even though returns to date are average, market not great)

The other is with Liberty through a FA. They invest in Allan Gray and Coronation.

The fees are just crazy.

See below image of the EAC I have just come across. I’m so angry I didn’t look at this before.

I’ve been with them for two years after moving from Discovery (another mess).

Would it be best if i cancel the Liberty/ AG/ Coronation F*ck up and put it all into 10X? I know it seems obvious, but I have to ask!

I have a Liberty Evolve investment with them too

Again, crazy fees (like 8% it seems!)

I’m thinking of cancelling this and placing this straight into Easy Equities, spread over a year or two of course.

I have an emergency fund of just under three months that i’m building up to be six months where i’d be comfortable

Would it be best to use the evolve investment to get this to six months worth and then put the rest into my Easy Equities TFSA/ Equities?

The only debt I have is my wife’s car, Still owe about R200k on this – Pay off first?

Pieter wants to know how to find a cheap car.

In one of your earlier shows Simon mentioned how he figured out the year price (or something) to help him to buy an underpriced second hand car.

I can’t remember which episode and I am having trouble figuring it out. Could you please be so kind as to give the formula again?

Subtract the current milage from 150,000 (or whatever you suspect the Death Mileage is for a car). Divide your expected annual milage into the remaining milage for number years until you suspect the car might have no real economic value. Divide that number of years into the price. That gives you a ballpark of cost per year. Now you can compare cars!

Flipi is living in Japan at the moment. They wrote us about RAs a while back, but this week sent pictures of the cherry trees in bloom. Since this show comes out on a public holiday, I’m including them in the show notes. Seeing the Japanese cherry blossoms are a bucket list item for me. Thanks for sending them, Flipi!

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.