tag:blogger.com,1999:blog-55050990622217660002024-03-20T06:25:35.360-07:00The Cent(ri)frugal ForceLiving frugally in the search for financial independence in South AfricaMr Cent(ri)frugal Forcehttp://www.blogger.com/profile/03109073391727107186noreply@blogger.comBlogger22125tag:blogger.com,1999:blog-5505099062221766000.post-51430179531781753672015-10-03T06:26:00.002-07:002015-10-03T06:26:33.681-07:00Investment Basics III: Unit Trusts and Index Funds<span style="font-family: Arial, Helvetica, sans-serif;">This post has been a long time coming, sorry wonderful readers! Life has been good and busy lately so I suppose you can take it as a good thing that I don't prioritise writing the blog over living in the real world :-) That being said, I do enjoy writing these posts and I do believe that they are fulfilling a need. It's good to be behind the keyboard again.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Today's post continues our mini-series on Investment Basics. In the <a href="http://www.centrifrugalforce.blogspot.co.za/2015/09/investment-basics-ii-shares.html">previous post</a> we covered the basics of what shares are and we ended with the idea that <i>diversification</i> is important. We want access to lots of shares and we want to make it as<i> easy</i> as possible and as <i>cost-effective</i> as possible to own these shares. This is where <i>Collective Investment Schemes</i> (CIS) come in. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<div style="text-align: left;">
<b><span style="font-family: Georgia, Times New Roman, serif; font-size: large;">1. Collective investment schemes help overcome the prohibitive mass of capital required to invest</span></b></div>
<br />
<span style="font-family: Arial, Helvetica, sans-serif;">Dale, Ellen and Felicity are good friends looking to invest in three top South African companies. Dale has R 1 000 to invest. Ellen has R 1 500 to invest and Felicity has R 500 to invest.</span><br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJhsOZ3SJBhQWOCsPeNwd2Jttg6kx-658oESPF1TPgL84nPbZwsJ6qzu0s3-ujZIkkytJ9BQZGV0ZFmNjIRS-bL7KD-guHVqHxddelxo9yDtUvNuFqwDvwO7M8Ymblq4VZahgWzP4DSBE/s1600/three_companies.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="155" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJhsOZ3SJBhQWOCsPeNwd2Jttg6kx-658oESPF1TPgL84nPbZwsJ6qzu0s3-ujZIkkytJ9BQZGV0ZFmNjIRS-bL7KD-guHVqHxddelxo9yDtUvNuFqwDvwO7M8Ymblq4VZahgWzP4DSBE/s400/three_companies.png" width="400" /></a></div>
<br />
<span style="font-family: Arial, Helvetica, sans-serif;">They want to be diversified so they don't want to buy shares in a single company. They definitely want to own all three companies. From the table above, the minimum investment that <i>each</i> of them would need to make is R 3 000 (1 000 + 800 + 1 200) if they buy just one share of each company. But none of them have this kind of money at the moment! Ellen has the great idea of pooling all their money, buying the shares together and then owning them collectively. Collectively they have the R 3 000 (1 000 + 1 500 + 500) required to purchase one of each share. Collectively they will own one of each share and individually they will own a fraction of a share that is proportional to the amount that each of them put into the <i>collective investment</i>.</span><br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi7fcAK8hxYWAOmKrbGYGnhx_qWoFnoqlxDUP2jih4URzg6K0w3rLIRyUNgkwhyphenhyphensqcrSLQ-0xcEhHHh_pB2u963WWmgZHepM50QJ0kFkw_lsQ3Geipx45ODvdcnlloRGv3TXWghufKcCu4/s1600/collective_investment.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="201" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi7fcAK8hxYWAOmKrbGYGnhx_qWoFnoqlxDUP2jih4URzg6K0w3rLIRyUNgkwhyphenhyphensqcrSLQ-0xcEhHHh_pB2u963WWmgZHepM50QJ0kFkw_lsQ3Geipx45ODvdcnlloRGv3TXWghufKcCu4/s400/collective_investment.png" width="400" /></a></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">So by pooling their resources Dale, Ellen and Felicity are able to achieve diversification that would not have been able to achieve by themselves.</span><br />
<br />
<div style="text-align: left;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: large;"><b>2. Collective investment schemes help reduce trading costs</b></span></div>
<br />
<span style="font-family: Arial, Helvetica, sans-serif;">When buying shares there are various costs involved:</span><br />
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;">IPL (Investor Protection Levy) for 0,0002% of the value of the trade (excluding VAT). This is to fund the Financial Services Board's investigations into insider trading.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">STRATE (Share TRansactions Totally Electronic) costs R 10,92 for trades below R 200 000 , 0,005459% of the value of the trade between R 200 000 and R 1 000 000 and R54,59 for trades over R1 000 000 (all excluding VAT). This is trading cost associated with keeping electronic records of all shares traded on the Johannesburg Stock Exchange.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">STT (Securities Transfer Tax) for 0,25% of the value of the trade. This is only applicable when buying shares.</span></li>
</ul>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">The above three costs (IPL, STRATE and STT) are fixed and in general will not differ from one stock broker to another. The only real cost that differs between stock brokers are:</span></div>
<div>
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Commission charged on each trade. These typically range from 0,2% through to about 0,6%. There is usually a minimum brokerage which ranges from R 20 to R120. The minimum effectively means that you only achieve the stated commission percentage after investing a minimum amount. For example with a commission percentage of 0,2% and a minimum commission of R 20 the most efficient investment is R 10 000 (20 divided by 0,2%). For smaller trades you still pay your R 20 commission which will represent more than 0,2% of the amount invested.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Ongoing 'platform fees'. These are either fixed monthly or annual fees or are a percentage of your total portfolio with the stock broker. A portfolio generally doesn't need to be that large before the fixed fee option is more cost-effective. Some stockbrokers do not charge platform fees for certain products (such as Tax Free Savings Accounts or if only Exchange Traded Funds are purchased).</span></li>
</ul>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Okay, enough of the dull theory of the different costs associated with trading shares. Suffice it to say that there are costs involved and that we want to minimise these costs so that more of our money actually ends up in our investment. Let's imagine a slightly different scenario which takes trading costs into account.</span></div>
</div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Dale, Ellen and Felicity each have R 3000 to invest in the following companies:</span></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEjMC1uS80hE5R19re-8OA6rmsjC80gt2xIqwW-JQO2gxg9BOV_r_GKDEk3j9Ow2qZcVdwFgP2t3E3y124ia01RoxI8GpsgxAGxQP4j1mmA4OozNv9uYjlit4Lg72YURO6G9XBETO1VII/s1600/shares_2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="153" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEjMC1uS80hE5R19re-8OA6rmsjC80gt2xIqwW-JQO2gxg9BOV_r_GKDEk3j9Ow2qZcVdwFgP2t3E3y124ia01RoxI8GpsgxAGxQP4j1mmA4OozNv9uYjlit4Lg72YURO6G9XBETO1VII/s400/shares_2.png" width="400" /></a></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Let's also assume that they each have enough extra money to cover the trading costs. What we want to compare here is the total trading cost to each of them if they buy one of each share individually (Scenario 1, with a total of nine trades made) or if they pool their money and buy three of each share (Scenario 2, with a total of three trades made). If you want to skip the details of the following table feel free to go straight to the conclusion. I won't mind. This table is for those of you who really want to see exactly how costs the various trading costs are calculated. In the table below I've assumed a minimum brokerage commission of R 9,00 per trade (at 0,3% which means the minimum trade required to actually achieve the 0,3% would be R 3000). Wherever I've multiplied by 1,14 I'm taking VAT of 14% into account. In the table you can see that the only costs that are affected by the number of trades made are STRATE and the broker's commission. </span></div>
<div>
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBlAYW89feD3zmJJvnu9XcItSVm15RkuOUrjzLhpuPQvVJF2ODFOVisAakG9jHUmOQh0jzqjRRRq_FQGstOoMerE2cVxzS9W7by6iHYOnVwEw5dMDCEk4dlZl6CGj4HCr4eTyXClUXg-k/s1600/share_purchases.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="411" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBlAYW89feD3zmJJvnu9XcItSVm15RkuOUrjzLhpuPQvVJF2ODFOVisAakG9jHUmOQh0jzqjRRRq_FQGstOoMerE2cVxzS9W7by6iHYOnVwEw5dMDCEk4dlZl6CGj4HCr4eTyXClUXg-k/s640/share_purchases.png" width="640" /></a></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Although Dale, Ellen and Felicity could afford to buy one of each share by themselves, by pooling their resources, these three investors have managed to reduce their trading costs. Great!</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">So in summary, investing collectively does the following.</span></div>
<div>
<ol>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Reduces the amount of capital needed to achieve diversification.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Reduces the trading costs associated with purchasing shares.</span></li>
</ol>
</div>
<div style="text-align: center;">
<i><span style="font-family: Georgia, Times New Roman, serif; font-size: large;"><b>Types of Collective Investment Schemes</b></span></i></div>
<div>
<br /></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif; font-size: large;"><b>Unit Trusts</b></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Unit trusts (also known as mutual funds) are a type of collective investment scheme set up by various financial institutions that formalise the above process except on a <i>much</i> larger scale - we're talking millions or billions of rands in the total fund and tens or hundreds of thousands of investors!</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">You can get unit trusts with different allocations between equities, bonds and cash. <i>Equity funds</i> generally have about 100% exposure to equities and will offer the best growth over the long term. <i>Balanced funds</i> can have up to 75% invested in equities with the remainder invested in less volatile asset classes (bonds and cash). These balanced funds suffer less in an economic downturn and are eligible for use in retirement products (they are Regulation 28 compliant), but they will experience less growth than pure equity funds in the long term. You can also find funds that focus on investing in property or that invest in companies that pay good dividends.</span></div>
<div>
<br /></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">The good things you get from a unit trust:</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><b><span style="color: #274e13;">+</span></b> Trading costs are spread out across a large number of people.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><b><span style="color: #274e13;">+</span></b> Diversification is really easy to achieve.</span></div>
<div>
<b style="font-family: Arial, Helvetica, sans-serif;"><span style="color: #274e13;">+</span></b><span style="font-family: Arial, Helvetica, sans-serif;"> You don't need to micromanage selecting, trading and keeping track of different shares.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br />On the other hand:</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="background-color: #f9f9f9; line-height: 20px;"><b><span style="color: #cc0000;">−</span></b> Y</span><span style="background-color: #f9f9f9; line-height: 20px;">ou give up some control (someone else chooses individual shares to buy).</span></span></div>
<div>
<span style="background-color: #f9f9f9; font-family: Arial, Helvetica, sans-serif; line-height: 20px;"><b><span style="color: #cc0000;">−</span></b> You're paying someone (a fund manager) to make choices for you. These costs can add up and you don't necessarily always get value from an active fund manger.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">A range of actively managed funds can be bought from various providers. My personal favourite is Allan Gray. Before you choose a fund you should take a look at the fund "fact sheet" for that fund (just Google the name of the find together with the words 'fact sheet') so that you know what you're investing in.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif; font-size: large;"><b>Index Investing</b></span></div>
<div>
<br /></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Index funds are <i>passively managed</i> and stand in contrast to traditional unit trusts which are <i>actively managed</i>. </span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">With active management a fund manger is employed by the fund to do research into the various companies available on the stock market and to choose which companies to invest in and how much to invest in each company. These decisions are not once off and the active fund manger will buy and sell shares in accordance with how they read the prevailing market conditions.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">With index funds (sometimes also called tracker funds), a computer is used to track a given index (essentially a weighted average of different companies satisfying specific criteria). For example, a fund may track the top 40 companies in the stock exchange. As the various companies grow and shrink or move into or out of the index (the top 40 in our previous example), sales and purchases of an appropriate number of shares are done automatically. An active manager is not required to do research into which companies offer value. The costs of most index funds are thus much lower than those of a traditional unit trusts. (The ongoing costs of most actively managed funds are between 1,5% to 2,5% with most index funds closer to 0,5%).</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">For more on index investing see </span><a href="http://momanddadmoney.com/index-investing/" style="font-family: Arial, Helvetica, sans-serif;">Mom and Dad Money</a><span style="font-family: Arial, Helvetica, sans-serif;">, </span><a href="http://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market/" style="font-family: Arial, Helvetica, sans-serif;">Mr Money Mustache</a><span style="font-family: Arial, Helvetica, sans-serif;"> or </span><a href="http://jlcollinsnh.com/2013/02/05/stocks-part-xv-index-funds-are-really-just-for-lazy-people-right/" style="font-family: Arial, Helvetica, sans-serif;">jlcollinsnh</a><span style="font-family: Arial, Helvetica, sans-serif;">. All good reads with explanations far better than my own :-)</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Essentially with an index fund you will always get the returns of the market. You won't beat the market, but you also won't under perform the market. Since the market inevitably keeps growing this is not a bad thing and for long-term serious investors they are a really great tool. With actively managed funds there is potential to beat the market, but with that potential is the ability to under perform the market . Very few active managers will actually beat the market and there's no real way of predicting from one year to the next who those active managers are going to be. I</span><span style="font-family: Arial, Helvetica, sans-serif;">n which case there was no point paying additional management fees if you would have been able to get the returns of the market through a passively managed index fund.</span><span style="font-family: Arial, Helvetica, sans-serif;"> </span></div>
<div>
<br /></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">You can get unit trust index funds as well as Exchange Traded Funds (ETFs). The difference between these? Not much. The main difference is to do with how they are traded. </span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Unit trust index funds can be bought from Linked Investment Services Providers (LISPs) and are priced once per day. There are usually no costs associated with purchasing, selling or switching between these funds. However, there is usually a management fee and the internal costs associated with managing these funds are often (slightly) more expensive than ETFs (about 0,4% is pretty good). We have quite a few unit trust index funds with Sygnia.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">ETFs are bought directly from stockbrokers and trade in the exact same way as shares. So unlike their unit trust counterparts there are broker commissions payable when trading ETFs. However, the ongoing costs can often be lower with lower internal costs (you can get certain good ETFs in South Africa for as low as 0,2%). Our main ETF at the moment is the RMB Top 40 (which aims to replicate the Top 40 Index) which has a total expense ratio of about 0,2%.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">So do you go with unit trust index funds or ETFs? Or both? Here's a table summarising the main differences between unit trust index funds and ETFs:</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjebuIpUSHoOIiHnxbw27NQCKbTg-GSvzOORXe8j-ATSQveGfCdu1xDoXosoZmGAYgx8SopcmaYIS9URW7VRQWnIJJEzwx-whVVkvMb_71xan7tYbFOhEw6qZqm3SnRFulaaOKkIN2IPm0/s1600/index_funds.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="292" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjebuIpUSHoOIiHnxbw27NQCKbTg-GSvzOORXe8j-ATSQveGfCdu1xDoXosoZmGAYgx8SopcmaYIS9URW7VRQWnIJJEzwx-whVVkvMb_71xan7tYbFOhEw6qZqm3SnRFulaaOKkIN2IPm0/s640/index_funds.png" width="640" /></a></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">In short, if you're investing for the long term and you know what funds you want to invest in then ETFs are a good way to go. If you're investing for a slightly shorter term or you want the flexibility to change funds without worrying about the cost of doing so then unit trust index funds may be more appropriate. There is also absolutely nothing wrong with a blend of the two. </span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">My wife and I have a good mix between actively managed unit trusts (where we started), unit trust index funds and exchange traded funds. We're heading more and more towards ETFs, but we're holding on to the actively managed unit trust funds that we've accumulated so far.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Hopefully this post has helped you better understand how to achieve diversification in a pretty easy and safe way. I know it's been a bit technical but feel free to use the summarised bits if you want to skip over the details:</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: center;">
<b><span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>The Executive Summary</i></span></b></div>
<div style="text-align: center;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<ol>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Diversification is important. We want access to as many (good) shares as possible, as easily and as cost-effective as possible.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">The best way to do this is through making use of collective investments schemes.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Actively managed unit trust funds are one way to go. They cost more than index funds. My personal port of call for actively managed funds is directly from Allan Gray online.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Index funds come in two main types, unit trust index funds and ETFs. They are very similar products and will experience similar growth. The differences are only really in how they are traded and the costs of trading. Index funds are cheaper than actively managed funds. My personal port of call for unit trust index funds is through Sygnia and for ETFs through ABSA Stockbrokers.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">As with any summary (and here I'm referring to the blog post as a whole) there are subtleties and other options that I've ignored. These are just the basics to get you going.</span></li>
</ol>
</div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Yours frugally</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Mr Cent(ri)frugal Force</span></div>
Mr Cent(ri)frugal Forcehttp://www.blogger.com/profile/03109073391727107186noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-55588781096060009442015-09-06T11:02:00.003-07:002015-09-06T11:02:51.057-07:00Going Gift Free...and not hating it<div dir="ltr" style="text-align: left;" trbidi="on">
When my husband first suggested going (largely) gift free last December*, I was horrified. I adore presents; choosing them, wrapping them, giving them, getting them, unwrapping them... the whole shebang.<br />
<br />
But after a long year, the thought of trying to pick out non-bankrupting presents that weren't largely meaningless additions to clutter and/or consumerism was overwhelming.<br />
<br />
I agreed to try it.<br />
<br />
We persuaded most of our immediate family to do the same.<br />
<br />
Somewhat to my surprise, I didn't hate it.<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjk7hGmjGy7nMcpNzTKLElxCRpKNk2wXqySkwKX636K2nBTOGr_CS0ryIWdArGrjhYHUCwkQgUuHfQXMRuX82DOz8zvnSSaFjjB5IyW1WH1_ne6yBoXVd8c89OZCTLOGrhY99r_HeLNLg/s1600/5545810212_a084b56b2b_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="424" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjk7hGmjGy7nMcpNzTKLElxCRpKNk2wXqySkwKX636K2nBTOGr_CS0ryIWdArGrjhYHUCwkQgUuHfQXMRuX82DOz8zvnSSaFjjB5IyW1WH1_ne6yBoXVd8c89OZCTLOGrhY99r_HeLNLg/s640/5545810212_a084b56b2b_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Now WHY would you cut these delightful things out of your life?<br /><i>Photo credit: <a href="https://www.flickr.com/photos/jdhancock/5545810212/" target="_blank">JD Hancock</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Why Replace Gifts?</i></span></div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
Why do we give gifts? Sometimes we do it in order to satisfy social convention, but in the best case scenario we genuinely desire to show love and appreciation for another person by giving them something that they will enjoy, and something which they wouldn't necessarily have gotten for themselves.</div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
Now ask yourself: does my gift giving always actually end up doing this? And if so, is it the best way to do it?</div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
Often, it seems to me, we spend a huge amount of time and a scary amount of money trying (sometimes unsuccessfully) to express our love. The stress of malls and shopping centres in the run up to Christmas can consume our attention for weeks ahead of "the big day", and being in that environment often increases our dissatisfaction with the gifts we've chosen and the lifestyle we live: being exposed to all that consumerism and advertising definitely has an impact. It's all very well to be strong willed, but companies spend millions of rand trying to make their product irresistible to people just like you and me.</div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
And then, too often, the gift you settle on isn't quite right. You end up buying something for the sake of having something to give, but it isn't quite what the person needs or wants, and you end up feeling even more dissatisfied. </div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
(This isn't to say that when you find <i>that perfect gift</i> you shouldn't buy it. But don't buy it because you have to. Buy it "just because". We did that once. Three years on, the gift in question is still being used daily. This is a win.)</div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
But when you are buying bulk gifts for everyone, it's unlikely that you'll hit the giver's jackpot for everyone. You'll probably have to settle in some cases, and end up back where we started. Dissatisfied.</div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
Or they'll get you a bigger/better gift, and you feel guilty.</div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
Or they'll get you a smaller/worse gift and you feel grumpy. And guilty for being grumpy.</div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
Either way, you lose. Money. Time. Peace of mind. Even relationship value.</div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
Wouldn't it be better to take that time, and a small portion of that money, and spend it with the person you love?</div>
<div style="text-align: left;">
<br /></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCwdd0xpBghGME1hwUahTEVBP6U73ezBlv0vsvRhVnfKBIXgkFXfRub6WOsjlAuDWtsuBCNZz14dKvxQWFGN3LSyFnoX278GAnKicwESqVFddsXwtWjjqHXSKMUfEapBvg5SlBt8umDGk/s1600/4178265189_27e9b8f629_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="432" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCwdd0xpBghGME1hwUahTEVBP6U73ezBlv0vsvRhVnfKBIXgkFXfRub6WOsjlAuDWtsuBCNZz14dKvxQWFGN3LSyFnoX278GAnKicwESqVFddsXwtWjjqHXSKMUfEapBvg5SlBt8umDGk/s640/4178265189_27e9b8f629_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">The gift of time?<br /><i>Photo credit: <a href="https://www.flickr.com/photos/aigle_dore/4178265189/" target="_blank">Moyan Brenn</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
<div style="text-align: left;">
<br /></div>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Time and Effort</i></span></div>
<div style="text-align: left;">
<br /></div>
I am a firm believer in this principle: if you want to cut something out of your life, replace it with something better. Otherwise the gap will either hurt like the blazes, or get filled by something worse.<br />
<br />
We replaced Christmas presents with two things: time and effort. Or, as we phrased it amongst ourselves, acts of service and family activities.<br />
<br />
Basically, we got together and made two lists. One was of things that we would like to have done for us, or that we needed help with. My requested act of service was making a headboard for our bed. My dad wanted help painting his puppet theatre. My mom needed help with organising her digital music collection, and so on. Then we made (and diarised!) times to do these acts of service for - and more importantly, <i>with</i> - each other.<br />
<br />
Mostly, the acts of service weren't necessities - of course we would help each other with urgent and essential things at any time during the year. They were just those little niggly things that you want done. In that way, they mimicked an important quality of gifts: no-one wants nothing but socks and toothpaste for Christmas! You want things that you just <i>want</i>.<br />
<br />
The second list was of family activities. Climbing Table Mountain, going to the Planetarium, having a mini carol service and baking gingerbread were some of our chosen activities. Some activities involved a smaller subset of the gifting community, others were much wider. We made a conscious effort to spend large chunks of time doing things that we wanted to do, rather than letting the whole "festive season" take over and leave us exhausted but without having actually spent quality time together.<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhyA3nV_v3TqnXzm-NVJ9Ygiu4N6ZVSKIP-vptTar8WwMuH0CRJ-L0KvKRkDESQ_22wc9JSI8s5FhbPnofp8hU_BFZ6a5HArepqzVlVEskFE9wXItnfdQqtjPSS5oZcLMPod-3TTahwnUc/s1600/14227331877_fb914b8bfb_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="422" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhyA3nV_v3TqnXzm-NVJ9Ygiu4N6ZVSKIP-vptTar8WwMuH0CRJ-L0KvKRkDESQ_22wc9JSI8s5FhbPnofp8hU_BFZ6a5HArepqzVlVEskFE9wXItnfdQqtjPSS5oZcLMPod-3TTahwnUc/s640/14227331877_fb914b8bfb_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Family outings aren't limited to the human race!<br /><i>Photo credit: <a href="https://www.flickr.com/photos/kasio69/14227331877/" target="_blank">Boris Kasimov</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Saving Money vs Financial Freedom</i></span></div>
<br />
You will notice that I haven't spoken much about saving money. That's because although that was a side-effect of our Gift Free campaign, it wasn't the main purpose. In fact, some of our acts of service and family outings actually cost some money. Gasp!<br />
<br />
But although it wasn't about saving money as such, it was definitely about financial freedom.<br />
<br />
Because financial freedom isn't only about being free to quit work if we want to. It is also about having our happiness independent from money. It's about satisfaction getting disconnected from consumerism and reconnected to relationship.<br />
<br />
From this point of view, and in fact from many points of view, I am more than happy to repeat the Gift Free strategy this year, without feeling the least bit sad about those glittery packages.<br />
<br />
What would you do to replace gifts in your life? If you're not ready to replace them altogether, how could you reduce the impact of stress and consumerism on your gifting decisions?<br />
<br />
To freedom!<br />
jjdaydream<br />
<br />
<br />
<br />
<br />
<span style="font-size: x-small;">*If you're wondering why I'm talking about December/Christmas in September it is because we have had to start planning travel arrangements and family events already... so it is at the forefront of my mind. 2015 is almost over, people!</span><br />
<br />
<br />
<br />
<br />
</div>
jjdaydreamhttp://www.blogger.com/profile/12869446910551139215noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-62594687592192818292015-09-02T21:29:00.000-07:002015-09-02T21:29:00.832-07:00Investment Basics II: Shares<div>
<span style="font-family: Arial, Helvetica, sans-serif;">This post is designed to sort out some terminology that can be a bit confusing in the investment arena. Starting to invest can seem like a really scary thing. I know that when I first started I was almost too scared to actually start because there just seemed so much to know. It turns out that, yes, there is a lot to know, but not that much that you really need to know before you start. The important thing is actually to dive in and start once you've got the Basic Theory and Good Investing Principles down. Don't wait until you know everything before you start - remember that time in the market is one of your biggest friends when it comes to <a href="http://www.centrifrugalforce.blogspot.com/2015/05/introducing-two-pillars.html">compound growth</a>.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<div style="text-align: center;">
<b><span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Shares / Stocks</i></span></b></div>
</div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">What does it mean to invest <i>in the stock market</i> or to buy <i>shares</i>? A share is a very small part of a company that has chosen to list on a stock exchange. When you buy a share you actually own a small piece of that company. Let's do this by way of example.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Bob and Mike start a pizza company. They're extremely creative in the kitchen, but not so much when it comes to names. So they decide to call their company <i>Bob & Mike's Pizza Company</i>. Bob has R600 to invest in the company and Mike has R400 to invest. So to be fair, they agree that Bob will have 60% of the company and Mike will own 40% of the company. The initial total investment in the company was R1 000 and this was the value of the company. Several years pass [pages fly off a calendar, a clock spins really fast and a sun rises and sets several times through a window] and before they know it, their pizza company is worth R10 000. How did it get there? They've been working hard for years and any <i>profits </i>that they have made they've put <i>back into the company</i> (after taking modest salaries for themselves to fund their frugal lifestyles).</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">At this stage Bob and Mike decide that it's time to expand. They don't have any more of their own money to put in so they list on the Johannesburg Stock Exchange so that the public can <i>invest </i>in their company. Sure, they'll have to start sharing their earnings with the members of the public who are brave enough to invest, but the profits will be bigger too. Without access to additional capital from the public their growth will be severely limited (and you thought <a href="http://www.investopedia.com/articles/07/stock-exchange-history.asp">crowdsourcing was something new</a>?). Bob and Mike decide to slice their company up into 10 <i>shares</i>. Bob keeps three slices of the company and Mike keeps two slices (in keeping with their original 3:2 ratio of capital injection into the company). The remaining five shares they make available for sale. I'm a huge fan of pizza and I've been wanting to diversify into the industry for a while so I decide to buy one of the shares on their first day of trading which leaves four slices still available on the market for other potential investors.</span><br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaQtkf4sp1aGv3jKFI_Fyt6NEvU2wkmPuLp70jRgKoyCdr69ab1-dTgZXc24ldCiz9OTh90Rn5DXofi2iugkr1iBzsuh4EQ7_P2-dUKRQ-_TcTPRV7ZLPFA85nNYkCgwcvlmwy4BPlQug/s1600/pizza_shares.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="454" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaQtkf4sp1aGv3jKFI_Fyt6NEvU2wkmPuLp70jRgKoyCdr69ab1-dTgZXc24ldCiz9OTh90Rn5DXofi2iugkr1iBzsuh4EQ7_P2-dUKRQ-_TcTPRV7ZLPFA85nNYkCgwcvlmwy4BPlQug/s640/pizza_shares.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Georgia, Times New Roman, serif; font-size: small;"><b>Bob & Mike's Pizza Co.</b><br /><i>Photo of original pizza: <a href="https://www.flickr.com/photos/sharedrecipes/2269983942/">Food Recipes</a> (<a href="https://creativecommons.org/licenses/by/2.0/">CC-BY 2.0</a>)</i></span></td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">So how much does this one share cost me? Well in principle each share should be sold for the total value of the company (R10 000 on the day of listing on the JSE) divided by the number of shares issued (in this case ten shares). A simple way to calculate the price of a share would look like this:</span><br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjkG4aUm3RK5pTaTsl-iAea_6fqzFQC_avsQPZaXasj_hGGRkNv1m8En1rJE907SWT6sBKtvZKmYSszhXFPt6pKorR3MQTWkqvdaUw6BRoq3k7SgarR5qh7pnaoTTysQrq-zYC_u0davBU/s1600/simple_share_formula.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="65" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjkG4aUm3RK5pTaTsl-iAea_6fqzFQC_avsQPZaXasj_hGGRkNv1m8En1rJE907SWT6sBKtvZKmYSszhXFPt6pKorR3MQTWkqvdaUw6BRoq3k7SgarR5qh7pnaoTTysQrq-zYC_u0davBU/s400/simple_share_formula.png" width="400" /></a></div>
<span style="font-family: Arial, Helvetica, sans-serif;">Using this simple model my single slice of Bob & Mike's Pizza Co will cost me R1 000. Okay, fine. I now own 10% of a pizza company (1 share out of the 10 issued). </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">What does owning a share do for me?</span><br />
<br />
<i style="font-family: Arial, Helvetica, sans-serif;">1. The company pays me a share of the profits.</i><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">As the company earns money, I get my fair share of the profits. Now a company will not always pay out all of the profit to its shareholders. Some profit is retained by the company to aid future growth. Whatever profit is left over is paid out to the shareholders<i> per share </i>so the shareholders who own more shares get more of the profits. When a company pays outs profits to shareholders these are called <i>dividends</i>.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">If Mike & Bob's Pizza Co. makes R2 000 profit in the year following my share purchase they may decide to keep R1000 in the company to keep it growing. The remaining R1 000 of profit gets paid out to the shareholders. Because there were 10 shares the divident payout will be R100 <i>per share </i>and I will receive R100 because I own one share. Bob owns three shares so he will get R300 and Mike owns two shares so he will get R200. If the remaining four shares haven't been bought yet, then they are still owned by the company and those dividends are retained.</span><br />
<br />
<span style="font-family: Arial, Helvetica, sans-serif;"><i>2. My share increases in value as the company grows. </i></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">My investment has helped the company to grow (they can buy a bigger and faster pizza oven, hire more delivery staff start a new branch in a nearby suburb etc.). As the company's value increases the value of my share increases (and here's the important bit) <i>without me needed to put in any additional money or work</i>. If after a few years [more pages fly off a calendar] the company is worth R20 000 (according to the company's books) then my share (being 10% of the company) will be worth R2 000. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">This might be the <i>actual value</i> of the share, but this can be very different from the market value (what you pay for to buy a share and what you get you you sell a share). </span><span style="font-family: Arial, Helvetica, sans-serif;">A</span><span style="font-family: Arial, Helvetica, sans-serif;"> more realistic share price calculation looks like this:</span><br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjv5rJGADDpDF1jLGuVXW7xt8_y_IyrQnnZ6f3vQeiV1mTqB-K__LfLxrtt2mlF94RyvP4Fm4KsyIZkSHivDd-NhZuDyreNqvy2B2xKi47WUaFhMQfzkl2tYmJvep8XFXGrZvgiFOzCNLo/s1600/complicated_share_formula.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="126" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjv5rJGADDpDF1jLGuVXW7xt8_y_IyrQnnZ6f3vQeiV1mTqB-K__LfLxrtt2mlF94RyvP4Fm4KsyIZkSHivDd-NhZuDyreNqvy2B2xKi47WUaFhMQfzkl2tYmJvep8XFXGrZvgiFOzCNLo/s400/complicated_share_formula.png" width="400" /></a></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">The <i>market value</i> of a share depends on how the company is seen by the public (prospective investors as well as customers), how many shares are actually available for sale and how the company is expected to perform in the future. This is where most of the volatility of investing in the stock market comes in. The <i>market share price</i> goes up and down throughout the day and from day to day without the <i>actual share value </i>necessarily changing. The <i>actual share value</i> does change, but not from one second to the next. The actual share value changes as the company earns profits (and puts them back into company so that it keeps growing) or as the company makes losses. In the long run the the market share price can't help but mirror the actual share price. Public perception (and all the other complicating factors) can skew the share price in either direction at any one moment or even for several months or years at a time, but over a long period of time the actual value of the company can't help but be the real basis for the market value of the share. The market value of a share tends to bob up and down around the true value - the graph below might make this clearer. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhqExGpnE4NylDVBpXxWRd9etMCBUUVF5A02SuyWxu02YLYS21yDhSvRkZUux-Feqq2QB06_jjk0GG3cTIA-YO65WUnaVLC0AYsRgfgtv4_GAK2mZsJY2bRTb0-Bw29c5VRCVymenqOgJA/s1600/share_price_over_time_simpler.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="346" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhqExGpnE4NylDVBpXxWRd9etMCBUUVF5A02SuyWxu02YLYS21yDhSvRkZUux-Feqq2QB06_jjk0GG3cTIA-YO65WUnaVLC0AYsRgfgtv4_GAK2mZsJY2bRTb0-Bw29c5VRCVymenqOgJA/s640/share_price_over_time_simpler.png" width="640" /></a></div>
<span style="font-family: Arial, Helvetica, sans-serif;">Imagine a company that experiences fairly steady growth year on year - sometimes it may grow a bit faster, and sometimes it may grow a bit slower. The growth of this company is represented by the smoothly increasing blue graph. The green graph shows what the share price might be on the stock market at any moment. In the long run it tracks the blue graph fairly well. This means that when you come right down to it <i>in the long run</i>, the market <i>does actually</i> care about the actual value of the company - otherwise there would be no correlation between the actual share price and the market share price. I've annotated the same graph below.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKJyMTcK20Imwqsl9sRKZKnalGYEy4XWHwbdnaRaVK8yIV2ZoEfwDm_pgdszPncyZtItSGwtP_KsKMBzUhzL2SW9blrFyVnwoVyOmrkKbaNI9eDiBG7OhoImVv7TTSvqJg79BUAvF5Hco/s1600/share_price_over_time.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="346" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKJyMTcK20Imwqsl9sRKZKnalGYEy4XWHwbdnaRaVK8yIV2ZoEfwDm_pgdszPncyZtItSGwtP_KsKMBzUhzL2SW9blrFyVnwoVyOmrkKbaNI9eDiBG7OhoImVv7TTSvqJg79BUAvF5Hco/s640/share_price_over_time.png" width="640" /></a></div>
<span style="font-family: Arial, Helvetica, sans-serif;">Now, I need to come clean. What I've told you so far isn't strictly accurate for a <i>single</i> company. It's much better if we think of the above scenario and graphs as representative of <i>the stock market as a whole</i> </span><span style="font-family: Arial, Helvetica, sans-serif;">(the set of all publicly listed companies)</span><span style="font-family: Arial, Helvetica, sans-serif;">. So why is the above a little naive as far a single company goes? Well, although in the long run the market value might care about the true value of the company in the short term the market might not yet <i>know</i> the true value of the company. For example (Graph A below) hype could drive up the market value of the company in the short term. Meanwhile, the company itself may be in turmoil (the CEO is resigning, the storehouse burned down and the insurance hadn't been paid...). Sometimes the market just can't catch on fast enough until it's too late. The share's true value might hit zero in an extreme case and the market value will hit zero too. It is definitely possible to lose everything when investing in a single company. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHmD4tH3ghIbYt9P6DuHAtvqTmtLFoFfzONKxtKYUuUhV31ukHjqthiz8jb9GPgYkthJ-VdmyHqAcuMD_qIiJF6aRMc4lrDjq1TTR4Qb5QGeGdIeysvo4HJc9w6yOIj0sfKC8qUmA3UpQ/s1600/hype_and_crash.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="305" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHmD4tH3ghIbYt9P6DuHAtvqTmtLFoFfzONKxtKYUuUhV31ukHjqthiz8jb9GPgYkthJ-VdmyHqAcuMD_qIiJF6aRMc4lrDjq1TTR4Qb5QGeGdIeysvo4HJc9w6yOIj0sfKC8qUmA3UpQ/s400/hype_and_crash.png" width="400" /></a></div>
<br />
<div class="separator" style="clear: both; text-align: center;">
</div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">As another illustration, Graph B shows how volatile the market value for a single company (or even a single sector of the economy) can be. Graph C shows volatility, but over a large number of companies across different sectors of the economy the volatility is lower and the ride less bumpy. This is the reason why it is good to be <i>diversified</i>. Overall risk is lowered and the ride is smoother as well. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<div class="separator" style="clear: both; text-align: center;">
<span style="font-family: Arial, Helvetica, sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj80NB-VzkMlSrrh9mqODAosfYuvUjjMnP0e31_CjXtFzj0y13LzSIXhsugYn3TBr0Qv5ZQ5U7l_5hsG2I0Lxa5cnt5jeioglIINCrwEBE60BI0M5TB9QDar_9BIlI_JDicjKoCK4aVIhQ/s1600/one_company_vs_stock_market.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="236" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj80NB-VzkMlSrrh9mqODAosfYuvUjjMnP0e31_CjXtFzj0y13LzSIXhsugYn3TBr0Qv5ZQ5U7l_5hsG2I0Lxa5cnt5jeioglIINCrwEBE60BI0M5TB9QDar_9BIlI_JDicjKoCK4aVIhQ/s320/one_company_vs_stock_market.png" width="320" /></a></span></div>
<br />
<span style="font-family: Arial, Helvetica, sans-serif;">So we don't ever invest in a single company. We want to invest in <i>lots</i> of companies. But there are costs involved in buying and selling individual shares. Plus how many of each company should we buy?
</span><br />
<div class="separator" style="clear: both; text-align: center;">
</div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br />
In the next post we'll look at Mutual Funds (aka Unit Trusts) as well as Index Funds to see how we can achieve this diversification easily. These investments products are ultimately invested in shares (lots of shares in lots of companies) so it's important that you're comfortable with what a share actually <i>is</i>. Hopefully this post has helped give you sufficient detail as well as the bigger picture.</span><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Yours frugally</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Mr Cent(ri)Frugal Force</span></div>
Mr Cent(ri)frugal Forcehttp://www.blogger.com/profile/03109073391727107186noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-59925732927978520942015-08-30T10:52:00.002-07:002015-08-30T10:54:20.204-07:00Ethical Decisions: Avoiding the Fool's Choice<div dir="ltr" style="text-align: left;" trbidi="on">
We recently stumbled across a website called <a href="http://madeinafreeworld.com/" target="_blank">Made in a Free World</a>. This is about sourcing ethical products, ones which don't make use of what is essentially modern slave labour. They have an alarming survey called <a href="http://slaveryfootprint.org/" target="_blank">Slavery Footprint</a>.<br />
<br />
You fill in data about your lifestyle (in great detail, like how many rooms your house has, and how many pairs of pants you have!), and they work out how many slaves/indentured labourers work somewhere in the world to make that lifestyle possible. Obviously things like cotton, coffee, cosmetics and so on are really problematic. Electronic devices also seem to be a real problem.<br />
<br />
The two of us got 26 and 35 slaves respectively.<br />
<br />
This was scary.<br />
<br />
This is the number of people - including children - who work in conditions that I'm sure all of us would consider unacceptable in order to provide us with our insanely luxurious lifestyles. <br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh7TTuZu0mehzlqD-fHu7rflsheJJcuouvwVjfpFD0aPdeEXvcEbWVfOTxQ8xUo27t1aCCLWvf-fogA7pTzc4kTeuhnDikc9qo1Iry7bH5og6m7YdEudYq0QifH4HNtw0XrSBPnpgZjKac/s1600/1485773850_4404d408ab_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="446" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh7TTuZu0mehzlqD-fHu7rflsheJJcuouvwVjfpFD0aPdeEXvcEbWVfOTxQ8xUo27t1aCCLWvf-fogA7pTzc4kTeuhnDikc9qo1Iry7bH5og6m7YdEudYq0QifH4HNtw0XrSBPnpgZjKac/s640/1485773850_4404d408ab_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">The economic chains which keep people in slavery are just as real as these ones.<br />
<i>Photo credit:<a href="https://www.flickr.com/photos/10213764@N02/1485773850/" target="_blank">Trevor Leyenhorst</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
<br />
I recommend everyone does this survey. Rethink your life choices. It's a humbling exercise, and one which we should all do once in a while.<br />
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Avoiding the Fool's Choice</i></span></div>
<br />
Now I know that often ethical consumer choices are prohibitively expensive. So how can we save money but still consume ethically?<br />
<br />
This can be an example of a <a href="http://www.crucialskills.com/glossary/#q27" target="_blank">Fool's Choice</a> or <a href="https://en.wikipedia.org/wiki/False_dilemma" target="_blank">false dichotomy</a>. You feel like you have to choose between two bad options. Actually, there is often a third option.<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgeManSCDkTboYaMsu3Cf9kLyOdmTVykl-qHH7sCZkhXDtYp0lwdIBEdXMC4GWW8z6nV5qhgcEpOKvI05l9STgH-wLTDksfY3TdL-I_kSDZ6gczLH4D7JyWRmvCp1MszLY24c8GFcR-L10/s1600/11715566974_f823ee2792_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="314" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgeManSCDkTboYaMsu3Cf9kLyOdmTVykl-qHH7sCZkhXDtYp0lwdIBEdXMC4GWW8z6nV5qhgcEpOKvI05l9STgH-wLTDksfY3TdL-I_kSDZ6gczLH4D7JyWRmvCp1MszLY24c8GFcR-L10/s640/11715566974_f823ee2792_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">False dichotomy: forgetting the third option.<br />
<i>Photo credit: <a href="https://www.flickr.com/photos/danmoyle/11715566974/" target="_blank">Dan Moyle</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
<br />
Neither.<br />
<br />
Don't buy the dodgy product. And if you can't afford the good product, then buy nothing.<br />
<br />
Mostly, <a href="http://centrifrugalforce.blogspot.com/2015/06/living-without-want-cancelling.html" target="_blank">you don't actually need either of them</a>.<br />
<br />
Consuming less is a good idea anyway. Buying less saves money, cuts down on slaves and is also better for the environment.<br />
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>When there isn't a third option...</i></span></div>
<br />
Even food, the obvious exception to just <i>not buying anything ever</i>, can be part of the false dichotomy. Maybe the third option there isn't so much "neither" as "something else altogether", such local, in season fresh products.<br />
<br />
But nonetheless, we have to accept that sometimes there is a genuine payoff here, and we have to make a genuine choice between cheapest and ethically acceptable.<br />
<br />
This is a complicated, entangled issue. In each of these situations we need to make a moral choice as best we can. All I ask - and I am asking myself as much as I am asking you - is that we really think about the choice, rather than just grabbing the quickest, easiest, or even just cheapest option.<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-4lWYn9V03uhMYZECJTIv6IkmAzTHHyFoFajI1dqx9sR25N3XAVsrFzvdCytKLugMqi1XiHK00LRUfY3d35UAWTxvZch5M1wWawxmvStvSubrwE1s7c3967iyhvEy6KhJ-moFp9HEJyg/s1600/5209251530_63face7a41_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-4lWYn9V03uhMYZECJTIv6IkmAzTHHyFoFajI1dqx9sR25N3XAVsrFzvdCytKLugMqi1XiHK00LRUfY3d35UAWTxvZch5M1wWawxmvStvSubrwE1s7c3967iyhvEy6KhJ-moFp9HEJyg/s640/5209251530_63face7a41_o.jpg" width="460" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Think first. Consume later.<br />
<i>Photo credit: <a href="https://www.flickr.com/photos/taymazvalley/5209251530/" target="_blank">Taymaz Valley</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
Yours, in a most challenged frame of mine,<br />
jjdaydream<br />
<br /></div>
jjdaydreamhttp://www.blogger.com/profile/12869446910551139215noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-14293791446527811602015-08-25T23:58:00.000-07:002015-08-26T08:45:49.326-07:00Why Budgeting can be Dangerous<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="separator" style="clear: both; text-align: center;">
<span style="font-family: Arial, Helvetica, sans-serif;"><iframe allowfullscreen="" class="YOUTUBE-iframe-video" data-thumbnail-src="https://i.ytimg.com/vi/qxiypT1IbCE/0.jpg" frameborder="0" height="266" src="https://www.youtube.com/embed/qxiypT1IbCE?feature=player_embedded" width="320"></iframe></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Over this weekend, we went down a Youtube rabbit hole: <a href="http://onerandfamily.sanlam.co.za/episodes.html" target="_blank">The One Rand Family</a>. This was a Sanlam initiative (advertisement) during the month of July which was National Savings Month. The original version was <a href="http://finweek.com/one-rand-man/" target="_blank">The One Rand Man</a>, which ran during July 2014. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div class="separator" style="clear: both; text-align: center;">
<span style="font-family: Arial, Helvetica, sans-serif;"><iframe allowfullscreen="" class="YOUTUBE-iframe-video" data-thumbnail-src="https://i.ytimg.com/vi/9vscXNIyf7s/0.jpg" frameborder="0" height="266" src="https://www.youtube.com/embed/9vscXNIyf7s?feature=player_embedded" width="320"></iframe></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">The big idea was that the participants got their whole salaries for the month in the form of one rand coins, and locked away their plastic money for the duration. This not only gave them a very visual sense of what was going on with their money (stacking up piles of coin-filled plastic containers makes you aware of the size of your car repayments on a very visceral level) but also made them think twice before spending. When you've actually got to dole out your last few piles of one rands, it makes you think more carefully about whether you really need whatever it is. And when you've only got a couple of hundred rands and 9 days left in the month... well, then you really start changing your spending behaviour, at least temporarily.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Watching all of their episodes, as well as some other interviews with the participants, it seems that the biggest challenge for them was not making use of overdraft/credit card facilities when the cash flow got tight at the end of the month. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Even for those of us who aren't quite as extreme as the One Rand Tribe, using credit as an escape route when our money has vanished is a <a href="http://centrifrugalforce.blogspot.com/2015/06/the-beast-of-night-called-debt.html" target="_blank">very bad idea</a>, short of a once off emergency. Because unless we have saved a lot already, this means that we are spending next month's money this month, with no particularly wonderful prospect of making up for it next month. </span><span style="font-family: Arial, Helvetica, sans-serif;">Borrowing for lifestyle expenses means that a month's salary is not enough for a month's lifestyle; and it definitely won't be enough for a month's lifestyle plus debt repayments. Ask yourself: what will be different next month? The sad truth is </span><span style="font-family: Arial, Helvetica, sans-serif;">that next month we'll have the exact same problem except probably worse: after all, your salary won't be any bigger; it still won't be enough to pay for your lifestyle. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span>
<span style="font-family: Arial, Helvetica, sans-serif;">I</span><span style="font-family: Arial, Helvetica, sans-serif;">f you aren't careful, you'll end up getting further and further behind, unable to pay the full credit card bill every month and therefore creeping further and further into debt. As soon as you start paying the minimum payments rather than the full balance it is scarily easy to end up in a situation where you are constantly a month or more behind: and then half your income is going to disappear into repayments that hardly even touch the capital of your debt but instead scrabble around in the foothills of a massive interest rate. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span>
<span style="font-family: Arial, Helvetica, sans-serif;">A truly alarming number of South Africans seem to be in this predicament.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span>
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_2lvx3gsseWyzJMEIFWNLhYpJKNm0QAHzfyhhbBzTJ1R_pwKAFuP_gpiWrHNveh-6w3mdZLY4NFL1j5NPtWHxnmgGFa5jQs2c4BYjF0I7iseH5ZDUUQIH-eETVkP8o_EkFqqC6Iqxcl0/s1600/16837598445_f3fdfd3051_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="404" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_2lvx3gsseWyzJMEIFWNLhYpJKNm0QAHzfyhhbBzTJ1R_pwKAFuP_gpiWrHNveh-6w3mdZLY4NFL1j5NPtWHxnmgGFa5jQs2c4BYjF0I7iseH5ZDUUQIH-eETVkP8o_EkFqqC6Iqxcl0/s640/16837598445_f3fdfd3051_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">The beast of the night called DEBT makes a guest appearance...<br />
<i>Photo credit: <a href="https://www.flickr.com/photos/jakerust/16837598445/" target="_blank">GotCredit</a> at <a href="http://www.gotcredit.com/" target="_blank"> www.gotcredit.com</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;">This got me thinking about BUDGETING: the process of trying to fit your lifestyle into your monthly income.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Here is the usual idea behind budgeting, one to which I have unfortunately subscribed for many years: </span><br />
<br />
<ol style="text-align: left;">
<li><span style="font-family: Arial, Helvetica, sans-serif;">List all the expenses you can't avoid, such as rent and utilities, tax, medical insurance and so on.</span><span style="font-family: Arial, Helvetica, sans-serif;"> These are usually the ones that bounce straight out of your bank account as soon as your salary arrives. You should know what they are. You probably can't do anything much about them. The exceptions to this are debt repayments, which also come off at this stage, and which you can definitely do something about (pay them off quicker!).</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">See how much money you have left. This is usually a lot less than any of us would like. Now allocate as much as you think you will need for other essentials like food, petrol and school fees.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Whatever is left is for spending however you like. This is where you "budget" for eating out, clothing, movies and holidays: all the things you'd actually like to spend your money on.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">If by exerting colossal effort you have managed to ensure that there is some money left at the end of the month, save it.</span></li>
</ol>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Now, budgeting like this is definitely better than not budgeting. At least you know where your money is going, and you have a reasonable expectation of not going into credit for the essentials of life. Depending on your self-control on step 3, this process will even prevent you from going into credit on the non-essentials: yay!</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">BUT</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">BUT </span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">BUT</span></div>
<br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span>
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Why Budgeting is Dangerous:</i></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Step 1 shouldn't have any debt in it whatsoever. <span style="color: red;">Making debt repayment come off like a normal expense makes it feel like it's okay.</span> It is not okay to be in debt. Half of the reason South Africans are in such a debt hole is because of the perception that debt is like an awkward uncle: not ideal to have around, but everyone has one, so it's fine. If you have a debt, then budgeting should involve Step 1, Step 2 and NOTHING ELSE until the debt is paid.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Step 2 is open to (mis)interpretation. <span style="color: red;">It is too easy to make yourself believe that something is essential, when it is actually a discretionary item.</span> Here is an example: for the first three years after we got married, we had yoghurt with our breakfast muesli every morning. Once in a while we would look at the price and wince - because yoghurt is a lot more expensive than milk - but we convinced ourselves that it was good for us, and therefore necessary. In fact, once you look at the sugar involved in most yoghurt, the "good for us" premise is unlikely. And unless you have a very specific medical situation no-one would say that the yoghurt cultures (or whatever they are) are <i>necessary</i> for health. The main thing healthwise for ordinary people is the calcium: and that is available much more cheaply in milk. It takes a huge amount of self-control to be totally honest with yourself about the true essentials of life, <a href="http://centrifrugalforce.blogspot.com/2015/07/frugal-shopping-grocery-edition_31.html" target="_blank">particularly when it comes to food</a>. A similar process often happens with petrol - we use too much of it, because we drive too much. "Allowing" this expense in our budgeting can make us feel like this is an acceptable situation.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Step 3 is a disaster waiting to happen. <span style="color: red;"><a href="http://centrifrugalforce.blogspot.com/2015/06/living-without-want-cancelling.html" target="_blank">We all know that the "I want" section is where budgets fall apart.</a></span> When I was a student I budgeted to buy one soft drink per week, on my way to tutoring. This was my discretionary spend. But guess what? When I walked past the shop on other days, sometimes I brought myself a soft drink anyway, because what's one extra soft drink? Yet if I did this once per week, my discretionary spend would have <i>doubled</i>. Yes, this is a silly example, and probably made no difference to my financial health. But when you're earning more than a student pittance, the tendency is to repeat this pattern in an increasingly unhealthy volume. R400 becomes R600, because I've worked hard and deserve it. R300 becomes R450 because it was a special deal and worth every cent. R200 becomes R370 because I don't want to look stingy in front of my friends. <span style="color: red;">Making it okay to spend some unnecessary money often opens the door to making it kind of okay to overspend</span> - and even to use credit to fund your lavish lifestyle. </span><br />
<div>
<br /></div>
<span style="color: red; font-family: Arial, Helvetica, sans-serif;">Putting discretionary spend before savings is a major catastrophe</span><span style="font-family: Arial, Helvetica, sans-serif;">: but it is a catastrophe that too many of us overlook in our monthly budgets. If your budgeting process looks like the one I outlined above, <span style="color: red;">y</span></span><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">ou are treading water</span>. And yes, that is better than drowning. But at the very best, you are probably making a small contribution to your pension fund as required by your employer, and perhaps <i>perhaps </i>saving something at the end of the month. But over all, you are (hopefully) breaking even, and making little to no provision for the future. <span style="color: red;">Yet you probably feel as if you are doing quite well.</span> But if a wave comes along... you could too easily go under. </span><span style="font-family: Arial, Helvetica, sans-serif;">News flash: your financial position may not be as awful as other people's. That doesn't mean you're in a good place.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span>
<br />
<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: right; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRxNKsiPZlZbaPAruXjD2ltEiZunf_UzLywPJ6xXmkr7NxOCxSnj6Jwv885cL8wH9KGIRMJW54rjKRFXzTldTbsf56pLh5mJasS3aTdVHrJZWHY50aaBPF6fGox_O6_Sui2cvO_pCX9JQ/s1600/7027596629_70d7540363_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="560" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRxNKsiPZlZbaPAruXjD2ltEiZunf_UzLywPJ6xXmkr7NxOCxSnj6Jwv885cL8wH9KGIRMJW54rjKRFXzTldTbsf56pLh5mJasS3aTdVHrJZWHY50aaBPF6fGox_O6_Sui2cvO_pCX9JQ/s640/7027596629_70d7540363_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Budgeting is the process of fitting lifestyle into cash flow, not the other way round!<br />
<i>Photo Credit: <a href="https://www.flickr.com/photos/76657755@N04/7027596629/" target="_blank">Tax Credits</a> at <a href="http://taxcredits.net/" target="_blank">taxcredits.net</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>What does healthy budgeting look like?</i></span></div>
<br />
<span style="font-family: Arial, Helvetica, sans-serif;">Don't get me wrong, budgeting is a really important and helpful part of living a frugal lifestyle, fueling the independence engine and (hopefully) reaching financial independence. But we need to budget in a productive way. Here are some ideas for healthy budgeting:</span><br />
<br />
<ol style="text-align: left;">
<li><span style="color: red; font-family: Arial, Helvetica, sans-serif;">Budget descriptively, not prescriptively</span><span style="font-family: Arial, Helvetica, sans-serif;">. Budgeting should be a process of observing your own spending habits. This means that you can plan cash flow effectively, and work out if and when you will be able to afford those unavoidable large expenses. It also means that you can safely save your maximum without being afraid of accidentally running out of grocery money.</span></li>
<li><span style="color: red; font-family: Arial, Helvetica, sans-serif;">Save first. </span><span style="font-family: Arial, Helvetica, sans-serif;">I've said this time and time again, but looking towards the future cannot be an afterthought to your month. Use your descriptive budgeting to work out how much it is possible to save, and get that amount out of your bank account ASAP, before you accidentally spend it.</span></li>
<li><span style="color: red; font-family: Arial, Helvetica, sans-serif;">Budget with a critical eye.</span><span style="font-family: Arial, Helvetica, sans-serif;"> When you look at your spending for last month, look out for danger areas. Perhaps when you look back you notice a gradual creep in expenditure on clothing. This enables you to cut back in those areas next month.</span></li>
<li><span style="color: red; font-family: Arial, Helvetica, sans-serif;">Don't budget for wants.</span><span style="font-family: Arial, Helvetica, sans-serif;"> If a "want" spending opportunity comes up, </span><a href="http://centrifrugalforce.blogspot.com/2015/07/how-to-spend-money.html" style="font-family: Arial, Helvetica, sans-serif;" target="_blank">either do it or don't do it, based on careful consideration of <i>that</i> situation</a><span style="font-family: Arial, Helvetica, sans-serif;">. Don't have a general rule like "up to R200 is okay for discretionary items", because the truth is that sometimes it is and sometimes it isn't. Make each choice deliberately, not automatically. (Imagine paying for it in one rand coins if you think it will help!)</span></li>
<li><span style="color: red; font-family: Arial, Helvetica, sans-serif;">Budget long term. </span><span style="font-family: Arial, Helvetica, sans-serif;">Create a spreadsheet or plan for the next ten years. Where would you like to be? This helps you to keep an eye on the bigger picture, without getting too bogged down in month to month expenses.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Whatever you do, </span><span style="color: red; font-family: Arial, Helvetica, sans-serif;">don't create a series of ineffectual and unrealistic budgets which you know you'll never be able to follow</span><span style="font-family: Arial, Helvetica, sans-serif;">. This will just make you feel bad about yourself OR make you feel unhelpfully good about yourself while making no actual change to your financial health.</span></li>
</ol>
<br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Overall, your budget should be a means of you (and your spouse/family) planning financial choices sensibly. It isn't a magic spell which will make all your financial problems go away. As with all financial tools, if a budget is used badly, it will have a negative impact on your financial situation. But used with caution, it can be enormously powerful.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: large;"><i>Postscript/PostInvasion from Mr Cent(ri)frugal Force:</i></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">You may find some of these tools helpful for putting together a healthy budget:</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiIppDGZc907w5QV0kdmD6PO5n7RMy7Mb_UzgWQ1dhHABKNpXdPfRxCe4VEB0chCQegYqsm9jOXK2ClRB_Dnpkn6rxAjVoiS8Z2uKomaWU72dhaxs5K-6M-ygpflCV2twUE8EJT7rAolV4/s1600/9408028555_9274613a4a_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="426" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiIppDGZc907w5QV0kdmD6PO5n7RMy7Mb_UzgWQ1dhHABKNpXdPfRxCe4VEB0chCQegYqsm9jOXK2ClRB_Dnpkn6rxAjVoiS8Z2uKomaWU72dhaxs5K-6M-ygpflCV2twUE8EJT7rAolV4/s640/9408028555_9274613a4a_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Picking the right tool can make all the difference.<br />
<i>Photo Credit: <a href="https://www.flickr.com/photos/lox/9408028555/" target="_blank">Lachlan Donald</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
<br />
<ul style="text-align: left;">
<li><span style="font-family: Arial, Helvetica, sans-serif;">Google Sheets - an online spreadsheet tool. I like to keep my descriptive budget in the cloud so that I have access to it anytime and anywhere - it's also easy to share it with others (once I've made a more user-friendly version of my spreadsheet I'll share it on the blog).</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">22Seven - this really cool company (now owned by Old Mutual) has an app (and a web version) that pulls in all your account balances from all your online accounts that you choose to link to your 22Seven account. You'll need to do your own research and choose how comfortable you are putting your passwords into their service, but their security appears to be pretty solid. Their software tracks your spending and categorises it for you - this is a very good way to see exactly where your money is going. Personally, I prefer to micromanage things so I like my spreadsheets and accounting software (see below). But I've been making use of 22Seven as well (mainly to decide if I'd like to recommend it on the blog) and I've been pretty impressed with them. They also have a blog which is pretty good - you should go check it out. One word of caution - the service is free, but they're probably hoping that you'll make use of them to save in a Tax Free Savings Account. The signup process looks ridiculously easy and the fees are not t</span><i style="font-family: Arial, Helvetica, sans-serif;">oo </i><span style="font-family: Arial, Helvetica, sans-serif;">bad (0,68%). But you can definitely find lower fees elsewhere - this 0,68% is a fee over and above the fees paid on whatever unit trusts you'll be investing in. Fees really matter so you'll want to do your research on this one. I'll try to do a blog post about fees soon.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">You could also make use of some accounting software. </span><span style="font-family: Arial, Helvetica, sans-serif;">Back in the day I used to make use of Microsoft Money, but I found the "category approach" for income and expenses not as helpful or powerful as a proper "account approach" that one would use in accounting. This is when I switched to gnuCash which is free and cross-platform. You can even turn off words like "debit" and "credit" and make them display something like "money in" and "money out" if that helps you ;-)</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Other than the above I haven't dabbled in any other budgeting tools, apps or services. If you have had a particularly good experience with other apps let us know in the comments!</span></li>
</ul>
<br />
<span style="font-family: Arial, Helvetica, sans-serif;">Happy budgeting!</span><br />
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">jjdaydream & Mr Cent(ri)frugal Force</span></div>
<br /></div>
Mr Cent(ri)frugal Forcehttp://www.blogger.com/profile/03109073391727107186noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-24068683658676074422015-08-23T10:17:00.000-07:002015-08-23T10:17:12.642-07:00Investing Basics I: Asset Allocation<span style="font-family: Arial, Helvetica, sans-serif;">At this stage we've established <a href="http://centrifrugalforce.blogspot.com/2015/06/pillar-2-financial-independence-engine.html">the importance of saving money <i>in order to invest it</i></a>. The Financial Independence Engine is most potent when powered by the stock market, but there are many ways to access the stock market so we'll explore some of these as we go along. Non-stock investments should not be overlooked - they add value at any stage of your financial independence journey and the role they play will change as your needs change.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">This mini-series will be about <i>where</i> your money is (or will be!):</span><br />
<ol>
<li><span style="font-family: Arial, Helvetica, sans-serif;">what <i>form</i> it's in (cash, bonds or stocks), and in what proportions</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">which <i>companies and parts of the economy </i>you've invested in</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">what <i>type of financial product</i> you invest in (fixed deposit, money market, retirement annuity, unit trust, ETF, tax free savings account etc.)</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">which <i>financial institution</i> you use as a platform</span></li>
</ol>
<span style="font-family: Arial, Helvetica, sans-serif;">Let's start by understanding the different forms in which you are able to invest, why you would choose each form, and how you should decide on the approximate proportions of each.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjto8o6ZqaC4alChS6WQ9sqYo-dNtEXSDe1KEkZeMkjGFR4yu0VZciPdYscEgJTprbw_yes9tiD1Ivi-rvTCzNFrgyd5HOrVzJoTC-gfB-ufwquJSb6m5It1v0jZFg2vyiA8uiCwSJg1N4/s1600/16620086347_5e973aacb8_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="428" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjto8o6ZqaC4alChS6WQ9sqYo-dNtEXSDe1KEkZeMkjGFR4yu0VZciPdYscEgJTprbw_yes9tiD1Ivi-rvTCzNFrgyd5HOrVzJoTC-gfB-ufwquJSb6m5It1v0jZFg2vyiA8uiCwSJg1N4/s640/16620086347_5e973aacb8_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Different forms of investments are called different asset classes<br /><i>Photo credit: <a href="https://www.flickr.com/photos/jakerust/16620086347/">GotCredit</a> at <a href="http://www.gotcredit.com/">www.gotcredit.com</a> <a href="https://creativecommons.org/licenses/by/2.0/">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
<b style="font-family: Arial, Helvetica, sans-serif;"><span id="goog_1915516700"></span><span id="goog_1915516701"></span><a href="https://www.blogger.com/"></a>Asset allocation</b><br />
<span style="font-family: Arial, Helvetica, sans-serif;">There are three main asset classes: cash, bonds and stocks/equities. In the investing world you might come across the idea of <i>asset allocation.</i> This is simply the ratio in which your assets are spread across these asset classes.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;"><i>Cash</i></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Essentially anything that earns interest counts as cash. Money placed in a savings account, fixed deposit, money market fund or similar are all examples of cash. In a previous post we established that cash is not the investment we are looking for because anything invested in cash typically only just about keeps up with inflation (sometimes not even). </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">What cash investments offer that the other asset classes do not offer is <i>accessibility</i>. If you need money in an emergency or for day to day expenses the last thing you want to do is to be forced to sell off some of your longer term investments at a bad time - for example when the markets have taken a large (but temporary) dip. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">We have about 4,5% of our investments in cash form (Capitec bank accounts and Allan Gray Money Market Unit Trusts) and the rest is in as aggressive a form as we can make it. The cash component of our investment represents more than six months worth of expenses which is available in case of emergency and for cash flow. Building a buffer like this is important so that <a href="http://centrifrugalforce.blogspot.com/2015/06/the-beast-of-night-called-debt.html">you never need go into debt</a>. The cash component of our investments enables us to be more aggressive with the rest of our investments.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;"><i>Bonds</i></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">When you lend money to an institution (or even the country itself) for a fixed period of time for either a fixed or variable interest rate you have yourself a bond. It's the exact opposite of the bond you might have on a house. Governments and companies make use of bonds to raise funds for pretty much anything - but since they're getting money they don't actually have yet they need to pay you interest for the privilege of having access to your money. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Bonds are typically considered more risky than cash, but less risky than stocks. We haven't invested in bonds directly, but we definitely have exposure to bonds through the various unit trusts we've invested in.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwXBH7_VE8Fa0s-g1IlctC9T2HKcG3NTYglmp0PXDE6YglMOFuEW4IRbUn1ncyG3DIWV6j8POfvQKtXnq_3CWuDH-MofBZJWrHu7xrU08xSEmvhZmSElPCtIH7aX-_nXUUO6MAHW9-mYM/s1600/9761570781_2d105f7e1b_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="477" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwXBH7_VE8Fa0s-g1IlctC9T2HKcG3NTYglmp0PXDE6YglMOFuEW4IRbUn1ncyG3DIWV6j8POfvQKtXnq_3CWuDH-MofBZJWrHu7xrU08xSEmvhZmSElPCtIH7aX-_nXUUO6MAHW9-mYM/s640/9761570781_2d105f7e1b_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">The stock market... scary, or not really?<br /><i>Photo credit: <a href="https://www.flickr.com/photos/andreas_poike/9761570781/">Andreas Poike</a> <a href="https://creativecommons.org/licenses/by/2.0/">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
<i style="font-family: Arial, Helvetica, sans-serif;">Stocks / Equities</i><br />
<span style="font-family: Arial, Helvetica, sans-serif;">When you buy stocks or equities, you are essentially buying a small part of a business or group of businesses. <a href="http://centrifrugalforce.blogspot.com/2015/07/types-of-investment-growth.html">You then share in the profits or losses of that business, either in the form of dividends or growth</a>. Your shares in the company grow as the business grows.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">The stock market is where you will make returns well above inflation if you're investing for the long term. However, in the short term, it is very possible for your stocks to decrease in value, which makes this <i>seem</i> like the most "risky" form of investment. Actually, the risk isn't as bad as it sounds: the risk isn't really that you will lose all your money (short of a catastrophe) but that <i>at the moment you want to sell your shares </i>they won't be at their most valuable. If you are able to wait for the correct moment to sell (either because you have time on your side because of youth, or because you have a good cash buffer) then this risk is minimised.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2ISujfnC6U5tdwUD0KxxVArZmObV1312jb4YxBmwBqDFRrDFZkZS3NZLaaZYJJn1qKhNJHf9zSwIJzJWol21AmPqokgyWVbeW_4U2REDWmDSk8RfjGGDwR_zJ5QNUQKcWxBgAaCXS0Wc/s1600/4376727123_35b2468b98_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="360" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2ISujfnC6U5tdwUD0KxxVArZmObV1312jb4YxBmwBqDFRrDFZkZS3NZLaaZYJJn1qKhNJHf9zSwIJzJWol21AmPqokgyWVbeW_4U2REDWmDSk8RfjGGDwR_zJ5QNUQKcWxBgAaCXS0Wc/s640/4376727123_35b2468b98_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><b>The real risk is losing out to inflation in the long term. Not the stock market. But it can definitely feel like it at times!</b><br />Photo credit <a href="https://www.flickr.com/photos/epsos/4376727123/">epSos.de</a> (<a href="https://creativecommons.org/licenses/by/2.0/">CC-BY 2.0</a>)</td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">If you're investing over a long time horizon (30 years and more) then the risk of losing in the stock market is virtually zero. The real risk is not being in the stock market and losing the r</span><span style="font-family: Arial, Helvetica, sans-serif;">ace against inflation. <i>The longer you are invested for, the lower your risk</i>.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Instead of working with the traditional asset allocation of "cash:bonds:stocks" we think of our asset allocation as as "things that roughly keep up with inflation : medium growth investments : high growth investments". The medium growth investments are more balanced, are typically Regulation 28 compliant (retirement annuity regulation that allows maximum 75% exposure to equities within the retirement annuity) and we're aiming to get about 5% above inflation on these. The high growth investments are pure equities and we're aiming for about 7% above inflation in the long term on these investments. </span><br />
<br />
<span style="font-family: Arial, Helvetica, sans-serif;">We're very young so we've maximised our exposure to the stock market through unit trusts and more recently passive exchange traded funds (ETFs). These are simply mechanisms by which you can diversify (invest in lots of different businesses so that the risk of your chosen business failing is minimized) and reduce investment costs - more of that in the next Investment Basics post!</span>Mr Cent(ri)frugal Forcehttp://www.blogger.com/profile/03109073391727107186noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-67280926270925844022015-08-10T10:47:00.001-07:002015-08-10T10:48:09.618-07:00Stuff Minimisation and Financial Freedom<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<span style="font-family: inherit;"><span lang="EN-US">Over the past two
years, we have been on an EPIC QUEST </span><span lang="EN-US"><span style="font-size: xx-small;">please tell me we’re
not the only people for whom thinking of things as quests makes the admin feel
more bearable…</span></span><span lang="EN-US"> One of the parts of this quest, as you know, has been reduction of
expenses. Another part has been self-education regarding personal finances, and
a resulting increase in investment income. A third branch of the quest, one
that has been essential to the financial freedom <i>frame of mind</i>, has
been the process of STUFF MINIMISATION. </span><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><span lang="EN-US"><br /></span></span></div>
<div class="MsoNormal">
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUE6G1pXx2NmvdbPDecSzJ960dGp4VXpx5BQwMP54TnyEcS_PapUz_CpMKmEIFJyOieqKmAZ0v-48Hz7sdkdrMT6hx2m30OCrS66fWJXtUxEEIaAKusxAVNXLToi8aPWosfN_AOnK3pGs/s1600/3809205891_bc4d44e355_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUE6G1pXx2NmvdbPDecSzJ960dGp4VXpx5BQwMP54TnyEcS_PapUz_CpMKmEIFJyOieqKmAZ0v-48Hz7sdkdrMT6hx2m30OCrS66fWJXtUxEEIaAKusxAVNXLToi8aPWosfN_AOnK3pGs/s640/3809205891_bc4d44e355_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Does your life feel like this? Time for STUFF MINIMISATION!<br />
<i>Photo Credit: <a href="https://www.flickr.com/photos/71966930@N00/3809205891/" target="_blank">Nathan Jongewaard</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
</div>
<div class="MsoNormal" style="text-align: center;">
<i style="font-family: inherit;"><span style="font-size: x-large;">Minimisation and Financial Freedom</span></i></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><span lang="EN-US"></span></span><br />
<span style="font-family: inherit;"><span lang="EN-US"></span></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><span lang="EN-US">What does STUFF MINIMISATION have to do with financial freedom? </span></span></div>
<div class="MsoNormal">
</div>
<ol style="text-align: left;">
<li><span style="font-family: inherit;"><span lang="EN-US"> </span></span><span style="font-family: inherit;">It is about reducing
our dependence on a consumer mindset, and retraining our brains to understand
that STUFF does not make us happy.</span></li>
<li><span style="font-family: inherit;">It is about
(re)discovering useful and awesome STUFF that otherwise gets buried in all the
other STUFF, and therefore getting the best use/most enjoyment out of the STUFF
we have instead of constantly needing new STUFF - otherwise known as
expenses!</span></li>
<li><span style="font-family: inherit;">It is about reducing the amount of time spent maintaining, cleaning and repairing all your STUFF, thereby increasing the amount of time available for <i>everything else.</i></span></li>
<li><span style="font-family: inherit;">It is about creating
a calm environment (minimizing stress right alongside that STUFF) from which we
are better able to cope with life. We are therefore better able to make tough,
long-term decisions instead of lurching from choice to choice in the sometimes
inexorable grip of what feels good </span><i style="font-family: inherit;">now</i><span style="font-family: inherit;">.</span></li>
</ol>
<br />
<div class="MsoNormal">
<span style="font-family: inherit;">However, STUFF MINIMISATION is a process, not a destination. We, for example,
still own far too much STUFF, despite all our efforts. We live a lavish
lifestyle, if you get down to the basic needs, surrounded by sentimental and
useful possessions.</span></div>
<div class="MsoNormal">
<div class="separator" style="clear: both; text-align: center;">
<br /></div>
<span lang="EN-US">The fact is, that although we may admire the homes furnished entirely by two blocks of concrete and a pot plant, we have no real desire to be minimalists. Some STUFF is handy to have around, and the premise of chucking everything not <i>currently </i>in use seems wasteful: after all, I will need that brand new extra beater at some point when my current one fizzles, as it inevitably will. But do I need ten microscopically different baking dishes, all of which fulfill the same essential function? Nope. Might I need the work trousers in one size up some day? Yeah, let’s be honest, I might. And why buy a new pair just because I didn’t want to keep one extra folded pair of trousers in the back of my cupboard? Do I need to keep the skirt which I’ve worn once in the three years since I bought it? Well… probably not. </span>There is a balance here, and probably a balance which comes out differently for every family.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
So I can't give you a date by which we will only have the optimal STUFF left in our home. I can't show you a picture of the ideal STUFF-free home, or tell you which of your STUFF you should get rid of.<br />
<br />
But I can tell you that embarking on a process of STUFF MINIMISATION definitely makes you think twice before acquiring: for that reason alone, it is worth considering in our consumer-mad world. </div>
<div class="MsoNormal">
<br /></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj1EeJuBBy4WIaYbOt0n_s7NkM9JAzSFQjGQp23ecpfu8BpfDHFYoGGWsExtOTUpuvVmYSKtd0XK5X2ilXYM67cIDI99eFUDztpwKHdUotEOfORs-pf2BpDjEE_zrfPWt1d7cN0H2XAZFI/s1600/16248248414_950a129892_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj1EeJuBBy4WIaYbOt0n_s7NkM9JAzSFQjGQp23ecpfu8BpfDHFYoGGWsExtOTUpuvVmYSKtd0XK5X2ilXYM67cIDI99eFUDztpwKHdUotEOfORs-pf2BpDjEE_zrfPWt1d7cN0H2XAZFI/s640/16248248414_950a129892_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><div style="font-size: 12.8000001907349px;">
Fill your life with freedom, not STUFF.</div>
<div style="font-size: 12.8000001907349px;">
<i>Photo Credit: <a href="https://www.flickr.com/photos/x1brett/16248248414/" target="_blank">brett jordan</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></div>
</td></tr>
</tbody></table>
<div class="MsoNormal" style="text-align: center;">
<br />
<i style="font-size: xx-large;">Making Minimisation Practical</i></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Most of us wouldn't mind a bit of a spring clean, and most of us would probably agree that we could stand to get rid of some STUFF. The difficulty is that, well, it's... difficult. Whether because of inertia or sentimentality, the STUFF MINIMISATION process is tough to start and tougher to make significant progress in. The choices are personal, and often emotional.</div>
<div class="MsoNormal">
</div>
<div class="MsoNormal" style="margin-left: 36.0pt;">
<br /></div>
<div class="MsoNormal">
</div>
<div class="MsoNormal">
How do I make myself actually make those choices on a fairly regular basis?</div>
<div class="MsoNormal">
</div>
<div class="separator" style="clear: both; text-align: center;">
<iframe allowfullscreen="" class="YOUTUBE-iframe-video" data-thumbnail-src="https://i.ytimg.com/vi/rkbcjfq5Owo/0.jpg" frameborder="0" height="266" src="https://www.youtube.com/embed/rkbcjfq5Owo?feature=player_embedded" width="320"></iframe></div>
<ol style="text-align: left;">
<li><span style="color: red;">Give almost everything away.</span> This is usually quicker and easier than selling, and it will probably give you a happy glow. Plus, (almost) everything can be given away, and not everything is saleable if you aren't going to do the massive garage sale thing. And I certainly do not have the energy for that. Most charity shops will take boxes and bags of unsorted junk with wide-embracing er, charity, and do all the sorting and pricing themselves. Some will even collect. If they can make a bit of money out of my pursuit of freedom, awesome. </li>
<li><span style="color: red;">Sell the big stuff.</span> Some STUFF is worth a lot of money: you know what that might be in your home. Double financial freedom whammy: less STUFF + more money. In South Africa, Gumtree is your friend, though you need to be careful (obviously). But if you don't have the bandwidth even for this... see #1! Don't get stressed about making a small amount of extra cash here: the main goal is getting the STUFF out of your life as efficiently as possible. Keep your prices low but fair in exchange for quick, easy sales.</li>
<li><span style="color: red;">Keep a secret STUFF stash in between dumping trips.</span> We have a big cardboard box in the garage. Whenever we decide that an item can go, we put it in there, straight away. No backsies. Then, when the box is full, we can take a trip to our favourite charity shop.</li>
<li><span style="color: red;">One step at a time.</span> Whether you work room by room, or have a special decluttering time in the week/month, or cope with one type of STUFF at a time, don't try to do everything in one go. That's just demoralising. Rather celebrate each item of STUFF that you manage to toss. And of course enjoy using the good STUFF unearthed!</li>
<li><span style="color: red;">Embrace the process... and remember it.</span> The pain has significant gain: if you can hold on to your irritation as you throw out another half used moisturizer, and bring it out at the right moment, you are way less likely to buy more useless STUFF next time you're at the mall.</li>
</ol>
Lastly, keep your eyes on the purpose of all your hard work: instead of gradually accumulating more STUFF, you are gradually accumulating more freedom. Instead of buying the latest and greatest, you are getting rid of the white elephants, the not-really-our-favourites and the no-longer-useful. Instead of filling your home with possessions, you are emptying it, to make space for possibility.<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-WQASCOyao897oNEQlS9zsXhPINl3lP6YP7NX5_baUd3EXDBvr-9E_SOsj92x__8djdMNtwyHVbHH0Nt2fWKVdW5GYIw9KeNi-03Raoxn-k6SH__6OaXazhm4wXl67WfxHyYBJ5wft14/s1600/1356360647_0461233e85_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-WQASCOyao897oNEQlS9zsXhPINl3lP6YP7NX5_baUd3EXDBvr-9E_SOsj92x__8djdMNtwyHVbHH0Nt2fWKVdW5GYIw9KeNi-03Raoxn-k6SH__6OaXazhm4wXl67WfxHyYBJ5wft14/s640/1356360647_0461233e85_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Make space for possibility!<br />
<i>Photo credit: <a href="https://www.flickr.com/photos/rowdie/1356360647/" target="_blank">Archana Jarajapu</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
To freedom!<br />
jjdaydream<br />
<br /></div>
jjdaydreamhttp://www.blogger.com/profile/12869446910551139215noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-14187513192313872652015-07-31T12:56:00.000-07:002015-07-31T12:56:00.084-07:00Frugal Shopping: Grocery Edition<div dir="ltr" style="text-align: left;" trbidi="on">
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiK6MRmOuhxJkmmy4_l32H-0LnUYMsFqywiVZiowq6mYlsPR1wo1kBhgORgRL5hIVv2v9iCcbra8W1zUb7tCaRj30Rm8j40pbQvkZR9h0ZOQ1CBUs7WTt7Kw7R8hW86_FG1KeCpWEM7FL0/s1600/154300399_b8dd1427f6_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiK6MRmOuhxJkmmy4_l32H-0LnUYMsFqywiVZiowq6mYlsPR1wo1kBhgORgRL5hIVv2v9iCcbra8W1zUb7tCaRj30Rm8j40pbQvkZR9h0ZOQ1CBUs7WTt7Kw7R8hW86_FG1KeCpWEM7FL0/s640/154300399_b8dd1427f6_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="font-size: 12.8000001907349px;">Grocery shopping anti-love...<br />
<i>Photo credit: <a href="https://www.flickr.com/photos/elsie/154300399/" target="_blank">Les Chatfield</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
Grocery shopping: along with the dishes and the laundry, one of those depressing chores that is half necessary again by the time you've finished packing it away... and worse than the aforementioned, it requires the regular expenditure of fairly large sums of money!<br />
<br />
Lots of us have experienced grocery shopping on a tight budget, especially near the end of the month. Lots of us have also experienced this curious phenomenon: when money is <i>really</i> tight, suddenly it is possible to spend so much <i>less </i>money at the grocery store than we previously thought possible. I thought I was buying only the bare minimum: but now it appears there is <i>another</i> minimum below my previous minimum - and I'm still perfectly well nourished. Magic!<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOlWiMXyLQDX9F9hXTd8yxYFMBrAvFOdcfbSJfJVoiHZBXHobFvzcLYltRJvqpJ-Bl940xpaDzMf22xrLp8-aSYJPf5m7vNnEWLsxJlfCloybzDOF3ybTIRzuh37QrdVooN29C8rRMAZs/s1600/7259669024_f198c98182_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="426" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOlWiMXyLQDX9F9hXTd8yxYFMBrAvFOdcfbSJfJVoiHZBXHobFvzcLYltRJvqpJ-Bl940xpaDzMf22xrLp8-aSYJPf5m7vNnEWLsxJlfCloybzDOF3ybTIRzuh37QrdVooN29C8rRMAZs/s640/7259669024_f198c98182_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="font-size: 12.8000001907349px;">Don't mess with my food supply!<br />
<i>Photo credit: <a href="https://www.flickr.com/photos/sodaniechea/7259669024/in/photostream/" target="_blank">Sodanie Chea</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
But when frugality is a choice rather than a necessity, groceries and food are some of the most difficult and emotional things to save on. Why? Food is one of the essentials of life, so cutting down or changing diet (or even just brand) choices can feel like a drastic lifestyle change, even if the shift is relatively small. Fair enough: we have strong cave-man/cave-woman instincts to protect our source of nutrition! In addition, we often feel defensive of our food and grocery choices, because they are some of the most intimate choices that we make on a day to day basis.<br />
<br />
However, just because our reluctance to make changes in this area is understandable does not mean we shouldn't make those changes: we need <a href="http://centrifrugalforce.blogspot.com/2015/06/pillar-1-fuelling-financial.html" target="_blank">all the fuel we can get for the independence engine</a>! We were already living fairly frugally, but in the six months after going postal on the Financial Independence Quest, we cut down our average monthly grocery bill by about R400. This may not sound like much, but remember: if we were to save that R400 <i>per month, </i>that is R4 800 extra to save <i>every year</i>. Assuming that this is <a href="http://centrifrugalforce.blogspot.com/2015/06/pillar-2-financial-independence-engine.html" target="_blank">sensibly invested</a> and gains a quite achievable 7% above inflation for ten years, this could accumulate into R66 300! Maths evidence? Courtesy of the annuity formula (for regular savings invested in something that earns compound interest):<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjM5WX53Bq7HJU3buQ0DxnJpRF8HCDz1lLvSf5CK8tx0zyOMEIJBqY7rAjE5wtv-72CL1nBwP0-mpUYCruSKlPY7c3PJtUv6A9kQxnoC6H2vkVvSAWHTni4T4Ko49qvsx-d26yyunVywl4/s1600/annuity_calc.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="630" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjM5WX53Bq7HJU3buQ0DxnJpRF8HCDz1lLvSf5CK8tx0zyOMEIJBqY7rAjE5wtv-72CL1nBwP0-mpUYCruSKlPY7c3PJtUv6A9kQxnoC6H2vkVvSAWHTni4T4Ko49qvsx-d26yyunVywl4/s640/annuity_calc.png" width="640" /></a></div>
<br />
<br />
Okay, I hope you're convinced that it is worth trying to shave down your grocery bill, even by a couple of hundred rand. Here are some of the ways in which we managed to gradually improve our spending. Everyone is different, and so your strategies will be different to ours. But these might give you some ideas.<br />
<br />
<div style="text-align: center;">
<span style="font-size: x-large;"><i>Regular Shopping Strategies</i></span></div>
<br />
<span style="color: red;">Go to the grocery store as seldom as possible.</span> This saves petrol and time, but also means that you have to plan your purchases carefully to last till next time, and cuts down on the chances for impulse buying (mmm, that freshly baked bread smells amazing, let's just... sound familiar?).<br />
<span style="color: red;"><br /></span><span style="color: red;">Make a list, and stick to it. </span>As mentioned above, impulse buying is the budget enemy. We are busy developing and trialing a Wunderlist shopping-list system, but pen and paper will do the same job.<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAfyYZsIqUArmJBseMH7KFlnmdfdzT6nSF98yWoLAEVr9L7kNh1qLivFYCz8QSUsCZf3xEUei5RVEwhiO5cSOwo6OUEwA_kNqmR3oAdCDzxxWvToKjaOcgmPq2dEqq6vtF0j3KoJbJiss/s1600/159109141_93877e0c4b_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAfyYZsIqUArmJBseMH7KFlnmdfdzT6nSF98yWoLAEVr9L7kNh1qLivFYCz8QSUsCZf3xEUei5RVEwhiO5cSOwo6OUEwA_kNqmR3oAdCDzxxWvToKjaOcgmPq2dEqq6vtF0j3KoJbJiss/s640/159109141_93877e0c4b_o.jpg" width="480" /></a></td></tr>
<tr><td class="tr-caption" style="font-size: 12.8000001907349px;">Make a list. Stick to it. Even if there is a chocolate aisle.<br />
<i>Photo credit: <a href="https://www.flickr.com/photos/striatic/159109141/" target="_blank">hobvias sudoneighm</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
<span style="color: red;">Visit only the aisles necessary for your planned purchases.</span> Although I do love wandering aimlessly through the aisles, this wastes time and increases the likelihood that I will spot something that I immediately <a href="http://centrifrugalforce.blogspot.com/2015/06/living-without-want-cancelling.html" target="_blank"><i>need...</i> but don't actually need</a>. Like Ultramel custard on special. <i>Stay away!</i><br />
<i><br /></i><span style="color: red;">Use the reward cards</span>... the free ones, obviously. But don't get suckered into buying things you otherwise wouldn't have. Redeem the points frequently: money saved this month is better than the same money saved next month. The money that stays in your bank account will earn interest :-)<br />
<br />
<div style="text-align: center;">
<span style="font-size: x-large;"><i>Bulk Buying Strategies</i></span></div>
<br />
<span style="color: red;">Buy in bulk</span>, but only when the cost per unit is genuinely better, and the increased bulk won't result in waste. Waste can be a result of increased usage (I have a huge block of cheese so I cut off a fatter slice for my sandwich) or expiration.<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh9k_b-qdJ-PiD81p0eQE3sB7k5H3K1AiLrOmdU4sAkudexA1oSWndudaRYOJYcY5SWzs3bR4R2ZDm-ky8yL8le8Yqbq4QEc_2MN94V_83vOnPkCuWsEeUttYobz-j_IUZQZbKBFYIvhms/s1600/3968828323_5ae54d5881_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh9k_b-qdJ-PiD81p0eQE3sB7k5H3K1AiLrOmdU4sAkudexA1oSWndudaRYOJYcY5SWzs3bR4R2ZDm-ky8yL8le8Yqbq4QEc_2MN94V_83vOnPkCuWsEeUttYobz-j_IUZQZbKBFYIvhms/s640/3968828323_5ae54d5881_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="font-size: 12.8000001907349px;">Buying in bulk can backfire...<br />
<i>Photo credit: <a href="https://www.flickr.com/photos/shlomif/3968828323/" target="_blank">Shlomi Fish</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
<span style="color: red;">Specials are brilliant but also dangerous.</span> Make use of them only if you would have been buying the item anyway, and if the product won't go to waste (see above!). But <i>do </i>make use of them: buy lots!<br />
<br />
<span style="color: red;">Go to Makro.</span> Yes, it's a mission, but once we've taken increased petrol consumption into account (our local Makro is further away than our local PnP) we usually save about 13%. We don't do this every five minutes, but stocking up on non-perishables and slightly-perishables once every few months is well worth it. Don't forget to follow the bulk buying guidelines though: we have been known to go a little Makro-mad and over-bulk (not a real word, but work with me here!).<br />
<br />
<div style="text-align: center;">
<i><span style="font-size: x-large;">Choice Strategies</span></i></div>
<br />
<span style="color: red;">Choose food that has a good cost per calorie</span>, or, even better, cost per nutrient ratio. How much does each calorie of lentil cost, compared to each calorie of lettuce? Hint: <i>much less. </i>Mr Cent(ri)frugal has a spreadsheet (which he'll share with you in a future post), because he is a keen bean that way. It makes interesting reading. For example, although sunflower seeds are expensive per kilogram, they are excellent value per calorie, because you only need a few to get full. In fact, my school lunch of about 160 g of seeds, nuts and raisins, is both cheaper and more nutritious than a sandwich, though it obviously requires supplementation with vegetables and so on in the evenings. The basic principle seems obvious: choose items that are cheap, but rich in nutrients over expensive, nutritionally empty items. The detail, when you <i>really </i>work it out, is often surprising, and probably deserves a post of its own.<br />
<br />
<span style="color: red;">Don't be snooty.</span> Pick and Pay or Checkers are acceptably close in quality to Woolworths for most items. The in-store brand is often indistinguishable from more well known brands. If you feel there is a real difference, actually work out exactly how much more you are paying for an equivalent product: in most cases it isn't worth it. (That being said sometimes the generic just doesn't cut it - but you first need to have <i>really</i> tested it before you cut it from your list.)<br />
<br />
<span style="color: red;">Keep your eyes on the goal:</span> is the better coffee, the out-of-season fruit or the imported luxury item more important than financial freedom? Is it more important than being able to quit your job (or go part time) and spend time with your kids? Nope, I didn't think so.<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJPW3OyJgaWcAoz95aC5OEdoxC6u0ejA-J3pS0KhmMj1pxJM0JgwFWjYAnbxL3cVfibJjkO4rpT_XsgyPyPgAvL9G4PGCFWv023eehQlWnQP0I9VKYA6LSjAlCeAzU0775ubMeinfO7U8/s1600/7865159650_12d17679a5_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="426" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJPW3OyJgaWcAoz95aC5OEdoxC6u0ejA-J3pS0KhmMj1pxJM0JgwFWjYAnbxL3cVfibJjkO4rpT_XsgyPyPgAvL9G4PGCFWv023eehQlWnQP0I9VKYA6LSjAlCeAzU0775ubMeinfO7U8/s640/7865159650_12d17679a5_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="font-size: 12.8000001907349px;">Even if some previous shots have gone astray... keep your eye on the target!<br />
<i>Photo credit: <a href="https://www.flickr.com/photos/comedynose/7865159650/" target="_blank">Pete</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
If you'd like to read more about this interesting topic, here's what Mr. [sic] Money Mustache [sic] has to say: <a href="http://www.mrmoneymustache.com/2011/08/23/grocery-shopping-with-your-middle-finger/" target="_blank">shopping with your middle finger</a>, and <a href="http://www.mrmoneymustache.com/2012/03/29/killing-your-1000-grocery-bill/" target="_blank">killing your $1000 grocery bill</a>. He is the original, and always good value. (He also talks about cost per calorie if you can't wait until we get to it!)<br />
<br />
May the grocery-force be with you!<br />
jjdaydream</div>
jjdaydreamhttp://www.blogger.com/profile/12869446910551139215noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-118472527653300672015-07-28T12:50:00.000-07:002015-09-02T20:03:44.111-07:00Types of investment growth<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Arial, Helvetica, sans-serif;">A few months ago my wife asked me to explain to her the difference between <i>interest</i>, <i>dividends</i> and <i>capital appreciation</i>. If we add in <i>income</i> then these are essentially the different ways in which money in an investment can grow. I'll admit that up until now I've probably been a little vague about the distinction between these different <i>mechanisms of growth</i> so I'll try to rectify that in this post. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">In the long run, all these forms of growth kind of end up doing the same thing - <i>they all grow your money. </i>And if we draw graphs of investments that experience these different mechanisms of growth then the graphs would look exponential:</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPVH_beJhCYNvJG3ehhR9dDUBYxSaQBAczbLHF7UNKVi6YWzcXA4-KaDI8nGIGjZSJvG6pycOPNb6DxVDOsdG4ieH0qDZXzKNZhf_WeCgGqaDCRk_ZBkxsW4z3y3qIiP1EearBG4-oG8E/s1600/exponential.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="355" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPVH_beJhCYNvJG3ehhR9dDUBYxSaQBAczbLHF7UNKVi6YWzcXA4-KaDI8nGIGjZSJvG6pycOPNb6DxVDOsdG4ieH0qDZXzKNZhf_WeCgGqaDCRk_ZBkxsW4z3y3qIiP1EearBG4-oG8E/s400/exponential.png" width="400" /></a></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">These are the same graphs that are produced by the "compound interest" formula that we looked at in an <a href="http://centrifrugalforce.blogspot.com/2015/05/introducing-two-pillars.html">earlier post</a>. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">All types of growth can look a lot like a lot like compound interest and they behave a lot like compound interest as well. </span><i style="font-family: Arial, Helvetica, sans-serif;">Money grows at a certain rate per year and in subsequent years you get growth on growth.</i><span style="font-family: Arial, Helvetica, sans-serif;"> Compound </span><i style="font-family: Arial, Helvetica, sans-serif;">interest</i><span style="font-family: Arial, Helvetica, sans-serif;"> is just a specific type of compound </span><i style="font-family: Arial, Helvetica, sans-serif;">growth</i><span style="font-family: Arial, Helvetica, sans-serif;">.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">So if everything kind of looks the same and does the same thing then why is it important to make the distinction between these different mechanisms of growth? Why don't we just call everything interest and be done with it? Two reasons:</span><br />
<ol>
<li><span style="font-family: Arial, Helvetica, sans-serif;">The "rates of growth" typically associated with each mechanism of growth can be very different. So some mechanisms will act faster on your money than others.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">The different growth mechanisms are taxed differently. You need to know how they are taxed so that (a) you can invest in a tax-efficient manner and (b) you know how and where to declare the proceeds of your different investment growth mechanisms (the return on your investment) in your annual tax return.</span></li>
</ol>
<span style="font-family: Arial, Helvetica, sans-serif;">These growth mechanisms are what cause the Financial Independence Engine to run and they cause it to run in slightly different ways.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Without further delay let's develop a rather silly analogy that will serve to illustrate the distinction between the different mechanisms of growth.</span><br />
<br />
<span style="font-family: Arial, Helvetica, sans-serif;">Edgar is the owner of a bakery that specialises in baking with interesting varieties and sizes of eggs - quail (small), duck (medium) and ostrich (large!). </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFbZJ4lsQk9c83RB3PLJ4gQ5vF99yqo4WHitnjyQIdpYIP5QabaU5sS4YhgIkbVtLcJ28N0wwcrpQCQMZtOyAJFQ0lh2eDqZzL49lF2rQ82ga-PNVUnW4Q2nNz_bGb9PdewI0VC6FJuPI/s1600/eggs.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="412" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFbZJ4lsQk9c83RB3PLJ4gQ5vF99yqo4WHitnjyQIdpYIP5QabaU5sS4YhgIkbVtLcJ28N0wwcrpQCQMZtOyAJFQ0lh2eDqZzL49lF2rQ82ga-PNVUnW4Q2nNz_bGb9PdewI0VC6FJuPI/s640/eggs.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Georgia, Times New Roman, serif;"><b>Photos used in the above image (left to right) credited to:<br /><a href="https://www.flickr.com/photos/verzo/5606192765/">Roberto Verzo</a>, <a href="https://www.flickr.com/photos/bokchoi-snowpea/4855037887/">snowpea&bokchoi</a> and <a href="https://www.flickr.com/photos/beckayork/5639567645/">Beck</a> (all <a href="https://creativecommons.org/licenses/by/2.0/">CC-BY 2.0</a>).</b></span></td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;">When Edgar does a stock take to see if he has enough eggs to cater for a large retirement party he doesn't worry about how many of each type of egg he has - he is only concerned about <i>the total amount of eggy goodness he has</i> (the rich golden yolk in particular). Quail eggs are the smallest with less yolk per egg, next come duck eggs and lastly the ostrich eggs with lots of yolk per egg.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">In our analogy, the amount of eggy goodness or the yolk represents the rand and cents value of our investment. The different types of egg represent a single "unit" of an investment - for example a "unit" in a unit trust, a single share in a company or a gift card.</span><br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinL1qaK0egxeLtv1YQ3XRwes3Kh4v0eDur4-mzP74Geg_riHGJ41Rd8B1OqonwAkW7lq5_-7S-Oyhf5-oVlofP8cwR3LAMI7WiEZ9qQ9KawTYnS9qmYq1d-E5xHZYfXHHCZX312vbLKLo/s1600/4900326914_c581948005_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="300" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinL1qaK0egxeLtv1YQ3XRwes3Kh4v0eDur4-mzP74Geg_riHGJ41Rd8B1OqonwAkW7lq5_-7S-Oyhf5-oVlofP8cwR3LAMI7WiEZ9qQ9KawTYnS9qmYq1d-E5xHZYfXHHCZX312vbLKLo/s400/4900326914_c581948005_o.jpg" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Georgia, Times New Roman, serif;"><b><span style="font-size: small;">Egg yolk is the currency in this eggsample :-)</span><br /><span style="font-size: x-small;">Photo credit </span><a href="https://www.flickr.com/photos/free-stock/4900326914/" style="font-size: small;">Emilian Robert Vicol</a><span style="font-size: x-small;"> (</span><a href="https://creativecommons.org/licenses/by/2.0/" style="font-size: small;">CC-BY 2.0</a><span style="font-size: x-small;">)</span></b></span></td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;">Let's continue...</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">It turns out that Edgar has more than enough egg yolk for the retirement party that he needs to cater for. In fact, he has so much extra egg yolk he's able to lend it out (in the form of eggs) to some of his friends who are also in the exotic egg catering business. In return for lending out egg to his friends in need, they will return the amount of yolk that they borrowed plus they will give him some more (either in the form off egg yolk or in the form of eggs). Let's look at these different business dealings in turn.</span><br />
<br />
<span style="font-family: Arial, Helvetica, sans-serif; font-size: large;"><b>Edgar earns interest from Alice</b></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">For every litre of egg yolk that Alice borrows from Edgar she promises to give him back the original amount of egg yolk plus 10% extra at the end of the year. On 1 January Alice borrows 20 litres of egg yolk. After a successful year in business Alice returns to Edgar on 31 December and gives Edgar 22 litres of egg yolk: 20 litres being the original amount borrowed and 2 litres (10% of 20 litres) being the <i>interest</i>. Edgar now has more egg yolk than he started the year with; his investment has grown.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<b><span style="font-family: Arial, Helvetica, sans-serif; font-size: large;">Edgar receives dividends from Bob</span></b><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Edgar thinks Bob's Egcellent Eggs, is a great company to invest in and he invests 100 duck eggs in Bob's company. When the company makes a profit, Bob likes to give all the profit to his shareholders - these company profits distributed to shareholders are called <i>dividends</i>. After a great year of business Bob pays Edgar a dividend of one litre of egg yolk. At this stage Edgar could take his egg yolk and make himself a decadent and fancy omelette. But seeing as he's not retired yet, Edgar does best to <i>reinvest his dividends. </i>One litre of egg yolk is roughly the amount of egg yolk in 10 duck eggs so Edgar gives Bob another 10 duck eggs bringing up the total of his investment to 110 duck eggs with a value of 11 litres of egg yolk. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<b><span style="font-family: Arial, Helvetica, sans-serif; font-size: large;">Edgar earns capital appreciation through Cathy</span></b><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Edgar decides on a long term investment in Cathy's Egg Emporium. He lends her 10 duck egg in January 2000. Cathy is incredibly focused on growing her company. If the company makes any profits, she pours them straight back into the company instead of paying it to the shareholders. So although the shareholders don't get any benefit immediately, they own a share of something that is worth<i> more</i> and their investment has <i>grown</i>. In December 2024 Cathy gives Edgar 10 <i>ostrich</i> eggs. How many eggs did Edgar have in 2000? Ten. How many eggs does he have now? Ten. So Edgar has the same number of eggs, each egg is just worth a lot more (in terms of yolk). This is capital appreciation. With capital appreciation you own the same thing (such as a house) or the <i>same number of things</i> (such as shares in a company), but each thing you own is simply <i>worth more</i>.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<b><span style="font-family: Arial, Helvetica, sans-serif; font-size: large;">Edgar earns (rental) income from Dave</span></b><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Dave runs a fancy coffee shop frequented by tourists and he thinks having some ostrich eggs on display in the window would be just grand! </span><br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWz-jVIXBIbA8Sykko3dGzj0PjT9kALIxs3ixAFKJNjwkz4RDbo8vM8o7YHLjmTyuNV6Zd6J_AHCjABavAvGHroKfr8LZUwBBnaBaBCXq-94ptZroT6IoOIK8UJD1tjY2J_TFbfwlgAEc/s1600/2987813313_a31d1fc3be_z.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="424" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWz-jVIXBIbA8Sykko3dGzj0PjT9kALIxs3ixAFKJNjwkz4RDbo8vM8o7YHLjmTyuNV6Zd6J_AHCjABavAvGHroKfr8LZUwBBnaBaBCXq-94ptZroT6IoOIK8UJD1tjY2J_TFbfwlgAEc/s640/2987813313_a31d1fc3be_z.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><b><span style="font-family: Georgia, Times New Roman, serif;">Photo credit: <a href="https://www.flickr.com/photos/rremundo/2987813313/">Redmond</a> (<a href="https://creativecommons.org/licenses/by/2.0/">CC-BY 2.0</a>)</span></b></td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;">He arranges with Edgar to rent 20 ostrich eggs, in return Dave will give Edgar 2 litres of egg yolk (from chicken eggs from the coffee shop kitchen) per year. Assuming that an ostrich egg holds 1 litre of egg yolk, Edgar has received a 10% <i>return on investment</i> (eggs with 20 litres of yolk rented out and returning 2 litres in rental income).</span><br />
<br />
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Cracking open the analogy</i></span></div>
<br />
<b><span style="font-family: Arial, Helvetica, sans-serif; font-size: large;">Interest and income</span></b><br />
<span style="font-family: Arial, Helvetica, sans-serif;">When your investment grows through interest you get more units, but each unit has the same value (each rand is worth one rand, but you have more of them). Interest gets paid to you regularly.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">When your investment grows through income you also get more units and each unit has the same value. You also get paid regularly. So income can look a lot like interest. So what's the difference? Consider the example of Alice who paid interest on the borrowed egg yolk and Dave who rented the ostrich eggs from Edgar. The only difference is the form of the asset that was borrowed. Dave was borrowing something that was not egg yolk itself (ostrich eggs) but had a value in terms of egg yolk and he needed to pay rental to enjoy the privilege. Alice was borrowing a certain amount of yolk (which is equivalent to cash in this analogy) and she needed to pay interest for this privilege.</span><br />
<br />
<b><span style="font-family: Arial, Helvetica, sans-serif; font-size: large;">Dividends and capital appreciation</span></b><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Bob and Cathy represent two extreme ends of the spectrum of how companies decide what to do with their profit. Many companies will pay some of the profits out as dividends to shareholders and retain some of the profits for furthering future growth. When Edgar earned dividends he earned it in the form of egg yolk (the cash currency in this analogy). He then had the option of keeping his dividends or reinvesting by buying more shares of Bob's company (measured in terms of duck eggs in this case). By reinvesting he increases the value of his investment because he has <i>more shares</i>, not because the shares he has are actually worth more. From Cathy, Edgar received no dividends and no intermediate payments. By retaining all the company's profits Cathy was making each share of Bob's more valuable. After 24 years Edgar's 10 eggs invested in Cathy's company were so valuable that he needed to receive ostrich eggs when we cashed in on his investment. In this example he had the same number of units of investment, but each one was worth more.</span><br />
<br />
<span style="font-family: Arial, Helvetica, sans-serif;">Remember that interest only barely keeps up with inflation (sometimes it doesn't even do that) so although it's useful it should not be your primary source of investment growth.</span><br />
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">When you invest in companies through unit trusts, ETFs (Exchange Traded Funds) or actual shares you'll benefit from both dividend income as well as capital appreciation in the long term. Some companies pay out more dividends than others and there are unit trusts and ETFs that try to have a higher proportion of high dividend paying companies.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Rental income is useful (but see the tax implication below) and an easy way to have some exposure to it is through unit trusts or ETFs focussing on owning and renting property. You'll also get some capital appreciation through these unit trusts or ETFs as the values of the properties rise over time.</span></div>
<br />
<div style="text-align: center;">
<i><span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;">Tax implications</span></i></div>
<br />
<span style="font-family: Arial, Helvetica, sans-serif;">You can earn R23 800 worth of<i><b> interest</b></i> in a single tax year before you start paying tax on interest earned. You'll need to declare all interest earned from all your investments. You can get this amount by adding up all the amounts labelled "local interest" on the IT3(b) statements that you'll get from your financial management people and banks.</span><br />
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><b><i>Dividends</i></b> that you earn are taxed in the hands of the company before they are paid over to you. You'll need to declare all dividends earned in the "other non-taxable income" category on your tax return (and follow the same approach of adding up all the dividend amounts on your IT3(b) statements.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">From year to year you'll probably not need to worry about tax on <i><b>captial appreciatio</b></i>n. This is because you'll only pay tax in the year that your investments are sold. This will (hopefully!) result in a large capital gain which follows the rules of Capital Gains Tax as described in the <a href="http://centrifrugalforce.blogspot.com/2015/06/tax-102.html">post on tax</a>.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><i><b>Investment income</b></i> (such as rental income in the above example) is taxed in the exact same way as your regular income from your job. The</span><i style="font-family: Arial, Helvetica, sans-serif;"> full amount </i><span style="font-family: Arial, Helvetica, sans-serif;">is included in your taxable income (no exemptions like interest income or the same benign treatment as capital gains tax)</span><br />
<ol>
</ol>
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>A fifth way of growing your money!</i></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">The four mechanisms of growth that we've discussed so far are not the only ways to grow your investment. You can also manually put money in yourself! This is money that you have saved for the purposes of investment. It's the fuel required for the <a href="http://centrifrugalforce.blogspot.com/2015/06/pillar-2-financial-independence-engine.html">Financial Independence Engine</a> before it starts running itself. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">In the short term, the amount that you are able to put in will far outstrip the investment returns from any of these types of growth. But eventually these growth mechanisms (the backbone behind Pillar Two) will start to earn more than you possibly can. The huge advantage of the investment growth mechanisms discussed in this post is that they are a type of passive income - meaning you don't have to work once they've started out earning you - this is the stage at which you've earned your financial independence.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>The relationship between investing and borrowing</i></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">You might have noticed that depending on how you read the examples of Alice, Bob, Cathy and Dave they could sound a lot like credit and borrowing. Yikes! How did an example about an
investment start to sound like an example about borrowing? Investing (or
lending as in the example above) goes hand in hand with borrowing. When
you invest in some investment product or company they are essentially
<i>borrowing money from you</i>. From Edgar's perspective he's investing. From
Alice's perspective, she's borrowing (as long as she's borrowing in
order to expand her business, that's fine - as long as she doesn't start
funding a decadent lifestyle on egg yolk credit!).</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">In a post that I hope to write soon we'll look at the different options of where to invest in South Africa. In the meantime I hope you've found this post useful!</span></div>
</div>
Mr Cent(ri)frugal Forcehttp://www.blogger.com/profile/03109073391727107186noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-49707876587141907902015-07-24T12:50:00.002-07:002015-07-24T12:50:17.577-07:00Cycling to Work in the Rain<div dir="ltr" style="text-align: left;" trbidi="on">
Today I got properly wet while cycling for the first time this winter. In the honour of the occasion, I thought I would post my practical thoughts on cycling to work through Cape Town winter!<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwjLKWi-iqw3RKZPmO33S030dm5ADvwBicfS_H4dQh4cKVdeOX5JeVaMym29-RZ544Ayq-alNG7AM_FYJ5hQ0de0SEVPY-rNni1WnpdmWvnVz6wTMEDFXE3q-Gm-LW3lQaj-1JhLVEPFk/s1600/12381421605_05975b77c1_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="386" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwjLKWi-iqw3RKZPmO33S030dm5ADvwBicfS_H4dQh4cKVdeOX5JeVaMym29-RZ544Ayq-alNG7AM_FYJ5hQ0de0SEVPY-rNni1WnpdmWvnVz6wTMEDFXE3q-Gm-LW3lQaj-1JhLVEPFk/s640/12381421605_05975b77c1_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Chances are, at some point in winter you will get wet!<br />
<i>Photo credit: <a href="https://www.flickr.com/photos/34517490@N00/12381421605/" target="_blank">Nick</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
<i></i><br />
<div style="text-align: center;">
<i><i><span style="font-size: x-large;">jjdaydream's ten hints for commuting in the rain</span></i></i></div>
<i>
</i>
<ol style="text-align: left;">
<li>Try to avoid getting very wet on the way <i>to </i>work. Risk it on the way home, no problem. But if it is pouring in the morning, you might want to wimp out, just this once. This is easier to control anyway, because once you're at work on your bike you don't really have a choice. (Fortunately, home is usually better supplied with hot water and towels!)</li>
<li>Keep dry clothes at work, for days when 1. doesn't quite work out. These should include socks, shoes and underwear, because wet underwear = not cool. (Mr Cent(ri)Frugal Force also takes in some spare clothes protected with plastic when he cycles in inclement weather.)</li>
<li>If you're gonna get wet, you're gonna get wet. Embrace the wateriness and don't be grumpy about it. You'll just ruin the fun of getting properly drenched for once: remember how awesome that was when you were a kid? </li>
<li>In the spirit of 3., don't bother with heavy rain gear. Obviously this is different if you have a very long way to go, but in Cape Town the weather is so unpredictable that if you take extra gear you could very well get stuck carrying a useless and heavy load. And I always get too hot in serious rain coats anyway: rain pants are worse. If I'm going to be wet, I'd rather it was with water than sweat/condensation. </li>
<li>However, plastic bags are your friends: you will dry, but your electronics and papers may not.</li>
<li>Subways may be full of water: 'nuff said.</li>
<li>Remember that roads are slippery: both you and the cars will take longer to stop in an emergency, so be extra careful. Visibility is probably also down. Switch on your lights, and be especially cautious at intersections.</li>
<li>Be friendly to fellow orphans of the storm. It is always good for a shared laugh when you are waiting at a traffic light with an equally soaked beggar or trudging commuter. And that helps you to forget that there is a chilly trickle of water running down the inside of your socks.</li>
<li>You will get mud on your butt. There is no easy way to avoid this.</li>
<li>If there is any chance <i>at all</i> of rain, <i>do not wear your glasses</i>. Contact lenses are the way forward. Please trust me on this, my friends. </li>
</ol>
<br />
<br />
<br /></div>
jjdaydreamhttp://www.blogger.com/profile/12869446910551139215noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-74977986439489782782015-07-12T10:29:00.000-07:002015-07-12T10:29:59.943-07:00Choosing a bank<div>
<span style="font-family: Arial, Helvetica, sans-serif;">When you think about saving money, what's the first thing you think of? Well, probably the bank, right? Most of us believe that keeping a pile of cash under the mattress is a bad plan, so... we have to make use of bank accounts. </span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">However, the sad truth is that putting money in the bank does not always result in that money working for you. Sometimes, especially in South Africa, you can actually LOSE money by keeping it in a poorly chosen bank account - don't forget that the vampire of inflation is always on the move, and if you add in stupendous bank charges and low interest rates... well, sometimes the mattress starts to seem like a pretty good option.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Not really. Mattresses don't allow you to make payments over the internet. And of course rather vulnerable to theft! But the truth is that in order for your cash to work as hard as possible, you need to pay a lot of attention to where you bank.</span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;">
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhF-uKGvnhTIUdpxjutXBzokPmXQhCZQv191iCTrG8Be704QIQuQYVb0OWirh-npHR3GxRPm9d7BZwEG_FoMBwFxaSd_elfyWH3cE-vnJdJsmFAIBmFABr01JfUzqKc6S9kHEWW6oEEoOs/s1600/7172025742_49200f6fe4_z.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="332" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhF-uKGvnhTIUdpxjutXBzokPmXQhCZQv191iCTrG8Be704QIQuQYVb0OWirh-npHR3GxRPm9d7BZwEG_FoMBwFxaSd_elfyWH3cE-vnJdJsmFAIBmFABr01JfUzqKc6S9kHEWW6oEEoOs/s400/7172025742_49200f6fe4_z.jpg" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Georgia, Times New Roman, serif;"><b>Squirrels do well to hoard nuts in secret locations.<br />You also need to keep your money in the right location!</b><br /><i>Photo credit <a href="https://www.flickr.com/photos/tomitapio/7172025742/">Tomi Tapio K</a> (<a href="https://creativecommons.org/licenses/by/2.0/">CC-BY 2.0</a>)</i></span></td></tr>
</tbody></table>
<div>
I have always paid considerable attention to bank charges - long before financial independence became a goal. My attitude towards bank charges and interest has always been along the following lines:</div>
</span><br />
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: large;"><i>Banks exist to pay me money, not the other way around.</i></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br />Banks should be honoured to have access to my savings in order to loan to others at a high interest rate. At the very least I should break even and the total of all bank charges should be <i>less</i> than the interest that I earn on my savings in a bank account.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: large;"><i>Your personal banking package</i></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">It is useful to think of your overall "personal banking package" which could consist of one or all of the following components:</span></div>
<div>
<ol>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><i>transactional account</i> - the account from which you are able to perform transactions (deposits, internet banking payments etc.)</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><i>savings account </i>- a linked account which usually earns higher interest than the transactional account, but has limited transactional functionality</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><i>credit card</i> - dangerous, but they have their uses as discussed in our post on <a href="http://centrifrugalforce.blogspot.com/2015/06/the-beast-of-night-called-debt.html">debt</a></span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><i>rewards programme</i> - some banks reward you for how you bank with them, how often and how much you use your credit (or debit) card with them such as uCount (Standard Bank), eBucks (FNB), Greenbacks (Nedbank) and Absa Rewards.</span></li>
</ol>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">The above package may all come from the same bank or it could be something that you construct from different banks and financial institutions (this is the option that we have taken). </span></div>
</div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: large;"><i>The ideal banking package</i></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Purely from a monetary perspective, the best package is the one that costs the least (if interest and rewards earnings are less than your bank charges) or the one that earns the most (if interest and rewards earnings are greater than your bank charges). Ease of use, location of branches and other features such as sms alerts, mobile apps etc. should not be neglected, but make sure you think very carefully about what you <i>actually need</i> out of a banking package as opposed to </span><span style="font-family: Arial, Helvetica, sans-serif;">the nice extras that a bank will try to sell you or hook you with.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">The following is what I consider the ideal banking package for my family:</span></div>
<div>
<ol>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Internet banking! Being able to make payments online is a non-negotiable for us.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">A single account from which to transact that also earns interest at a high rate.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">A simple fee structure at the lowest possible cost.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">A credit card for managing cash flow - the actual interest rate on the card is not important as we never plan on paying interest on it. What's important is that we have at least one month interest free and that any costs involved are<i> less</i> than the interest we earn on the money that stays in our bank account.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">A rewards programme <i>if and only if</i> it earns more than it costs and if it falls in line with our usual spending habits (how much money we spend, what we spend it on and where we spend it: in other words, so we don't spend more by trying to save money).</span></li>
</ol>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: large;"><i>Fee structures</i></span></div>
</div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Most bank accounts have a fixed monthly cost in addition to costs per transaction. Some bank accounts are "p</span><span style="font-family: Arial, Helvetica, sans-serif;">ay-as-you-transact" (with a low fixed monthly fee) and others come with "bundled transactions" (a higher fixed monthly fee, but with either a near-unlimited or fixed number of transactions included).</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">In order to determine which is best for you, it is important to determine what types of transaction and how many of those transactions you would typically perform every month. The main transaction types to consider are:</span></div>
<div>
<ol>
<li><span style="font-family: Arial, Helvetica, sans-serif;">External debit orders (retirement annuity contributions, credit card repayments etc.)</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Internet banking payments / EFTs (rent, monthly donations etc.)</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Cash withdrawals at till points (smaller amounts).</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Cash withdrawals at your bank's ATM (larger amounts).</span></li>
</ol>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Think about how many transactions you really use, and whether the bundled transactions are worth it. Although each transaction may be cheaper if you transact a lot, the fewer transactions you make, the less likely it is to be worth your while. This is certainly what we found when we switched to a much cheaper pay-as-you-transact account. Although each transaction was theoretically more expensive, we still came out ahead. </span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: large;"><i>Interest earned on your bank account</i></span></div>
</div>
<div style="text-align: center;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Surprisingly, most transactional bank accounts don't actually pay you interest (or pay a very low interest rate) on any money you have in them. Instead, the bank offers you a linked savings account into which you need to transfer your money and then you can earn interest on <i>that</i> money. But you can't easily access those funds directly: they first have to be moved back into the transactional account. </span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">What this system has in its favour, is that your money earns interest in a place that is slightly harder to access - so if you don't have very good money discipline (yet!) then this could be a helpful feature. However, this feature is also the biggest downside of this system. You need to estimate very carefully how much you actually need in the transactional account so that you can maximise the amount that earns interest in the savings account and you're usually limited to how many times you can transfer from the savings account into the transactional account. What a schlep! </span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">What we need is something simple - a single account from which we can transact <i>and</i> earns a decent rate of interest.</span></div>
<div>
<br /></div>
<div style="text-align: center;">
<i><span style="font-family: Georgia, Times New Roman, serif; font-size: large;">Credit cards</span></i></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">As mentioned in a <a href="http://centrifrugalforce.blogspot.com/2015/06/the-beast-of-night-called-debt.html">previous post</a>, we don't have the luxury of choice in credit cards that they seem to have in the US. So instead of choosing the card that gives you the best rewards we're looking for the card that <i>costs the least</i>. Things to consider when choosing a credit card:</span></div>
<div>
<ol>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Credit cards usually have a fixed monthly fee or a fixed annual fee. (Choose one that is zero! Credit cards aren't actually worth paying for.)</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Make sure you have access to either internet banking or emailed statements.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Make sure that you have at least one month (most in South Africa give 55 days) interest free.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Using your credit card for cash withdrawals or for purchasing petrol will cost from the very first day - rather use your debit card for these.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">If you get your credit card from the same place you have your bank account these are sometimes bundled together. Make sure that the bundled cost is less than the cost of a stand-alone credit card from one institution and a bank account from another.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Credit cards are often an integral part of banking reward programmes. Again, you'll need to perform some calculations to see if paying the associated fixed monthly fee in order to have access to the rewards programme is actually worth it. (Spoiler: in most cases, it isn't!)</span></li>
</ol>
</div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: center;">
<i><span style="font-family: Georgia, Times New Roman, serif; font-size: large;">Rewards programmes</span></i></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">It's important to perform the detailed calculations for yourself to see if belonging to a rewards programme is worth it. I'll give you some of the major things to consider here, but you'll need to factor in your own spending patterns. </span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">The best approach to calculating if a reward programme is worth it looks something like this:</span></div>
<div>
<ol>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Work out your ideal banking package and spending patterns while </span><i style="font-family: Arial, Helvetica, sans-serif;">ignoring the existence of any possible rewards programmes.</i><span style="font-family: Arial, Helvetica, sans-serif;"> </span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Then see how much </span><i style="font-family: Arial, Helvetica, sans-serif;">extra </i><span style="font-family: Arial, Helvetica, sans-serif;">joining the bank and the reward programme will cost.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">See how much you would need to alter your spending pattern to get certain benefits from the rewards programme:</span></li>
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Do you need to spend more than you would without the existence of the rewards programme?</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Will you be limiting your freedom because you're required to change most or all of your banking habits just to get certain rewards or achieve a certain level of rewards?</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Do you need to do your shopping somewhere inconvenient or further away? If you need to drive further away than your closest shopping centre then this will add to the cost of joining the rewards programme.</span></li>
</ul>
</ol>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">It is really important to remember that rewards programmes are essentially marketing tools. This means that in most situations, the company is going to make more money out of your participation in the programme - otherwise they wouldn't offer it. It <i>can </i>be win-win, but the company is always going to come out ahead; after all it is their game. </span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Also, by their very nature these programmes reward <i>consumption</i>: something which we are trying to cut down on. If you are being very frugal, they will have nothing to reward you on. So you need to be very sure that you can game the system before going for a programme like this.</span></div>
<div>
<br /></div>
</div>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: large;"><i>So what is <b>our</b> personal package?</i></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">We do our banking with Capitec and we have a credit card from Virgin Money. We haven't bothered with any banking rewards programmes.</span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">Without actually specifically advertising either of these institutions (if their packages change we will always be willing to move) I'm happy to go through our logic about how we came to the above combination:</span></div>
<div>
<ol>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Capitec charges low fees, the fee structure is simple.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Capitec offers very good interest on your bank balance - and they don't bother with a separate transactional and savings account.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Virgin Money costs us absolutely nothing.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">The combination of the above means that our banking package earns us more than it costs us which is just how I like it.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">We'd need to adapt our spending far too much for any of the banking reward programmes to make sense for us - although they certainly are better value than they were a few years ago.</span></li>
</ol>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Something to note about your bank account: regardless of who you bank with, you shouldn't get too excited about their interest rates as only the essential day-to-day cash should be kept in your transactional account. The rest of your cash that is set aside to be easily accessible in case of emergency should be in a money market fund - safer and it will achieve slightly higher growth. Plus, it is never a good idea to keep all your eggs in one basket.</span></div>
</div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">I'll admit, constructing the "optimal personal banking package" can be quite a complicated and demanding task. The "best package" can also change from time to time as the banks compete with each other and change their offerings. Don't let the perfect be the enemy of the good - find a banking solution that works for you and gives you only what you actually need. If the offering with the next bank is only slightly better, the hassle of switching banks is probably not worth it. </span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">But if the differences become significant, don't be afraid of going through the motions of switching. Don't be suckered by special platinum cards or loyalty rewards: a bank is a business, and you are a customer. If they are not fulfilling your needs, you need to move.</span></div>
<div>
<br /></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Going through the above process of evaluating your banking solution can be time consuming, but the potential savings are worth it. You can bank on it.</span></div>
Mr Cent(ri)frugal Forcehttp://www.blogger.com/profile/03109073391727107186noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-69922223662894323522015-07-04T09:36:00.000-07:002015-07-04T09:36:14.447-07:00How to Spend Money<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Arial, Helvetica, sans-serif;">Um... hang on. Isn't this blog supposed to be about saving money, not spending it?</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Well, if you really think about it, spending and saving are predicated upon each other. If you spend badly, you'll have nothing to save. And if you don't save, you'll have nothing to spend.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">So yes, in this post, I'll be talking about <i>when</i> and <i>how</i> to spend money on things that are wants rather than needs, and that are significantly expensive, without breaking the budget, regretting your buys or wasting money. Believe me, it is way too easy to do all of those: and I've made spending mistakes way too often. It is out of some of those mistakes that this blog post was born.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">So, how should I spend money?</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>First Things First</i></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">Put all of your saving, debt repayments (hopefully zero), giving and essential fixed expenses (like rent) into debit orders that go off as soon as you get paid.</span> Commit to NEVER EVER EVER using the credit card to a greater balance than you still have tucked away in your bank account. Then you literally won't have the money to make catastrophic errors: it will be safely tucked away, out of the reach of impulse buys.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">This really shouldn't be optional.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Assuming that this is done, and that you have carefully worked out that you do in fact have the money to buy whatever it is... what next?</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Acknowledge previous mistakes</i></span><br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhaPwyGpsU4xpWozVkd1k3EjlqGidj9CbztSFGjCONWWH-38_tmz3OyiBLQcUoUh8AF1G1ZjikVEJgB1dQvqq3eqUMOGc447ehYdwzUuHAIArGOThkd2r9tq5CmJVhnFlIZ6zJqETp1Pug/s1600/9352524106_afa8c2c281_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="612" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhaPwyGpsU4xpWozVkd1k3EjlqGidj9CbztSFGjCONWWH-38_tmz3OyiBLQcUoUh8AF1G1ZjikVEJgB1dQvqq3eqUMOGc447ehYdwzUuHAIArGOThkd2r9tq5CmJVhnFlIZ6zJqETp1Pug/s640/9352524106_afa8c2c281_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: small;"><b>In order to learn from our mistakes, we need to reexamine why we made them.</b><br /><i>Photo credit</i>: <i><a href="https://www.flickr.com/photos/andymag/9352524106/in/photostream/" target="_blank">Andy Maguire</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></span></td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;">We've all bought that gimmicky item that looked so good in the advert or on the mannequin. Spending well starts with accepting that sometimes you've spent badly, and identifying why you did so. Are you a sucker for good advertising (like I am)? Do you buy expensive items if you're hungry? Do you make excuses for buying too many clothes? </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Acknowledging your weaknesses will enable you to avoid repeating mistakes. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Get a second opinion</i></span><br />
<br />
<span style="font-family: Arial, Helvetica, sans-serif;">If you know that a certain area or type of expenditure is a danger spot for you (because of course you acknowledged past mistakes!), get an (honest) second opinion from someone that (a) you can trust and (b) will give you a sensible opinion. Often a spouse or sibling is a good option: you don't want someone who would be afraid to hurt your feelings by saying HELL NO!</span><br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlaUNaP8KFmdrZ5L4bQs8aEOu4rT-3soDF0jrPBV8GhM-IEa9Rg8ZWDtvZvtTOdXeoVF1gVaX8_tBBW4rrjUdCgRkQ89oORp0OSXLfJloLkeBGZDhaPGcKW8Bf5k_WTD9Qb3qbZ2azUos/s1600/5764026117_be12e8588f_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="477" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlaUNaP8KFmdrZ5L4bQs8aEOu4rT-3soDF0jrPBV8GhM-IEa9Rg8ZWDtvZvtTOdXeoVF1gVaX8_tBBW4rrjUdCgRkQ89oORp0OSXLfJloLkeBGZDhaPGcKW8Bf5k_WTD9Qb3qbZ2azUos/s640/5764026117_be12e8588f_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: small;"><b>Sometimes you just need someone else to tell you NO!</b><br /><i>Photo credit: <a href="https://www.flickr.com/photos/steveboneham/5764026117/" target="_blank">sboneham</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></span></td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;">Sad but true: often when I've asked for a second opinion it is because I have a sneaking suspicion that this expenditure would not be a good idea... knowing that you should ask can be your brain's safety catch when you actually know that you shouldn't.</span><br />
<br />
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Sleep on it</i></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">We're assuming that this projected expenditure isn't a need. Your life doesn't depend on having it. In which case, there is no rush. Don't fall for the sales-chatter: go home and think about it; for several days, weeks or months if necessary, depending on the size of the expense. Often by the time you get back to your car (or bicycle) you'll find that you don't really want it that much. Impulse buys are definitely the enemy of sensible spending.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">In many other cases, even if you still want it, a small amount of research will reveal a better or more economical version of the thing you desire. Calmly looking at the options online may also remove the psychological pressure of having a salesperson hovering over you and telling you all the reasons you should buy it immediately (though in my opinion if someone is pressuring you to buy, you should walk away immediately, as a matter of principle). Either way, waiting a while means you'll be able to make a smarter, more informed decision.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjrOoHd7rNb-eaKkIvjlAXUsg9BQCcGTHT1TL9hJCRWKe-cFvgUVMZAY9FUau-TAR5x7HstuFbd9FHBJKpit2S4maGpJtK69SceRFZjQNQv3WP266qmc8b_iELHqvivnELecHqLROOTbE/s1600/7787096102_88a9721ab1_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="399" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjrOoHd7rNb-eaKkIvjlAXUsg9BQCcGTHT1TL9hJCRWKe-cFvgUVMZAY9FUau-TAR5x7HstuFbd9FHBJKpit2S4maGpJtK69SceRFZjQNQv3WP266qmc8b_iELHqvivnELecHqLROOTbE/s640/7787096102_88a9721ab1_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: small;"><b>Sleep on it: given how much they sleep, kittens must make the BEST DECISIONS EVER. </b><br /><i>Photo credit: <a href="https://www.flickr.com/photos/aigle_dore/7787096102/" target="_blank">Moyan Brenn</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></span></td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;">If nothing else, you'll be more confident that you really do want it. And I've spoken about the benefits of delayed gratification before, right? </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br /><span style="font-family: Arial, Helvetica, sans-serif;"></span>
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Does it improve your quality of life?</i></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">So, how do you know if you <i>really</i> want it? I like to ask myself a series of questions regarding the difference that this item is going to make in my life:</span><br />
<span style="font-family: Arial, Helvetica, sans-serif; font-size: large;"><b><br /></b></span>
<span style="font-family: Arial, Helvetica, sans-serif; font-size: large;"><b>Is this item going to improve my quality of life</b></span><br />
<br />
<ol style="text-align: left;">
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="font-size: large;"><b>Tangibly?</b></span> (e.g. not a new set of dishes almost identical to my current set)</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="font-size: large;"><b>Permanently?</b></span> (e.g. not a fashion item that won't be wearable next year)</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><b><span style="font-size: large;">Ethically?</span></b> (e.g. not a new car which guzzles petrol and destroys the planet)</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="font-size: large;"><b>Sensibly?</b></span> (e.g. I will still be able to buy groceries for the rest of the month)</span></li>
</ol>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">If the answer is yes to all of those questions, you've slept on it, and you've consulted your trusted buddy about it, then I wouldn't feel bad about going for it! Life is meant to be enjoyed. You've saved, you've given, and you've been prudent. You've thought very carefully about whether this will really improve your quality of life. So, go ahead and enjoy it!</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEho23CljKIp_eg8vUyx_pmOsPGAOH4sHvOxGSPs9c9O-VOSm_k0_ma6zplMztG9rVBK-KxHgaOyBbwhJfQ58-XRRRbOYcirxvSz1bPotn33k1WORcuLy6NfPPz-k4D418hIwff9Md7tfU8/s1600/220238850_b9f7dce417_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEho23CljKIp_eg8vUyx_pmOsPGAOH4sHvOxGSPs9c9O-VOSm_k0_ma6zplMztG9rVBK-KxHgaOyBbwhJfQ58-XRRRbOYcirxvSz1bPotn33k1WORcuLy6NfPPz-k4D418hIwff9Md7tfU8/s640/220238850_b9f7dce417_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: small;"><b>Go ahead, take a bite of that ice-cream!</b></span><br /><i><span style="font-size: small;">Photo credit: <a href="https://www.flickr.com/photos/hvassaleiti/220238850/" target="_blank">Jökull Auðunsson</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></span><br /></i></td></tr>
</tbody></table>
To wise, successful spending!<br />
jjdaydream</div>
jjdaydreamhttp://www.blogger.com/profile/12869446910551139215noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-58711415901305297582015-06-30T09:59:00.000-07:002015-07-03T02:59:12.624-07:00Tax 102<span style="font-family: Arial, Helvetica, sans-serif;">In the last post we looked at <a href="http://www.centrifrugalforce.blogspot.com/2015/06/tax-in-south-africa-101.html">tax basics</a>. In this post we'll look in more detail at how the tax calculation works with some examples, get to grips with tax terminology and some more information about the various deductions and types of tax. This post may be a bit long - I hope you won't find it too taxing!</span><br />
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Tangled up in terminology </i></span></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj63nQkdObxTKN5LF2-JY9sh5mo2fRjuqqEdajUV7iwppwFJXFdNNAPBj4_CfhvYNEbrQ3CNxngS8FrfkdKRCt8EdJGQOaC6CRblLffTMLX0xZ6HL4G-4y5NgNRu2epUdCT5TjV9BJ9dTk/s1600/3396427350_c4cc87bfb8_b.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="426" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj63nQkdObxTKN5LF2-JY9sh5mo2fRjuqqEdajUV7iwppwFJXFdNNAPBj4_CfhvYNEbrQ3CNxngS8FrfkdKRCt8EdJGQOaC6CRblLffTMLX0xZ6HL4G-4y5NgNRu2epUdCT5TjV9BJ9dTk/s640/3396427350_c4cc87bfb8_b.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Georgia, Times New Roman, serif;"><span style="text-align: start;"><span style="font-size: small;"><b>It's easy to get tangled up in terminology and abbreviations. Hopefully the list below will help!</b></span></span><br /><i><span style="font-size: small;">Photo credit: <a href="https://www.flickr.com/photos/uxud/3396427350/in/photolist-6b8zwf-6vTgiF-4yVjkz-6JgTkX-8ELsW9-7MAVZT-nRZpk-528Fwg-6tZjcX-68bcuk-8TDdJe-fFTbHv-8Ynt5M-4V4sUg-f76jw-iG96x4-4KPB3t-4V4rQM-4V8FLf-5Sw1iK-8HRBxt-r7fBR4-6YuaPm-8LFjwo-6tV5SZ-hqkkA-6tV9nc-dPcqJ1-aB76kW-sgv5t2-ehGe21-49XGXK-biBAwv-aFvkxa-98kgVG-a3DqaD-arETjN-e3EWoG-bzfAcW-arbLjD-mrQdx-2MYpnV-8mzrsm-7vZxTX-k5kvqd-5deZuC-5daD9B-4a2LDA-83gie6-v45Sua">Gavin Schaefer</a> (<a href="https://creativecommons.org/licenses/by/2.0/">CC-BY 2.0</a>)</span></i></span></td></tr>
</tbody></table>
<div>
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;">CGT - Capital Gains Tax. This is a fairly benign tax (relatively speaking) on profits made on the sale of certain assets.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">IRP5 - this is the document issued to you by an employer that pays tax over to SARS in the form of PAYE.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">IT3a - a document issued to you by an employer that does not pay tax over to SARS in the form of PAYE.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">IT3b - a document issued by financial service providers (banks, investment management firms etc.) where the total interest and dividends that you have received is reflected.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">IT3c - a document issued by </span><span style="font-family: Arial, Helvetica, sans-serif;">financial service providers indicating everything you will need to calculate your capital gains (base costs of shares / unit trusts etc. sold as well as their selling price).</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">ITA34 - the actual tax assessment issued by SARS. This comes as an annoying pdf that seems impossible to open in anything other than Adobe Reader.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">ITR12 - this is the tax return that you will complete as an individual.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">PAYE - Pay As You Earn: tax paid over to SARS by your employer on a monthly basis.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">SARS - the South African Revenue Services (aka, "the tax man").</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">UIF - Unimployment Insurance Fund. A deduction of 1% of your gross income is paid over to SARS and this is matched by your employer.</span></li>
</ul>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">These documents should be sent to you by your financial people by email - you can always request them if you haven't received them. You need to save them somewhere sensible because you could be asked to send them in. This is called being audited and it isn't scary: as long as you are well prepared.</span></div>
</div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: center;">
<br /></div>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Retirement deductions</i></span></div>
<div>
<br /></div>
<div>
<b><span style="font-family: Arial, Helvetica, sans-serif;">Pensions</span></b></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">If you have an employer pension, then your employer can contribute up to 20% of your income (from this employer) towards your pension and you can contribute and deduct up to 7,5% of your retirement funding income (income received from an employer through which you have a pension) from your taxable income.</span></div>
<div>
<br /></div>
<div>
<b><span style="font-family: Arial, Helvetica, sans-serif;">Retirement annuities</span></b></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">You can deduct up to 15% of <i>non</i>-retirement funding income (income received from all sources other an employer through whom you have a pension) from your taxable income if you contribute to a retirement annuity.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Let's look at an example to see what this looks like for someone who earns R200 000 gross salary from their employer as well as R100 000 of additional income from other sources:</span></div>
<div>
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBP_yZtooW6NQAhktYDS_C93-fdlOGCa3YioKLuAQFDe-ecLXzaLfkbLBGkHMo6NgLgZhloiNl_c3GEv6o2VNfoJhaFtgwotP46tF86eaAK9m3ComSfR4iYRT_JdFLXIg125RLGgFltIE/s1600/retirment_deductions.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="321" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBP_yZtooW6NQAhktYDS_C93-fdlOGCa3YioKLuAQFDe-ecLXzaLfkbLBGkHMo6NgLgZhloiNl_c3GEv6o2VNfoJhaFtgwotP46tF86eaAK9m3ComSfR4iYRT_JdFLXIg125RLGgFltIE/s400/retirment_deductions.png" width="400" /></a></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">The maximum amount that they will be allowed from both pension fund contributions and retirement annuity fund contributions is R15 000 provided they contribute at least these amounts. In addition, the employer could be contributing up to 20% (although they're more likely to be contributing something more in line with the 7,5% that you can contribute).</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Rules </span><span style="font-family: Arial, Helvetica, sans-serif;">relating to retirement products will be changing soon, but not for the 2015 or 2016 tax years. Possibly (hopefully!) for the 2016/2017 tax year. When these new rules kick in, it's likely that you will be able to deduct 27,5% of your taxable income through your contributions to pension funds, retirement annuities and provident funds.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div style="text-align: center;">
<i><span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;">Donations</span></i></div>
<span style="font-family: Arial, Helvetica, sans-serif;">As mentioned in a previous post on <a href="http://www.centrifrugalforce.blogspot.com/2015/06/the-grace-of-giving-now-or-later.html">giving</a>, you are able to deduct up to 10% of your taxable income if you make donations to certain public benefit organisations. You will need to get a certificate from them for all donations made in a given tax year. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div style="text-align: center;">
<i><span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;">Capital Gains Tax</span></i></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">I'm not going to go into all the details here as Capital Gains Tax can get fairly complicated, so I'll just stick to the basics which cover most situations. I'll refer to buying and selling shares as an example, but this also applies to unit trusts, ETFs or even property investments.</span></div>
<div>
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Each year you can get R30 000 of <i>profit</i> related to the sale of an asset tax free. In other words, when you sell shares, they need to have increased by more than R30 000 in value before you would start paying tax on them. </span><span style="font-family: Arial, Helvetica, sans-serif;">This amount increases to R300 000 in the year of death which is fair as many assets will need to be sold at this stage.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Once you've deducted the allowed <i>annual exclusion</i> you multiply your profit by the <i>inclusion rate</i> for individuals, which is 33.3% at the moment. So effectively, only one-third of your profits above R30 000 form part of your taxable income. This still needs to be multiplied by the tax rate associated with your tax bracket to work out the tax you would pay on these capital gains.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">When you sell your primary residence, the first R2 million<i> in profit </i>is exempt from capital gains. </span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">If you trade shares frequently, then SARS will class you as a trader and any profit you make will be classed as part of your income - this would mean no reduction through the R30 000 exclusion or only including 33.3% through the inclusion rate. All profit will form part of your taxable income in this case. As far as I am aware you need to hold onto shares for at least six months in order not to be seen as a trader.</span></li>
</ul>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Here's what the capital gains tax calculation looks like:</span> </div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixwxd5B0h6yTOaKuvOlhZTgJG1XTlKuCGHyBT5cX_FrLOZo5IlZRdRItlG7ArKQb2ZLWS3BU9ZVY1UBCd59vF4FLwNwtHYKP2-RLq3YjRrdsZGYz2hdOvkrXXbk3YgGusTM4vSvvsI6gs/s1600/.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="304" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixwxd5B0h6yTOaKuvOlhZTgJG1XTlKuCGHyBT5cX_FrLOZo5IlZRdRItlG7ArKQb2ZLWS3BU9ZVY1UBCd59vF4FLwNwtHYKP2-RLq3YjRrdsZGYz2hdOvkrXXbk3YgGusTM4vSvvsI6gs/s640/.png" width="640" /></a></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Let's look at an example. Let's say you sell R200 000 worth of shares that you originally purchased for R120 000. Let's further assume that you're sitting in the 25% tax bracket before the capital gains tax is factored in and that all of the taxable portion lies in this bracket.</span></div>
</div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBrso2uJ1LsFtz_oHY6OFKS78Nm1lYO2HhnAT2SOkMdalAOIeq334lVgC5vhh5JsxXn01kw_Vo_IKJXpFTHQ5Regi4ymkbHZQWrIyD_XnVjylr6td2jPtDcdMwKcFV2RkHqUy_4xzTLQk/s1600/cgt_example.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="287" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBrso2uJ1LsFtz_oHY6OFKS78Nm1lYO2HhnAT2SOkMdalAOIeq334lVgC5vhh5JsxXn01kw_Vo_IKJXpFTHQ5Regi4ymkbHZQWrIyD_XnVjylr6td2jPtDcdMwKcFV2RkHqUy_4xzTLQk/s400/cgt_example.png" width="400" /></a></div>
<div>
<br /></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">For more on capital gains tax, here's the <a href="http://www.sars.gov.za/AllDocs/OpsDocs/Guides/LAPD-CGT-G02%20-%20The%20ABC%20of%20Capital%20Gains%20Tax%20for%20Individuals%20-%20External%20Guide.pdf">comprehensive guide</a> prepared by SARS.</span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Medical tax credits</i></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">If you belong to a medical aid, then from your calculated tax obligation you can subtract R257 for yourself, and your first dependent and R172 for each additional dependent <i>per month </i>that you belong to the medical aid in a given tax year. So for a family of four, the person who pays for the medical aid could deduct 12 X (R257 + R257 + R172 + R172) = R10 296 for the 2015 tax year. This is not a deduction (it's not reducing taxable income); it's a tax credit. So it takes place right near the end of the tax calculation at the same time that you are credited with any tax already paid in the form of PAYE or provisional tax.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Medical costs that your medical aid does not cover can potentially also reduce your tax obligation, but these uncovered medical costs need to be quite big relative to your income to even make a small difference. Nevertheless, keep a record of all uncovered medical expenses and enter the total into the appropriate place in your tax return. Taking photographs of all receipts and storing them digitally is probably the best approach.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">For more information see <a href="http://www.sars.gov.za/TaxTypes/PIT/Pages/Medical-Credits.aspx">Medical scheme fees tax credit (SARS)</a> and <a href="http://www.sars.gov.za/TaxTypes/PIT/Pages/Additional-Medical-Expenses-Tax-Credit.aspx">Claiming medical expenses (SARS)</a>.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Tax free savings accounts</i></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">These were introduced for the first time in the 2015/2016 tax year (the tax year that we are currently in and not the tax year for which we are about to start submitting our tax returns). So there is still time to get one of these, but knowing exactly where to get it and what you should include in it will take some research - this will be the subject of a future post.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Play by the rules</i></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;">
</span>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">You <i>are</i> allowed to structure your investments in a tax efficient manner. This might influence decisions about:</span></div>
<span style="font-family: Arial, Helvetica, sans-serif;">
<div>
<ul>
<li>When you sell an asset (in which tax year) or how much of an asset you sell.</li>
<li>How you structure donations (how much, who in a couple does the donating: hint, it's the person in the higher tax bracket!)</li>
<li>If you're part of a couple, how you might choose who takes on additional work.</li>
<li>If additional work is even worth it (if most of it sits in a higher tax bracket then it become less worth it; this is where knowing your marginal rate is helpful)</li>
</ul>
</div>
<div>
However, <i>tax evasion</i> is not cool and is not legal. Everything you submit must be an honest and accurate reflection of your various income streams. Know the rules so that you can play the game well <i>within the rules</i>.</div>
</span></div>
<div>
<br /></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">If you follow <a href="https://docs.google.com/spreadsheets/d/19-AZE38k5488Ce2jCgFIMivcMFxUkR9Mkje3De95vGQ/edit?usp=sharing">this link</a> you'll come across a spreadsheet that you can copy and adapt to perform your own tax calculations. Some notes on using this spreadsheet:</span></div>
<div>
<ol>
<li><span style="font-family: Arial, Helvetica, sans-serif;">It's designed for someone who knows the very basics of working in Excel.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">I tried to make it as general as possible, but it is impossible to take everyone's possible tax situation into account. You may need to adapt it in some or all of the following ways:</span></li>
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Take your age into account when it comes to the rebates and the exemption on interest earned.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Work out your tax bracket for a given tax year when working out your "tax obligation for the year".</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Add more rows if you have more sources of income not listed.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Remove the rows associated with retirement funding income and pension fund deductions of you are self employed or your employer does not offer a pension.</span></li>
</ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;">There may be some small discrepancies between your tax assessment as issued by SARS (the ITA34) and the result from this spreadsheet - if it differs by a few cents it's because you only enter whole number amounts in your tax return.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">I'm only human - there may be some mistakes here. Let me know if you find them and I'll correct them - I'll update the tax calculator as any discrepancies arise.</span></li>
</ol>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Until next time, and good luck with e-filing tomorrow! (Yes, I'm assuming you'll do it the day it opens, not the day it's due! If you qualify for a tax refund you want to use it as fuel for your <a href="http://www.centrifrugalforce.blogspot.com/2015/06/pillar-2-financial-independence-engine.html">Financial Independence Engine</a> as soon as possible!)</span></div>
</div>
<div>
<br /></div>
Mr Cent(ri)frugal Forcehttp://www.blogger.com/profile/03109073391727107186noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-10530324998774098972015-06-25T12:36:00.000-07:002015-06-25T12:36:16.269-07:00Tax in South Africa 101<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Tax season for the 2014/2015 tax year starts on 1 July for individuals so I thought this would be a good time to start a mini series on tax. This post will start with a basic introduction and in the next post we'll go into some more detail.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Tax years for individuals always run from 1 March to 28 (or 29) February. It's historical. From 1 July you'll be able to submit your tax return for the tax year starting 1 March 2014 and which ended on 28 February 2015. Because tax years do not coincide with calendar years there is always a little ambiguity which is why talking about the 2014/2015 tax year is helpful terminology.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwLvp606J5DAgcy7nM8cQR6w0jb1mT1pU8q5Xng67ig2UAnAj3LAHD9joCcHKmgHPBW8Q4Uv7TS8A9qjD0AD4knvHdCOkj2ytrKfgTi3WyUMnjfE6iTFehMyMjpqY63-BbZF3uWU0oEME/s1600/16650125410_9bf507aa87_k.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="403" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwLvp606J5DAgcy7nM8cQR6w0jb1mT1pU8q5Xng67ig2UAnAj3LAHD9joCcHKmgHPBW8Q4Uv7TS8A9qjD0AD4knvHdCOkj2ytrKfgTi3WyUMnjfE6iTFehMyMjpqY63-BbZF3uWU0oEME/s640/16650125410_9bf507aa87_k.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Georgia, Times New Roman, serif; font-size: x-small;"><b>Tax is not scary. It's just like a friendly green button waiting to be pressed. <br />But you really should know what that button does.</b><br /><i>Photo credit <a href="https://www.flickr.com/photos/jakerust/16650125410/in/photolist-rnjfcL-FEBNn-CDhDJ-iTXYep-bxDenq-9Vx7u4-7fP5dL-biaBRX-9jeqKN-bDdcmL-axoSjw-biaCV6-biaYZP-9VwGaa-9xSJ1E-77Un37-bSr87x-iqbHS2-7TXaQY-7Ff4Av-9mu7MM-7DqTEi-mMfmxi-9p7dNM-biaWZ4-eebxNq-rqzjFb-jcktAs-biaMc2-9VwzJV-dM3ZSU-axuhRV-mnnL7y-ee5RgX-bPLRLH-9VxbfZ-9afN2b-a1w2xS-biaDRz-bDw2PE-biaH2x-ahxhw9-o5bh9S-biaAS2-9VzXJ9-bASdkj-ir8LWg-rRZ5Za-rBzT31-rCNjgH">www.gotcredit.com</a> (<a href="https://creativecommons.org/licenses/by/2.0/">CC-BY 2.0</a>)</i></span></td></tr>
</tbody></table>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Tax is Not Scary</i></span></div>
<br />
<span style="font-family: Arial, Helvetica, sans-serif;">Firstly, tax is nothing to be worried about. It's quite logical and straightforward once you're used to it. In addition to not being worried about tax, you should also not feel sad about paying tax. The money that we contribute to the government in the form of tax goes towards education (and paying my wife's salary!), healthcare, improvements to roads, parks and libraries. Yes, there is corruption. Yes, some of our tax is wasted and not spent wisely or efficiently. But on the whole, things function and they are only able to function because of the money that we contribute. </span><br />
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 25.1428489685059px;"><br /></span></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 25.1428489685059px;">We pay various types of tax, but the two main types of tax that we experience are tax based on our <i>spending</i> in the form of Value Added Tax (VAT) which is 14% as well as tax based on our <i>income</i>. Income </span>tax is based on a percentage of the total income that you earn after subtracting allowed deductions.</span></div>
<div style="text-align: left;">
<span style="color: #383838; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 25.1428489685059px;"><br /></span></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><b>Main types of income subject to tax</b></span></div>
<div style="text-align: left;">
</div>
<br />
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;">employment income (salaries and wages)</span></li>
</ul>
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;">employment bonuses</span></li>
</ul>
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;">employment fringe benefits (housing allowance, medical aid contribution etc.)</span></li>
</ul>
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;">interest earned (on savings accounts, fixed deposits, from money market etc.)</span></li>
</ul>
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;">dividends (regular payments from companies of which you are a shareholder)</span></li>
</ul>
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;">capital gains (profit on the sale of an asset)</span></li>
</ul>
<br />
<br />
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 25.1428489685059px;"><b>Main types of deductions allowed</b></span></span></div>
<div style="text-align: left;">
</div>
<br />
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 25.1428489685059px;">retirement vehicles: pension funds, retirement annuities, provident funds</span></span></li>
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 25.1428489685059px;">we'll go into the exact rules in the next post</span></span></li>
</ul>
</ul>
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 25.1428489685059px;">donations to the right type of organisation (up to 10% of taxable income)</span></span></li>
</ul>
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 25.1428489685059px;">medical tax credits (based on contributing to a medical aid)</span></span></li>
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 25.1428489685059px;">the exact details will come in the next post</span></span></li>
</ul>
</ul>
<br />
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>The Tax Calculation</i></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">Once you've added in all the income that is subject to tax and deducted all the allowed deductions you are left with something called your <i>taxable income</i>. </span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvijoqW-I3e0wsT1TW2h_oKYDPEDPiey4LcuLN0LYbwPePxYX2VfZhDKt9jSK9K2q37NojMuFrU1CL7aU3vyqO1LhjVtN_aI5eT2ivKIjF-W8RjXm0XWX1JRhaTOKB7l2vHL9b8Q-j92c/s1600/1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"><img border="0" height="68" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvijoqW-I3e0wsT1TW2h_oKYDPEDPiey4LcuLN0LYbwPePxYX2VfZhDKt9jSK9K2q37NojMuFrU1CL7aU3vyqO1LhjVtN_aI5eT2ivKIjF-W8RjXm0XWX1JRhaTOKB7l2vHL9b8Q-j92c/s400/1.png" width="400" /></span></a></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">A percentage of this value is calculated as your tax obligation for a given tax year. There are six <i>tax brackets</i> and the bracket that you fall into depends on the size of your <i>taxable income </i>(i.e. income after allowed deductions). For 2014/2015 the the <a href="http://www.sars.gov.za/Tax-Rates/Income-Tax/Pages/Rates%20of%20Tax%20for%20Individuals.aspx">tax brackets</a> work as follows:</span><br />
<br />
<br />
<ol>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Any taxable income less than or equal to </span><b style="font-family: Arial, Helvetica, sans-serif;">R174 550</b><span style="font-family: Arial, Helvetica, sans-serif;"> is taxed at </span><b style="font-family: Arial, Helvetica, sans-serif;">18%</b><span style="font-family: Arial, Helvetica, sans-serif;">.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Anything between R174 550 and </span><b style="font-family: Arial, Helvetica, sans-serif;">R272 700</b><span style="font-family: Arial, Helvetica, sans-serif;"> is taxed at </span><b style="font-family: Arial, Helvetica, sans-serif;">25%</b><span style="font-family: Arial, Helvetica, sans-serif;">.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Anything between R272 700 and </span><b style="font-family: Arial, Helvetica, sans-serif;">R377 450</b><span style="font-family: Arial, Helvetica, sans-serif;"> is taxed at </span><b style="font-family: Arial, Helvetica, sans-serif;">30%</b><span style="font-family: Arial, Helvetica, sans-serif;">.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Anything between R377 450 and </span><b style="font-family: Arial, Helvetica, sans-serif;">R528 000</b><span style="font-family: Arial, Helvetica, sans-serif;"> is taxed at </span><b style="font-family: Arial, Helvetica, sans-serif;">35%</b><span style="font-family: Arial, Helvetica, sans-serif;">.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Anything between R528 000 and </span><b style="font-family: Arial, Helvetica, sans-serif;">R673 100</b><span style="font-family: Arial, Helvetica, sans-serif;"> is taxed at </span><b style="font-family: Arial, Helvetica, sans-serif;">38%</b><span style="font-family: Arial, Helvetica, sans-serif;">.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Any portion of taxable income over </span><b style="font-family: Arial, Helvetica, sans-serif;">R673 000</b><span style="font-family: Arial, Helvetica, sans-serif;"> is taxed at </span><b style="font-family: Arial, Helvetica, sans-serif;">40%</b><span style="font-family: Arial, Helvetica, sans-serif;">.</span></li>
</ol>
<br />
<br />
<br />
<span style="font-family: Arial, Helvetica, sans-serif;">The rate associated with the tax bracket that you fall into is known as your <i>marginal rate</i>. If you lie in a higher tax bracket then any portion of your taxable income that falls into a lower tax bracket is taxed at the rate of that bracket. The calculation looks something like this:</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0afobGQV0tCP9vv74IIUQDTMFw3yu2OTEu8S9WtNiYs27uphPWhD05fFiJnooWExQl6vJg1utwyK4ZPlgEQYdmfH3AyRz79t82G4SO-ikPOhNhTka3Hxdn7i_VBJS6uydF-yt5i236hw/s1600/3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"><img border="0" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0afobGQV0tCP9vv74IIUQDTMFw3yu2OTEu8S9WtNiYs27uphPWhD05fFiJnooWExQl6vJg1utwyK4ZPlgEQYdmfH3AyRz79t82G4SO-ikPOhNhTka3Hxdn7i_VBJS6uydF-yt5i236hw/s640/3.png" width="640" /></span></a></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<div class="separator" style="clear: both; text-align: center;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">Everyone also receives a tax rebate which is deducted from this tax obligation. For 2014/2015 the rebates are R12 726, plus another R7 110 if you are older than 65 plus another R2 367 if you are older than 75. </span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEQWZZ3l1ATlT0lTe1pPxMRrOKLahPZ4XhEMcB8jWOa9RgJmfCerySrQxudKQycwB-ayG2BJuOEauw55w8eCZKe3doUC-CvQ2KexEE_rTOEhZ7NjrZrgRm4H2axhteRyHsQJQic_sITtw/s1600/3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"><img border="0" height="56" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEQWZZ3l1ATlT0lTe1pPxMRrOKLahPZ4XhEMcB8jWOa9RgJmfCerySrQxudKQycwB-ayG2BJuOEauw55w8eCZKe3doUC-CvQ2KexEE_rTOEhZ7NjrZrgRm4H2axhteRyHsQJQic_sITtw/s400/3.png" width="400" /></span></a></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">If you're employed, your employer should be taking off tax every month in the form of Pay As You Earn (PAYE). If you're self employed you are classed as a provisional tax payer and provisional tax needs to be paid part way through the tax year. In either case, you can subtract from your tax obligation any tax that you have already paid to work out how much tax you still need to pay or how much of a refund you will receive if you have paid "too much tax".</span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiALAIEAdod6b1HrkOfAiDagBU8RnUfjRhPKosA44nvYs5lt91j-qLy4XS-AJF-PVdWUaAh5n8uUi-0RC8l3JdvWQcDZCclh8lpunahA6CUjUvSwIu4rpBCrkCGyEvFeGwh6e5eztBnCAw/s1600/4.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"><img border="0" height="106" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiALAIEAdod6b1HrkOfAiDagBU8RnUfjRhPKosA44nvYs5lt91j-qLy4XS-AJF-PVdWUaAh5n8uUi-0RC8l3JdvWQcDZCclh8lpunahA6CUjUvSwIu4rpBCrkCGyEvFeGwh6e5eztBnCAw/s400/4.png" width="400" /></span></a></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">Don't panic if you found any of this confusing! Next post we'll look at some example tax calculations and I'll also share a spreadsheet that can help you with the calculations. But I think it's important to see the maths behind the tax calculations.</span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">Hold on to any questions you may have until the next post - then if you still have questions fire away!</span></div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
<br /></div>
<div>
<span style="color: #383838; line-height: 25.1428489685059px;"><span style="font-family: Arial, Helvetica, sans-serif;"><i>Useful South African Revenue Services (SARS) references:</i></span></span><br />
<br />
<ul>
<li><a href="http://www.sars.gov.za/AllDocs/OpsDocs/Guides/LAPD-Gen-G01%20-%20Taxation%20in%20South%20Africa%20-%20External%20Guide.pdf" style="font-family: Arial, Helvetica, sans-serif; line-height: 25.1428489685059px;">Taxation in South Africa 2014/2015</a></li>
<li><a href="http://www.sars.gov.za/Tax-Rates/Income-Tax/Pages/Rates%20of%20Tax%20for%20Individuals.aspx" style="font-family: Arial, Helvetica, sans-serif;">Rates of Tax for Individuals</a></li>
</ul>
</div>
<br />
<div style="border: 0px; font-family: gotham, helvetica, arial, sans-serif; font-size: 14px; line-height: 1.571428em; margin: 0px; padding: 0px;">
<div style="border: 0px; color: #383838; font-size: 14px; line-height: 21.9999923706055px; margin: 0px; padding: 0px;">
</div>
</div>
Mr Cent(ri)frugal Forcehttp://www.blogger.com/profile/03109073391727107186noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-90018742116747500742015-06-21T10:17:00.000-07:002015-06-21T10:17:33.118-07:00The Grace of Giving: Now or Later?<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Arial, Helvetica, sans-serif;">John Wesley famously said, <span style="background-color: white; color: #181818; line-height: 18px;"><i>“Earn all you can, give all you can, save all you can”</i>. Most of us will admit that generous giving is an admirable quality. How does this fit in with the quest for financial independence?</span></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; color: #181818; line-height: 18px;"><br /></span></span>
<div style="text-align: center;">
<span style="background-color: white; color: #181818; line-height: 18px;"><span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Now or Later?</i></span></span></div>
<span style="background-color: white; color: #181818; line-height: 18px;"><span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i><br /></i></span></span>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVK2kiL1spl7o4kg63NL0bF2shtQX-CkfzLesYl03fDheX_5uy5zEl8grovnUP4YOpIx-Z_L9Sx2B0ERcIOQg8S2Xtr3xAX7EH1fOaOoq9QXkEsIYpS0ZkAlK4mA39-lB0BGfCyd2QZjU/s1600/4820016398_18b3580fdb_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="358" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVK2kiL1spl7o4kg63NL0bF2shtQX-CkfzLesYl03fDheX_5uy5zEl8grovnUP4YOpIx-Z_L9Sx2B0ERcIOQg8S2Xtr3xAX7EH1fOaOoq9QXkEsIYpS0ZkAlK4mA39-lB0BGfCyd2QZjU/s640/4820016398_18b3580fdb_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">As always, there are several sides to the argument...<br /><i>Photo credit: <a href="https://www.flickr.com/photos/kristofher/4820016398/" target="_blank">Kristofher Muñoz</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; color: #181818; line-height: 18px;">At the moment, as an example, we live on roughly 22% of our joint salaries (post tax). Surely that leaves 78% to donate to charities and organisations that desperately need financial support? John Wesley also said </span></span><span style="background-color: white; color: #181818; line-height: 18px;"><span style="font-family: Arial, Helvetica, sans-serif;">“<i>Do you not know that God entrusted you with that money (all above what buys necessities for your families) to feed the hungry, to clothe the naked, to help the stranger, the widow, the fatherless; and, indeed, as far as it will go, to relieve the wants of all mankind?"</i> Whether or not you believe in God, t</span></span><span style="background-color: white; color: #181818; font-family: Arial, Helvetica, sans-serif; line-height: 18px;">he needs in this country are so enormous that it is difficult to sanction holding on to resources which could serve others.</span><span style="background-color: white; color: #181818; font-family: Arial, Helvetica, sans-serif; line-height: 18px;"> </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; color: #181818; line-height: 18px;"><br /></span></span>
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; color: #181818; line-height: 18px;">On the other hand, if we are particularly good stewards of our wealth, then surely it is better for us to take good care of it, ensuring optimal growth, and allowing much greater generosity in the future - putting compound interest to work for charity, as it were. The hope is that after reaching financial independence, our ability to be lavish with our giving will be much larger. Besides, if we don't save at all, we ourselves will be a burden on society at some point in the future when we are no longer able to work. </span></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; color: #181818; line-height: 18px;"><br /></span></span>
<span style="background-color: white; color: #181818; font-family: Arial, Helvetica, sans-serif; line-height: 18px;">And if we can imagine a third, less altruistic hand in this argument, what about the whole point of this blog? Aren't we supposed to be saving everything we possibly can so that we can reach financial independence as quickly as possible? That couple of thousand rand that you give away each month could be powering the financial independence engine and shaving months if not years off your working life. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; color: #181818; line-height: 18px;"><br /></span></span>
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; color: #181818; line-height: 18px;">Since this one is probably a bit easier to answer, let's put it to rest now:</span></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; color: #181818; line-height: 18px;"><br /></span></span>
<div style="text-align: center;">
<span style="color: #181818; font-family: Georgia, Times New Roman, serif; font-size: x-large;"><span style="background-color: white; line-height: 18px;"><i>Reasons to Give Now:</i></span></span></div>
<br />
<ol style="text-align: left;">
<li><span style="background-color: white; font-family: Arial, Helvetica, sans-serif; line-height: 18px;"><span style="color: red;">Gratitude.</span> Giving really is a grace. It gives me a chance to reflect on everything we've been given. How wonderful that we are in a position to have so much more than we need that we can <i>give money away</i>! How wonderful that we are able to touch the lives of others, even in a small way. How wonderful that we are able to encourage and support causes that we believe in.</span></li>
<li><span style="color: red;"><span style="background-color: white; font-family: Arial, Helvetica, sans-serif; line-height: 18px;">There are an awful lot of needs </span><i style="font-family: Arial, Helvetica, sans-serif; line-height: 18px;">right now</i><span style="background-color: white; font-family: Arial, Helvetica, sans-serif; line-height: 18px;">.</span></span><span style="background-color: white; color: #181818; font-family: Arial, Helvetica, sans-serif; line-height: 18px;"> Telling the NGO to let the children in the orphanage hang on a few years for their supper because we're just letting their donation grow by compound interest... you can imagine how well that wouldn't go down. The church roof might actually fall in by the time we are good and ready to start giving. </span></li>
<li><span style="background-color: white; font-family: Arial, Helvetica, sans-serif; line-height: 18px;"><span style="color: red;">Good habits die hard.</span></span><span style="background-color: white; color: #181818; font-family: Arial, Helvetica, sans-serif; line-height: 18px;"> Even if you are giving less than you plan to give in the long run, it means it won't come as such a shock when you finally reach the point where you want to start giving a significantly. The danger of course is that we get so attached to our money that by the time we were going to start, it's just too much... or we haven't taken account of it in our FI calculations, or, or, or... Far better to put the habits into place from the beginning, even if it burns a little bit.</span></li>
<li><span style="background-color: white; font-family: Arial, Helvetica, sans-serif; line-height: 18px;"><span style="color: red;">Tax.</span></span><span style="background-color: white; color: #181818; font-family: Arial, Helvetica, sans-serif; line-height: 18px;"> You won't ever make money by giving but if you're giving to the right types of organisations <a href="http://www.sars.gov.za/AllDocs/OpsDocs/Guides/LAPD-IT-G17%20-%20Basic%20Guide%20to%20Tax%20Deductible%20Donations%20-%20External%20Guide.pdf" target="_blank">(section 18A)</a> then the government will give you a tax rebate on some of your donations. Up to 10% of your taxable income can be deducted from your taxable income via donations. So you pay a bit less tax. (Mr Cent(ri)frugal will do a more detailed post on this later - this is called delegation.) What is comes down to as far as I'm concerned is you're forcing the government to donate money to the charity of your choice. I like. </span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; line-height: 18px;"><span style="color: red;">Giving in other ways.</span><span style="color: #181818;"> This doesn't really belong on this list, but it is still something to consider. Sometimes, we can (and should) be giving acts of service, not only money. This costs nothing but time, but can be hugely valuable. Does the organisation you're supporting need volunteers? Maybe this is a way that you can maximise both giving and saving. (I still don't think financial giving should be off the table, though...)</span></span></span></li>
</ol>
<div style="text-align: center;">
<span style="color: #181818; font-family: Georgia, Times New Roman, serif; font-size: x-large;"><span style="line-height: 18px;"><i>How much then?</i></span></span></div>
<div style="text-align: center;">
<span style="color: #181818; font-family: Georgia, Times New Roman, serif; font-size: x-large;"><span style="line-height: 18px;"><i><br /></i></span></span></div>
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEh9YOO5Ym5z0IPf6Xwa2HvZGE5Nyqd5nntgsQ3X_fXf2P_26XeUBRgSaKovO7z__F2mh2vfsdtUysohyphenhyphenkiulPI6Jm7qlryzwzKRrB49KaVKPOk8CNIcKRScTuZeGSDpySAOTnnvxRmdk/s1600/8085629858_57c0ef51fe_o.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="527" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEh9YOO5Ym5z0IPf6Xwa2HvZGE5Nyqd5nntgsQ3X_fXf2P_26XeUBRgSaKovO7z__F2mh2vfsdtUysohyphenhyphenkiulPI6Jm7qlryzwzKRrB49KaVKPOk8CNIcKRScTuZeGSDpySAOTnnvxRmdk/s640/8085629858_57c0ef51fe_o.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Not <i>whether </i>there should be a gift, but <i>what size</i> the gift should be.<br /><i>Photo credit: <a href="https://www.flickr.com/photos/61423903@N06/8085629858/in/photolist-djuY4m-be1Xvv-6dCrkR-djmVpg-6awWox-brfpyt-6DeA4q-bAWEi1-7Tbb9t-citSjG-4aT8QN-5V78Rt-cj7EHC-9LvdHH-7pTazF-iuiV2B-2Dj3gw-95hFtg-6yUYh8-6aB6rm-8Uwt9o-iuiiYS-94LTSq-7GHF7y-fHLd1t-KLYW4-5UTiMS-aVmeYp-uf4x3f-3NhPsD-8AYdMe-dCRNnt-6kgLw-dbPNQV-99zTFz-5GWi7R-be24vM-94eVrp-8Xkf6J-dxgMa9-cehV4Y-vbF1W-bBkSEv-8RTKR5-4Jp1Nj-oRuse6-dz5Wnj-91XHZn-4TTAc-7pfPqE" target="_blank">FutUndBeidl</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
<span style="background-color: white; color: #181818; font-family: Arial, Helvetica, sans-serif; line-height: 18px;">Okay, so assuming that you agree with me that a certain amount of giving should happen now, the question really comes down to this: where is the balance between the "give all you can" and the "save all you can" clauses of the Wesleyan advice with which I started this post?</span><br />
<span style="background-color: white; color: #181818; font-family: Arial, Helvetica, sans-serif; line-height: 18px;"><br /></span>
<span style="background-color: white; color: #181818; font-family: Arial, Helvetica, sans-serif; line-height: 18px;">I think this is really something each individual or family needs to figure out for themselves. I'll share our thinking, not because I think we've necessarily got this sorted, or because we feel grandly self-righteous about how much we give (as you'll see, we haven't reached our giving goal yet), but because it can be helpful to have a benchmark; somewhere to start your own thinking.</span><br />
<span style="background-color: white; color: #181818; font-family: Arial, Helvetica, sans-serif; line-height: 18px;"><br /></span>
<span style="background-color: white; color: #181818; font-family: Arial, Helvetica, sans-serif; line-height: 18px;">I mentioned that we live on approximately 22% of our post tax income. We donate about 8% of that income to two organisations - one religious, one education NGO. The remaining 70% goes to savings. </span><br />
<span style="background-color: white; color: #181818; font-family: Arial, Helvetica, sans-serif; line-height: 18px;"><br /></span>
<span style="color: #181818; font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; line-height: 18px;">Our end goal is to be giving the same amount that we live on. Wouldn't it be wonderful if we could each support another family to the same standard of living that we enjoy? Of course this money wouldn't go to one other family, but would be spread out across the organizations that we support. It simply gives us an image of how we would like the world to be: every person fully supporting one other person.</span></span><br />
<span style="color: #181818; font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; line-height: 18px;"><br /></span></span>
<span style="color: #181818; font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; line-height: 18px;">We haven't reached this giving goal yet. At the moment, it would just put our financial independence goal too far away. We are (theoretically) only supporting just over one third (8/22) of another couple, living at the same level as we do. But we're working on it. And after financial independence we are confident that this will be possible, if not exactly easy. It forms part of our plan: we are saving more now, aiming for a bigger goal, so that we can make it happen in the future.</span></span><br />
<span style="color: #181818; font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; line-height: 18px;"><br /></span></span>
<span style="color: #181818; font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; line-height: 18px;">In closing, I really do believe that giving, both now and later, is an incredible opportunity. It puts you at the forefront of a different way of seeing the world; a way of seeing the world that isn't about "us" and "them" but only about all of us, together, doing the best we can. Even if we don't get it right straight away, it is a dream that we can all work towards, starting with the smallest donation and building up from there.</span></span><br />
<span style="color: #181818; font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; line-height: 18px;"><br /></span></span>
<span style="color: #181818; font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; line-height: 18px;">To gracious giving, and generosity of heart!</span></span><br />
<span style="color: #181818; font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; line-height: 18px;">jjdaydream</span></span><br />
<span style="background-color: white; color: #181818; font-family: Arial, Helvetica, sans-serif; line-height: 18px;"><br /></span>
<span style="background-color: white; color: #181818; font-family: Arial, Helvetica, sans-serif; line-height: 18px;"><br /></span></div>
jjdaydreamhttp://www.blogger.com/profile/12869446910551139215noreply@blogger.com2tag:blogger.com,1999:blog-5505099062221766000.post-64216727173965033682015-06-17T11:13:00.002-07:002015-06-17T11:13:28.123-07:00Cycling<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Arial, Helvetica, sans-serif;">Hi again everyone</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">People tend to look at me bit strangely when I tell them that I cycle to work. I must say that I had a lot of misgivings at first too. But now I think that ditching the car (most of the time) has been one of the best changes we've made to our lives in the last few years. Here's my bold summary:</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>You should cycle to work.</i></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLuoiw1XF0n9VwtaRMadxhbPN-j_pxUur_xR3VZekBGVXjJRbPsTCpGM860pT3XviAlWQzZVHkBcLJl8JsJ2I7bKgBjKQlUYVnwuKu1AmPVfSmote8YRtmqvhtR48ILD1xFWeAsCNnQHA/s1600/3149358543_538d50ec27_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="428" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLuoiw1XF0n9VwtaRMadxhbPN-j_pxUur_xR3VZekBGVXjJRbPsTCpGM860pT3XviAlWQzZVHkBcLJl8JsJ2I7bKgBjKQlUYVnwuKu1AmPVfSmote8YRtmqvhtR48ILD1xFWeAsCNnQHA/s640/3149358543_538d50ec27_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Who wouldn't want to ride a bike when it looked like this?<br />
<i>Photo credit: <a href="https://www.flickr.com/photos/mgobbi/3149358543/" target="_blank">Michael</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;">Not sold? Not even by the blue and yellow bike?</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Benefits of cycling:</i></span><br />
<ol style="text-align: left;">
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">The Planet.</span> People, we do not live on an infinite resource. I would like my children to know what trees look like from first hand experience. Every kilometer cycled is a kilometer less fossil fuel consumption.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">Your wallet.</span> Our very basic little citiGolf costs approximately R4 per kilometer, if you factor in wear and tear, maintenance, depreciation and fuel (which you absolutely should, by the way. That new clutch is not going to pay for itself!). How much does your car cost? Go <a href="http://www.aa.co.za/on-the-road/calculator-tools/rates-calculator.html" target="_blank">here</a> to get an estimate. It totally changed my perspective when I worked out that my home-work route was costing me R50 a time. Would I really spend R250 per week just getting to work?</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">Health.</span> I am fitter (and skinnier) than I've ever been in my life, despite eating like a Trojan. This comes down to simple Maths: although I don't cycle fast, or particularly far, I get about an hour's worth of exercise on average five times a week. This makes a big difference to a totally <i>non-gym</i> girl. If I don't cycle for a week, I can feel the stress levels rising as well. Apparently endorphins are a real thing.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">Connection. </span>Moving more slowly, and not isolated in your car bubble, you notice more. This week, I noticed that the pavements near our house had been swept, and spent several moments feeling grateful to whomever had toiled at that thankless task. I shared a wry grin with some domestic workers setting off on their longer journey home. Cycling gives me a chance to connect with the world around me far more than driving.</span></li>
</ol>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGrNYpzdpVXMXbSJjJPWkzEROVfJO98C0zs-nCld2pshFdrOEByo8Y6vj13QUUty6BcGHqoWXv_4wgKTKwBXKuOJevHWDWalHExdCVcXkYtj_dfsYi2MbxrN14vCua5L5cFo7y-sXSJgA/s1600/13205411865_2d12766a70_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="426" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGrNYpzdpVXMXbSJjJPWkzEROVfJO98C0zs-nCld2pshFdrOEByo8Y6vj13QUUty6BcGHqoWXv_4wgKTKwBXKuOJevHWDWalHExdCVcXkYtj_dfsYi2MbxrN14vCua5L5cFo7y-sXSJgA/s640/13205411865_2d12766a70_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Being connected to the world around you: priceless.<br />
Photo credit: <a href="https://www.flickr.com/photos/onepointfour/13205411865/in/photolist-m7VbSV-7pBtca-dvMSq-4oGgE-dSds3q-bu7qwq-7tytD4-84BykQ-f2MKA-8MrJjT-9J4HFP-rPJg5U-5Nihze-bxjDLG-qRbNu9-eUzcBm-4Tb5Un-iNR75-qe6Pkc-3BcP6s-hVZMqK-cEXeqU-6d4a8A-eqp7Aw-7jk4vQ-jx7vZ-pracgE-4fdkfK-4984i6-89gRqT-5qvSM8-6VQp7o-fvnzZa-okvtFm-4z2iFT-96AQXb-9uhjrp-jt3rB7-9ZAu47-o3s6Z-piMeAm-84ByPf-bH2e1T-5Q4KrS-77YdLc-joYwpp-fp6y-arYxM3-6ZgGGJ-pXsv3G" target="_blank">Dustin Gaffke</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></td></tr>
</tbody></table>
<div>
<i style="font-family: Georgia, 'Times New Roman', serif; font-size: xx-large;">Problems with cycling (and how to make them go away):</i></div>
<div>
<ol style="text-align: left;">
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">"I'll arrive at work all sweaty and gross".</span> Actually, you don't get that hot and sweaty, even in summer: cycling works up a pleasant breeze. You also don't have to cycle as if you're about to win the Tour de France. I usually take it easy; and if I can feel that I'm getting a bit warm then I deliberately slow down for the last few minutes of my trip. </span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">"I can't work in cycling clothes".</span> Um, most workplaces have bathrooms, right? Some even have shower facilities. Now since I'm a teacher and I am NOT sharing a shower facility with the kids (we all have limits), I don't shower after my trip. But I do keep my work clothes in my staff locker and change when I get to school. I transport a week's worth of clothes when I drive in on the day I stay for evening classes. The quick-change process takes about 5-10 minutes in the morning.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">"It's too far".</span> If you live less than 10 km from work, just stop being a wuss. If I can get fit enough, trust me, anyone can. If you live further away, consider moving closer to work, or moving work closer to home: quickest way to reduce your carbon footprint too!</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">"It's cold and wet in winter".</span> See point three above. The benefits far outweigh this consideration, unless it is actually POURING when you want to leave. And that has only happened to us once or twice this whole winter so far; it is far rarer than you might think. If you ain't already sick, you'll dry and warm up in no time. </span></li>
<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: right; text-align: center;"><tbody>
<tr><td><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYzZ8GaNkusPvJkacOuQjUvM7KjgB-LPBCcXQfK6F71yEPOgdRPNi38nlGDycFLd9TlA4ePUx7lPD-9CHKnmjbnLjO1JZhgFyO1U59BN6DNTja8HFWKOGWJpCNX1TqFifgg9I7ivC_0gc/s1600/4205340411_cecbf6600d_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="428" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYzZ8GaNkusPvJkacOuQjUvM7KjgB-LPBCcXQfK6F71yEPOgdRPNi38nlGDycFLd9TlA4ePUx7lPD-9CHKnmjbnLjO1JZhgFyO1U59BN6DNTja8HFWKOGWJpCNX1TqFifgg9I7ivC_0gc/s640/4205340411_cecbf6600d_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="font-size: 12.8000001907349px;">It isn't snowing, so stop making excuses!<br />
<i>Photo credit: <a href="https://www.flickr.com/photos/sakeeb/4205340411/" target="_blank">Sakeeb Sabakka</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">(CC-BY 2.0)</a></i></td></tr>
</tbody></table>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">"I've got too much to carry".</span> Easy. Stay at work a bit longer. Work a bit more efficiently. Leave work at work. This is a fantastic side effect of cycling. Brain space expansion!</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">"It'll take too long"</span>. It takes me about 30 minutes to cycle to school. If there is absolutely no traffic (i.e. almost never) it take 15 minutes to drive the same distance. And I'm getting in my free gym and mental health session as well. The time investment might feel like a lot, but it is actually minimal, considering the other benefits. I do leave a little earlier in case of flat tyres and other cycling catastrophes but that just gives me a bit more time at work to get my ducks in a row. My husband sometimes beats his colleagues home, as he almost always cycles during peak traffic.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">"It's not safe".</span> the received wisdom in South Africa is that the streets are a mad, bad place to be, especially for women, and much better only seen from the tinted windows of your vehicle. This is an important one to get right: it isn't worth risking your personal safety. BUT if you think about it, the very act of living risks your personal safety. You have to decide what risks are acceptable, based on their reward. My safety boundaries? I won't cycle at night. I have chosen my route based on the cycle paths as far as possible. I try to cycle with my husband through the dangerous/dark parts of the trip. I am hyper cautious on the road, and often wait for ages at intersections rather than take any chances. Depending on where you live, this last point might be the deal breaker. But think carefully before you allow it to put you off: you may just be making excuses. Plus, the more cyclists we have on the roads, the safer it will be for everyone: more cycle paths, better motorist awareness, general goodness.</span></li>
</ol>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">So, to return to my first point... </span><i style="font-family: Georgia, 'Times New Roman', serif; font-size: xx-large; text-align: center;">You should cycle to work.</i></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">It's okay to be scared - I was at first! Don't let fear stop you.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">It's okay to start out slow. I'll post another time on how I got into the swing of it. Don't let inertia stop you. </span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">It's also okay to wimp out once in a while. Every day that you don't drive is benefiting you in so many ways. Don't let a desire for 100% perfection stop you.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Basically, don't let anything stop you.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">To freedom!</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">jjdaydream</span></div>
<div>
</div>
</div>
</div>
jjdaydreamhttp://www.blogger.com/profile/12869446910551139215noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-105055199719381552015-06-14T11:27:00.002-07:002015-06-14T11:27:55.151-07:00The Beast of the Night called Debt<div style="text-align: center;">
<b><span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>EMERGENCY POST!</i></span></b></div>
<div style="text-align: center;">
<b><span style="font-family: Georgia, Times New Roman, serif; font-size: large;"><i><br /></i></span></b></div>
<div style="text-align: left;">
<span style="font-family: Georgia, Times New Roman, serif;">While cycling to work this week I saw a newspaper headline telling me that South Africa is <a href="http://www.iol.co.za/news/south-africa/western-cape/sa-world-s-most-indebted-nation-1.1869296#.VXsjO3WUdNA">"the world's most indebted nation"</a>. I was going to post something about where to bank or where to invest in South Africa this weekend, but debt is such a serious emergency that this post cannot wait any longer!</span></div>
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKZdiswK46Y7JyMhA_tm7Fz0WTI2WsrSWIywg737iOG6v2IUap7_ZwrnFWIKB5OEb0uHv-mYdXpKpXIsQPM6wOO6-J7vKyfoYveQHSVtEisyc7NrEelRQiY8728W6W-_9i__sFuSrA4JE/s1600/5517760158_b17900d902_b.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><span style="font-family: Georgia, Times New Roman, serif;"><img border="0" height="401" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKZdiswK46Y7JyMhA_tm7Fz0WTI2WsrSWIywg737iOG6v2IUap7_ZwrnFWIKB5OEb0uHv-mYdXpKpXIsQPM6wOO6-J7vKyfoYveQHSVtEisyc7NrEelRQiY8728W6W-_9i__sFuSrA4JE/s640/5517760158_b17900d902_b.jpg" width="640" /></span></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Georgia, Times New Roman, serif; font-size: x-small;"><b>The Beast of the Night Called Debt</b></span><span style="font-family: Georgia, Times New Roman, serif;"><br /><i>Photo credit <a href="https://www.flickr.com/photos/familymwr/5517760158/">Pablo Piedra</a> (<a href="https://creativecommons.org/licenses/by/2.0/">CC-BY 2.0</a>)</i></span></td></tr>
</tbody></table>
<span style="font-family: Georgia, Times New Roman, serif;">To see why debt is such a terrible thing. Let's take a look another look at the formula that tells us how how our investments grow with compound interest:</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br />
</span><br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjj8W-oRBNQ8TR4jtQAQg0bxMk4ZmfrehihZACmXeeOWopt5J5VuyHUZeHNvbYQGWRs7dBpKf1I9KTbMNMWyXUzWogD8hcNQVC6tEm1yyzN_C7OBdNfLdfH4wjPVtSmeqEl3RyJYUInsc0/s1600/compound_interest.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Georgia, Times New Roman, serif;"><img border="0" height="54" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjj8W-oRBNQ8TR4jtQAQg0bxMk4ZmfrehihZACmXeeOWopt5J5VuyHUZeHNvbYQGWRs7dBpKf1I9KTbMNMWyXUzWogD8hcNQVC6tEm1yyzN_C7OBdNfLdfH4wjPVtSmeqEl3RyJYUInsc0/s200/compound_interest.png" width="200" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
<div class="" style="clear: both; text-align: left;">
<span style="font-family: Georgia, Times New Roman, serif;">which we can compare to the formula that tells us how our debt grows:</span></div>
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjj8W-oRBNQ8TR4jtQAQg0bxMk4ZmfrehihZACmXeeOWopt5J5VuyHUZeHNvbYQGWRs7dBpKf1I9KTbMNMWyXUzWogD8hcNQVC6tEm1yyzN_C7OBdNfLdfH4wjPVtSmeqEl3RyJYUInsc0/s1600/compound_interest.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Georgia, Times New Roman, serif;"><img border="0" height="54" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjj8W-oRBNQ8TR4jtQAQg0bxMk4ZmfrehihZACmXeeOWopt5J5VuyHUZeHNvbYQGWRs7dBpKf1I9KTbMNMWyXUzWogD8hcNQVC6tEm1yyzN_C7OBdNfLdfH4wjPVtSmeqEl3RyJYUInsc0/s200/compound_interest.png" width="200" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
<span style="font-family: Georgia, Times New Roman, serif;">See any difference? You shouldn't, because they're the same. That's right, the same power of compound interest that can help you buy freedom when you invest, acts against you when you're in debt.</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<div style="text-align: center;">
<div style="text-align: left;">
<span style="font-family: Georgia, Times New Roman, serif;">When you have an <b>investment</b> <i>it grows exponentially</i> and when you have a <b>debt</b> <i>it also grows exponentially -</i> according to the same laws of mathematics. <span style="text-align: center;">It is said that "Those who understand compound interest, earn it. Those who don't, pay it." My true hope is that you will come to truly understand compound interest. If you can't wait for what I plan to write in a future post - begin your studies <a href="http://everythingmaths.co.za/read/maths/grade-10/09-finance-and-growth-00#toc-id-8">here</a> and work your way up.</span></span></div>
<div style="text-align: left;">
<span style="text-align: center;"><span style="font-family: Georgia, Times New Roman, serif;"><br /></span></span></div>
</div>
<div style="text-align: left;">
<span style="font-family: Georgia, Times New Roman, serif;">The current prime lending rate in South Africa is 9,25%. Credit card rates are anywhere between 14% and 23%. Borrowing money at any of these rates can only lead to real financial difficulties. If we take inflation into account, then the prime lending rate is effectively about 4,25% and credit cards are between 9% and 18%. If you have any debt at these rates, then paying off this debt gives you a guaranteed real return (above inflation) equal to that rate. So paying off debt <i>fast and aggressively </i>is the wisest thing you could do.</span></div>
<div style="text-align: left;">
<div style="text-align: center;">
<i><span style="font-family: Georgia, Times New Roman, serif; font-size: large;"><br /></span></i></div>
<div style="text-align: center;">
<i><span style="font-family: Georgia, Times New Roman, serif; font-size: large;">Good debt? Rare and risky if it exists.</span></i></div>
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Georgia, Times New Roman, serif;">People often talk about "good debt". I'm not going to completely refute this idea, but I do feel the need to highlight the <i>only </i>conditions under which debt can be "good":</span><br />
<br />
<ol>
<li><span style="font-family: Georgia, Times New Roman, serif;">The interest rate that gets paid on the debt is low. This automatically excludes all credit cards as well as borrowing money for a car. Oh, and buying anything on <i>hire purchase</i> is a seriously bad idea.</span></li>
<li><span style="font-family: Georgia, Times New Roman, serif;">The borrowed money is being put to good use. This means that you're not borrowing money for general life expenses or leisure expenses. Putting the borrowed money to use means you're using it to earn more money (a concept referred to as <i>leveraging</i>). This can definitely be profitable, but you really need to know what you're doing. The borrowed money could be to start a business or to inject additional capital into an existing business.</span></li>
</ol>
<div>
<span style="font-family: Georgia, Times New Roman, serif;">Personally, I don't like debt at all. I believe that you should up for <i>anything </i>you want to buy with cash. <i>Yes, even a house</i>. But I do acknowledge that money might need to be borrowed in order to produce an income with which to do the saving (as in the business example above).</span></div>
</div>
<div style="text-align: left;">
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<div style="text-align: left;">
<span style="font-family: Georgia, Times New Roman, serif;">So credit cards... what role do they play in our quest for financial freedom? Firstly,</span></div>
<div style="text-align: left;">
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
<span style="font-family: Georgia, Times New Roman, serif; font-size: large;"><div style="text-align: center;">
<span style="font-size: large;"><i>Credit cards are <b>not </b>for borrowing money.</i></span> </div>
</span></div>
<div style="text-align: left;">
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Georgia, Times New Roman, serif;">They are for managing your cash flow better. Most credit cards in South Africa give you about 55 days interest free (the actual number of days is not important, only that it is more than one month). This means that when you use your credit card to buy your groceries and pay for strictly necessary expenses the actual cash you have earmarked for these expenses sits in your bank account earning interest! As long as you pay your credit card in full, every month, then you will <i>never pay interest</i>. This is the <i>only </i>way to use a credit card! Never pay only the minimum amount due (it's a trap!). Never let a month go buy without paying the full amount owing. If you don't have the self discipline to do this then you should <i>not</i> have a credit card.</span></div>
<div style="text-align: left;">
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Georgia, Times New Roman, serif;">We aren't fortunate enough in South Africa to have the types of credit card rewards programmes that they have in the US. So we might not be able to actually earn money from credit cards, but we can shop around and choose a card that will <i>cost us the least</i>.</span></div>
<div style="text-align: left;">
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Georgia, Times New Roman, serif;">The best card that I could find is from Virgin Money - there are no monthly, yearly or admin fees. Internet banking with this card is free. They do have some other rewards, but none of them are really relevant to our family's needs.</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">I'll do another post on the rewards programmes that we do have in South Africa, but in the meantime I'll share my conclusion: they're not worth it. Now this conclusion depends on your individual spending patterns and circumstances so you will have to do your own calculations, but in most cases the rewards escalate with spending. If you're planning on living a frugal lifestyle to generate fuel for your financial independence engine then rewards programmes won't benefit you because the very thing they reward is<i> consumption</i>.</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">For more takes on just how serious debt is, let me point you towards Mr Money Mustache who tells us that <a href="http://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/">"debt is an emergency"</a> and jlcollinsnh who says that <a href="http://jlcollinsnh.com/2015/03/26/stocks-part-xxviii-debt-the-unacceptable-burden/">"debt is an unacceptable burden"</a>.</span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><br /></span>
<span style="font-family: Georgia, Times New Roman, serif;">So to summarise:</span><br />
<br />
<ol>
<li><span style="font-family: Georgia, Times New Roman, serif;">Don't get into debt in the first place.</span></li>
<li><span style="font-family: Georgia, Times New Roman, serif;">If you already have debt, pay it off as fast as possible.</span></li>
<li><span style="font-family: Georgia, Times New Roman, serif;">Use credit cards wisely and not for their advertised purpose.</span></li>
</ol>
<br />
<span style="font-family: Georgia, Times New Roman, serif;">Now go forth and defeat the Beast of the Night called Debt!</span></div>
Mr Cent(ri)frugal Forcehttp://www.blogger.com/profile/03109073391727107186noreply@blogger.com2tag:blogger.com,1999:blog-5505099062221766000.post-73284899052359649122015-06-10T09:51:00.000-07:002015-06-10T11:31:44.624-07:00Pillar 2: The Financial Independence Engine<h2 style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif;">Pillar 2: The Financial Independence Engine</span></h2>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif;"><b>(aka sensible investments)</b></span></div>
<div>
<br />
<span style="font-family: Arial, Helvetica, sans-serif;">Recall that the second pillar upon which a financially independent life is based is choosing sensible investments which will grow faster than inflation. You need to choose investments that give the biggest possible rate of growth (<i>i </i>in the compound interest formula). In this post I hope to give some background to the options available to you.</span><br />
<br /></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-SNbA0Z3qyTRe-VRjuuxLHh3VtG2VRhJJy-O7GcseVChhxcfQ9ztdT708XYFiIKwqep0Qu5qMG8_FdprXDeGmfBomzn4lT9hbUA-h4kLuUVFTgC36DO87qZvkyAFYu2Z2jv3wSJc9EW0/s1600/4732521196_0365ed621d_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-SNbA0Z3qyTRe-VRjuuxLHh3VtG2VRhJJy-O7GcseVChhxcfQ9ztdT708XYFiIKwqep0Qu5qMG8_FdprXDeGmfBomzn4lT9hbUA-h4kLuUVFTgC36DO87qZvkyAFYu2Z2jv3wSJc9EW0/s640/4732521196_0365ed621d_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Georgia, Times New Roman, serif; font-size: x-small;"><b>Our Financial Independence Engine. Next stop, "Freedom!" Choo Tjoe!</b></span><br />
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-small;"><i>Photo credit <a href="https://www.flickr.com/photos/statelibraryqueensland/4732521196/">State Library of Queensland</a> (<a href="https://www.flickr.com/commons/usage/">no known copyright restrictions</a>)</i></span></td></tr>
</tbody></table>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: large;"><b><i>Saving vs Investing</i></b></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Firstly, it's important to make a distinction between <i>saving</i> and <i>investing</i>.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Saving is a <i>verb</i> - it's what we do as we build up Pillar 1. We live a frugal lifestyle and the money that we're no longer spending on things we don't need we <i>save</i>. But once the money has been <i>saved</i> it has to be put <i>somewhere</i>.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Savings is a </span><i style="font-family: Arial, Helvetica, sans-serif;">noun</i><span style="font-family: Arial, Helvetica, sans-serif;"> - it refers to our saved up cash.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWGL1X2AsBkmsdO0XpG7ey3ePkOFm_rkjJ3KDeMIc23Gw5CGNExcb_udfuydiezbC545bEesdyzChfYFCJtO_B8icPp51l4QowNlzqhYSaQDSRdOrFPvM15MT6sEXQRLlaBFk4I_Ibv6M/s1600/8071495186_b454d13356_k.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="330" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWGL1X2AsBkmsdO0XpG7ey3ePkOFm_rkjJ3KDeMIc23Gw5CGNExcb_udfuydiezbC545bEesdyzChfYFCJtO_B8icPp51l4QowNlzqhYSaQDSRdOrFPvM15MT6sEXQRLlaBFk4I_Ibv6M/s400/8071495186_b454d13356_k.jpg" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Georgia, Times New Roman, serif;"><b>Cash in a treasure chest may look pretty, but it's the Engine we are looking for.</b></span><br /><i>Photo credit </i><a href="https://www.flickr.com/photos/fatedenied/8071495186/" style="font-style: italic;">Tom Garnett</a><i> (</i><a href="https://creativecommons.org/licenses/by/2.0/" style="font-style: italic;">CC-BY 2.0</a><i>)</i></td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"> Now cash doesn't necessarily mean actual coins and notes. It can refer to something like a bank account, a fixed deposit or a money market fund: where your money is somewhere invested in actual coins and notes, and (some) of the interest on that is passed on to you. This is what we call a cash investment. The thing about all of these cash investments is that they won't be working hard in the way that you need them to in order to build up Pillar 2. Even when you're earning interest on your cash (alarmingly NOT always the case in South African banks), this interest is usually in line with or lower than inflation.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: large;"><b><i>Cash is not King</i></b></span><br />
<span style="font-family: Georgia, Times New Roman, serif;"><b><i>Cash is a Lazy Prince who is vulnerable to the Vampire of Inflation</i></b></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEio-P8PD9UzFwyIvJOploLW80Fibp2ktwepfS8_s6g4QsuN2aRYi6m8DXMsthf9p-ksGg4llK3nFPtY8CuIrpS3YYZWkA8OjzBWVkr-jwnXx63UVEkXiryQ0ghrkCkh1x3tWWnOswtB80E/s1600/5052013068_5fa28cfc9e_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="391" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEio-P8PD9UzFwyIvJOploLW80Fibp2ktwepfS8_s6g4QsuN2aRYi6m8DXMsthf9p-ksGg4llK3nFPtY8CuIrpS3YYZWkA8OjzBWVkr-jwnXx63UVEkXiryQ0ghrkCkh1x3tWWnOswtB80E/s400/5052013068_5fa28cfc9e_o.jpg" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Georgia, Times New Roman, serif;"><b>Inflation is a Scary Vampire, but there is a way out!</b><br /><i>Photo credit <a href="https://www.flickr.com/photos/vblibrary/5052013068/in/photolist-8GqTtA-77BrrL-a95ZF4-8PuV1F-5yoZja-8GnH5p-nvSKB6-5zQiDL-7d6Pdm-6VbyaH-fLwv22-HJXLi-57gvi4-6HjfYj-8zjqDo-44QdJG-8GpStT-bXfB3-7wBX1W-dYgWZt-5N8vFP-3T8GK-419XqU-5Jkx6t-3bPxCe-7xJXCR-7uRoBK-2CyiJ-8QeoDa-8GnH3x-icUaEQ-8eTudA-6ziVi5-8ccbM4-76H5Tk-hrKHTm-3wFHVD-7Yq8aA-dYnDuU-HrzYF-HrA6p-8Gs7w9-6ZJ6ap-fLwvbr-9ek8PG-fLwv9x-g63fy-cFgdBJ-6MfYFv-ndDKHB">Enokson</a> (<a href="https://creativecommons.org/licenses/by/2.0/">CC-BY 2.0</a>)</i></span></td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;">At some point I'll do a post all about inflation. For the moment, all you need to appreciate is that inflation is the rising price of goods and services as time progresses. Inflation is the reason that prices go up and why salaries need to have "cost of living" increases. Inflation has hovered around 6% in South Africa for the past few years and at the moment it's about 4,5% - so let's just simplify things and say we're dealing with an inflation rate of 5% (to see historic inflation rates click <a href="http://www.inflation.eu/inflation-rates/south-africa/historic-inflation/cpi-inflation-south-africa.aspx">here</a>). Now not all goods and services rise with inflation - some rise faster and some rise slower. But it's a good way to estimate the price you can expect to pay for something from one year to the next - something that costs R100 today will probably cost about R105 next year.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">The problem, of course, is that although your cash is growing (hopefully) it isn't necessarily growing fast enough to counteract the effects of inflation. If you earn R3 in interest but the price of your groceries went up by R5, you've actually lost R2; even though you might have thought that your savings was growing!</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">If you are getting 3% in interest (since we're hoping to be earning on significantly more than R100), that isn't good enough - over the course of a year your savings will still get effectively <i>smaller</i> by 2%. Do this every year for 10 years? You've lost a lot of money. It's still more actual rands than you started with, but it can't even buy the same amount as you could at the beginning. You are further from financial freedom than ever.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">If you don't want to lose out to inflation then you're left with a few options:</span><br />
<ol>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Spend your money now before the Vampire of Inflation sucks its value dry.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Invest your money in something that grows <i>at the same rate</i> of inflation.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Invest your money in something that grows <i>faster than</i> inflation. </span></li>
</ol>
<span style="font-family: Arial, Helvetica, sans-serif;">The first option seems attractive - spend now before prices go up next week. Logical, right? But with this approach all we're doing is <i>spending</i>, not <i>saving</i>. We'll never have our money working for us and growing with compound interest because<i> we'll never have any money</i>. So let's scrap this option immediately. It goes against Pillar 1 because it will leave us with no fuel for our financial independence engine (Pillar 2).</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">And who would choose the second option if they could choose the third option? So let's see how to achieve growth faster than inflation.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">We need to <i>save</i> money and then once we've saved it we need to put it into a suitable investment. So far we've determined that this suitable investment is not cash under the mattress, a bank account, a fixed deposit or money market. So what's left?</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: large;"><b><i>The Stock Market</i></b></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgfq3z2JeEHPZUBIdVMDX87B9_deECPgEkNArMtrrApo5HoOOt8rVSLVxxZiKywvnKy8oXOSEJokrr9g0T-yNAKzWi8EfXoALq0bZ-O1Iuu0xINqhQH_VPwU8AVDzS682UMTHfN5Eov5Zc/s1600/11943050564_506fdbc3fe_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="300" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgfq3z2JeEHPZUBIdVMDX87B9_deECPgEkNArMtrrApo5HoOOt8rVSLVxxZiKywvnKy8oXOSEJokrr9g0T-yNAKzWi8EfXoALq0bZ-O1Iuu0xINqhQH_VPwU8AVDzS682UMTHfN5Eov5Zc/s400/11943050564_506fdbc3fe_o.jpg" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><b>All evidence spells out "Stock Market" as our Engine of choice</b><br /><i>Photo credit </i><a href="https://www.flickr.com/photos/lendingmemo/11943050564/" style="font-style: italic;">Simon Cunningham</a><i> (</i><a href="https://creativecommons.org/licenses/by/2.0/" style="font-style: italic;">CC-BY 2.0</a><i>)</i></td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;">It's by investing in companies listed on the stock market that we'll get the inflation-beating returns we're looking for. But wait, aren't stocks "risky"? The short answer is No. The longer answer needs us to define what we mean by "risk". In the world of investing, risk is related to <i>the probability that your investment will lose value</i>. Okay, we probably agree on that definition. But how can I say that the stock market is not risky if a company that you're invested in can go bust and lose it's entire value?</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Let's be clear at this point. It <i>is</i> entirely possible to lose money in the stock market if you invest in any of the following ways:</span><br />
<ol>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><i>Investing for the short term</i>. Investing now and expecting to cash in on your investment within a very short time period. At any particular moment your investment might experience a temporary (but possibly very large) dip in value despite the fact that it is growing overall. You don't want to be forced to withdraw it during the dip.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Investing in a <i>small number of companies</i> and tying the fate of your investment to those few companies. Those companies might die a horrible death, in which case your investment has gone down the tubes. Don't invest in a company based on "a hot tip" from a friend or because the media is going crazy about it.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Trying to <i>time the market</i> by "buying low and selling high". This is a nice idea in principle, but it's impossible to consistently get this timing right. Regular people are not soothsayers or stock market geniuses.</span></li>
</ol>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">So how do we invest in the stock market and reduce the above risk?</span></div>
<div>
<ol>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><i>Invest for the long term</i> - minimum 10 years.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;"><i>Invest in a large number of companies</i> - this is called <b>diversification</b>. If one company goes bust you still have money in all the other companies working for you.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">Don't try to time the market. <i>Invest regularly and consistently</i>. It's not about tim<i>ing</i> the market, it's about time <i>in</i> the market.</span></li>
</ol>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">At this point I think it's really important that you get a decent level of understanding of the stock market before you start investing. One of the Overseas Masters, <a href="http://jlcollinsnh.com/stock-series/">jlcollinsnh</a>, has done a wonderfully readable explanation of investing in the stock market. He writes from the perspective of the US stock market, but most of what he says can be applied to the South African stock market as well.</span></div>
</div>
<div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">We're nearly at the point where we can start looking at specific places to invest your money in South Africa. But it really</span><span style="font-family: Arial, Helvetica, sans-serif;"> is important for you</span><span style="font-family: Arial, Helvetica, sans-serif;"> to feel comfortable and confident when it comes to investing the money that you have saved through Pillar 1 - this is why all this background has had to come before the specifics.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Until next time!</span></div>
</div>
</div>
<h4 style="text-align: center;">
</h4>
Mr Cent(ri)frugal Forcehttp://www.blogger.com/profile/03109073391727107186noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-89343055090422786132015-06-06T04:34:00.001-07:002015-06-06T04:34:57.114-07:00Living without Want: Cancelling Discretionary Spending<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Arial, Helvetica, sans-serif;">Hello fellow sojourners!</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">I'm not financially minded. Accounting, tax returns and spreadsheets leave me stone cold. So I'm here to speak about the more personal/day-to-day side of our financial independence journey.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Not being quite as hardcore as my husband (Mr Cent(ri)frugal to you) I found it difficult to adjust to the mindset required for financial freedom. I was never exactly a spendthrift - I grew up on a tight budget, and chose teaching as a profession, so saving wisely and spending carefully were always part of my outlook. FIRE was a reasonably natural extension of my natural inclinations. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>The Discretionary Spending Trap</i></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">However, when I started working, having the ability to randomly decide to go out for coffee with a friend, purchase a jersey that caught my eye or buy a treat at the grocery store without counting the metaphorical pennies was a wonderful side-effect of a grueling job. Having my R200 (or whatever it was) of "free" spending money each month made me feel... free. If I wanted it, within reason, I could have it. And who doesn't like that? And if the budget got a bit expanded occasionally, well, where's the harm in that, right?</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">So the notion of cancelling discretionary spending was quite a stretch.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOiUIdXEb1vGQAnMjOR9eaOknOKk2YAhjxM7AYSCFzZcsahMZYrDLrJ-WIpBLuYB-irfI7olIfH1BWhWIfGeRWh3EA4GsGC4iD9xwY_Bx86G8TLA56JUBoXmNM_U6XohyE8yjsfJlJcps/s1600/5626590796_7a3afe7e95_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="510" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOiUIdXEb1vGQAnMjOR9eaOknOKk2YAhjxM7AYSCFzZcsahMZYrDLrJ-WIpBLuYB-irfI7olIfH1BWhWIfGeRWh3EA4GsGC4iD9xwY_Bx86G8TLA56JUBoXmNM_U6XohyE8yjsfJlJcps/s640/5626590796_7a3afe7e95_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Photo credit: <a href="https://www.flickr.com/photos/29233640@N07/5626590796/" target="_blank">Robert Couse-Baker</a> <a href="https://creativecommons.org/licenses/by/2.0/" target="_blank">CC-BY 2.0</a></td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;">However, as everyone knows, stretching is actually a good thing. Especially when it gets you out of a particularly insidious mind-trap. </span><span style="font-family: Arial, Helvetica, sans-serif;">Here are some of the questions that helped me to adjust to a new way of thinking:</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Do I need it?</i></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">If you are a middle class person, the answer is probably: No. Which is sad when your credit card is itching, but not really sad when you think about all the people - some a few minutes drive away from you - who don't have food, water, sanitation or a roof over their heads.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">So, 99% of the time, a few minutes honest reflection tells me... nope, I don't need it. I have eaten. I am warm and clothed. I have more than enough. This discretionary item is a <i>want</i>. It sounds so simple, but it's a good place to start your thinking.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>What do I really want?</i></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">I was recently given a voucher for a large shopping mall. It is sitting in my bag, right now. Every now and again, I think about what I would like to spend it on. It's a fun activity, one which reminds me of the delicious planning and anticipation when I received money as a child. I used to save up to buy something, and I can still remember the feeling of walking to the shops with the correct sum in my pocket with a glorious glow of achievement.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">But truthfully, once the coveted item was purchased it was often something of a let down. Of course, the glow of getting lasted a few days, but the toy or clothing item, whatever it was, was never quite as exciting. After a week or two, it was often relegated to the shelf of "not quite favourites".</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">So what was it that I <i>really </i>wanted?</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">The same is often true of "event" spending - dinner, coffee, movies with friends. Whether it is R50, R100, R200 or R300 later, I've had a lovely time. My relationships have benefited, I feel relaxed and happy: good spending, right?</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Well, maybe. But what, exactly, is it that made me happy? Was it the conversation? Because that is free. Was it the coffee? Because that costs a lot less to make at home. Was it the movie? Cheaper to rent, and probably nicer because you can pause to go to the loo or get a snack any time you like; plus there are no annoying people with glowing phone screens. Was it the popcorn? Have you tasted homemade popcorn?</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">As for restaurant food, yes, sometimes it is way better than anything I can make at home. But sometimes it's pretty mediocre, and I spend the evening with menu envy, looking at the dish at the next door table. Sometimes I eat too much, or the waiter takes ages, or parking ends up costing a fortune. Wouldn't a special meal, carefully made at home, properly presented for once, give more enjoyment, show more love, result in more relationship building?</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Again, what is it that I wanted? <i>Really</i> wanted?</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-HSdyc6K3c5LOe1SHnvX2gDDu6GmJBca_PgGVhYNhicKvY1kNxfAiqzoX4XWNglZdZ2UJzkY3jTTEJKrXe_GukbGb8K3BMbA3PiWKBtiYg6ZmMq0l1TT7qUF5mA0BBqibDjCmRgoGtiA/s1600/unsplash_5244808e6b835_1.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="422" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-HSdyc6K3c5LOe1SHnvX2gDDu6GmJBca_PgGVhYNhicKvY1kNxfAiqzoX4XWNglZdZ2UJzkY3jTTEJKrXe_GukbGb8K3BMbA3PiWKBtiYg6ZmMq0l1TT7qUF5mA0BBqibDjCmRgoGtiA/s640/unsplash_5244808e6b835_1.JPG" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Photo credit: <a href="https://unsplash.com/charliefoster" target="_blank">Charlie Foster</a> (<a href="http://creativecommons.org/publicdomain/zero/1.0/" target="_blank">Public Domain</a>)</td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;">In most cases, the thing that truly makes me happy is free. Or at least costs a lot less than commercialism would lead me to believe - don't get me started on advertising! Many friends have been more than accommodating, and in fact sometimes relieved (because loads of people are really on something of a shoestring budget, one way or another) when I've said "What about..." or "I would rather..." or "I'm on a tight budget, so...". Sometimes, this opening leads to a candid and up-building conversation that wouldn't have otherwise been possible.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">So what is it that you want? And is swiping that card going to buy it for you?</span><br />
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Is this an exception?</i></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">As with every system, it would be naive to think that there are no exceptions. Sometimes, there is a birthday party, a new friend, a big celebration or some other reason to break every rule in the book.</span><span style="font-family: Arial, Helvetica, sans-serif;"> </span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">Maybe not every rule.</span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">We still go out to dinner, or get takeaways - just once every couple of months, instead of once a week. And we find that those occasional outings become just that: occasions, rather than run of the mill, expensive habits. I'll write another post sometime on how we save money even on special occasions - without diminishing enjoyment. For now, suffice it to say that sometimes it's fine to spend money on important things. </span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">Also, sometimes you've just had a "&^#&-off" kind of day, and eating a R5 chocolate-bar is just going to make you feel momentarily better... and sometimes that's fine. Especially if it's a R5 chocolate-bar instead of a R200 massage. And again, if it isn't a weekly habit, but a once-in-a-while treat. Which will also make that little treat a lot more... treaty. </span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Living without Want</i></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">So, to return to that voucher sitting patiently in my backpack... it isn't burning a hole in my proverbial pocket, as it definitely would have been a few years ago. I've thought of one or two useful and fun things I could spend it on; and we might even treat ourselves to a burger at the same time. It'll be an event, spending that voucher, and it isn't even that much money. In the meantime, my life goes on, with all it's ordinary enjoyments and non-money-related pleasures.</span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">I still want things; everyone does. But your life can be fully satisfying without spending money on a whim. Your desires are not the boss: you are. </span><i><span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;">Don't let your "wants" rule you.</span></i></div>
<div style="text-align: left;">
<i><span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><br /></span></i></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">Yours in the fullness of life,</span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">jjdaydream</span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<br /></div>
jjdaydreamhttp://www.blogger.com/profile/12869446910551139215noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-25590235167164173682015-06-03T11:32:00.000-07:002015-06-06T04:43:46.379-07:00Pillar 1: Fuelling the Financial Independence Engine<div dir="ltr" style="text-align: left;" trbidi="on">
<div>
<h2 style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif;">Pillar 1: Fuelling the Financial Independence Engine</span></h2>
</div>
<h4 style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif;">(aka Living a Frugal Lifestyle)</span></h4>
<div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijjRLaz5XYJj95rA91dugFvnyqlXe6f1zkeXUwMXfUyLOewAWFtSkYla-3AUIk7dvrotbyd8R9UtmcZYre73jvbgBJJkj5tUWtitP8AG04p6I-gGb3eDg1kcEcVnnhBqMkmHl7KvGjD9Y/s1600/7309935684_67b208b8c4_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="266" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijjRLaz5XYJj95rA91dugFvnyqlXe6f1zkeXUwMXfUyLOewAWFtSkYla-3AUIk7dvrotbyd8R9UtmcZYre73jvbgBJJkj5tUWtitP8AG04p6I-gGb3eDg1kcEcVnnhBqMkmHl7KvGjD9Y/s400/7309935684_67b208b8c4_o.jpg" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Georgia, Times New Roman, serif;"><b>Photo credit <a href="https://www.flickr.com/photos/trophygeek/7309935684/">trophygeek</a> (<a href="https://creativecommons.org/licenses/by/2.0/">CC-BY 2.0</a>)</b></span></td></tr>
</tbody></table>
</div>
<div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">The more you can reduce your expenses, the more you have available to save and put into investments. Eventually these investments will be out-earning you and will be generating enough growth on their own to fund your lifestyle. </span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Reducing expenses is more important than increasing income because it does <i>two </i>important things:</span></div>
<div>
<ol>
<li><span style="font-family: Arial, Helvetica, sans-serif;">It means you can save more.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">It means the target you need to reach is smaller so you'll get there sooner.</span></li>
</ol>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">The first point is (hopefully) obvious:</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div style="text-align: center;">
<b><span style="color: #274e13; font-family: Georgia, Times New Roman, serif; font-size: large;"><i>income - expenses = money to invest!</i></span></b></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">But by itself it does not explain why reducing your expenses is more important than increasing income when trying to increase the amount of money you have to invest. To explain that we need to look at the second point. Remember that your sizeable investment will be <i>growing</i> at a certain rate <i>above</i> inflation. If the amount by which your investment grows is greater than the amount required to live then you can consider yourself financially independent!</span><br />
<br />
<div style="text-align: center;">
<span style="color: blue; font-family: Georgia, Times New Roman, serif; font-size: large;"><b><i> growth on investment > living expenses</i></b></span></div>
<div style="text-align: justify;">
<span style="background-color: white; font-family: sans-serif; line-height: 44.7999992370606px; text-align: -webkit-center;"><span style="color: blue; font-size: large;"> ⇒</span></span></div>
<div style="text-align: center;">
<span style="color: blue; font-family: Georgia, Times New Roman, serif; font-size: large;"><i><b>financial independence!</b></i></span></div>
<br /></div>
</div>
</div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">If you live a frugal lifestyle your living expenses will be lower. If your living expenses are lower the the growth you require on your investment will be lower. Which means you need a smaller total investment to produce that growth.</span><br />
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i><b>Think Creatively to Live a Big Frugal Lifestyle</b></i></span></div>
<br />
<span style="font-family: Arial, Helvetica, sans-serif;">Some people are naturally frugal. But frugality is definitely something that can be learned. It eventually becomes fun and natural. At first it requires you to look at <i>all </i>of your expenses and re-evaluate them. Think outside the box. Don't assume that every expense is a given and that there is no way around it. Yes, some of them might be (if possibly only temporary), but you should at least try to think of creative solutions around them.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br />
</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Spend some time drawing up a list of all the things you spend money on and try to find ways to find cheaper alternatives. Some expenses could be deleted from your budget permanently! In future posts we'll look at some specific examples of how we've reduced our spending.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Yours frugally,</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Mr Cent(ri)frugal Force</span></div>
</div>
Mr Cent(ri)frugal Forcehttp://www.blogger.com/profile/03109073391727107186noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-57926205901401428332015-05-30T07:04:00.002-07:002015-06-03T09:59:08.553-07:00Introducing The Two Pillars and Compound Interest<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Arial, Helvetica, sans-serif;">Dear Awesome Person</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">In the last post I stated somewhat cryptically that:</span><br />
<blockquote class="tr_bq" style="text-align: center;">
<span style="background-color: white;"><span style="color: blue; font-family: Georgia, Times New Roman, serif; font-size: large;"><span style="line-height: 21.7350006103516px;">"Money can be used to </span><i style="line-height: 21.7350006103516px;">buy</i><span style="line-height: 21.7350006103516px;"> freedom by </span><i style="line-height: 21.7350006103516px;">not spending</i><span style="line-height: 21.7350006103516px;"> it</span><i style="line-height: 21.7350006103516px;">."</i></span></span></blockquote>
<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: left; margin-right: 1em; text-align: left;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6vjKcMpniv3cA4xeLsIApK8W_lw9vKYUWaMfv7NuH28yTxLSn9fjTtr7PDeFEHPqXo3CCR8fD1xZRPWqmDjU9mTyvC8yRyr9GWZTYqyE7LKDKnOmbYhgBjQWSVTrxuMJyTkIG5UT5Neg/s1600/two_pillars.jpg" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6vjKcMpniv3cA4xeLsIApK8W_lw9vKYUWaMfv7NuH28yTxLSn9fjTtr7PDeFEHPqXo3CCR8fD1xZRPWqmDjU9mTyvC8yRyr9GWZTYqyE7LKDKnOmbYhgBjQWSVTrxuMJyTkIG5UT5Neg/s320/two_pillars.jpg" width="213" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><b><span style="font-family: Georgia, Times New Roman, serif;">Photo credit <a href="https://www.flickr.com/photos/juliamaudlin/14471667541/">Julia Maudlin</a> (<a href="https://creativecommons.org/licenses/by/2.0/">CC-BY 2.0</a>)</span></b></td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;">It's probably time to explain what I meant by this. I present to you what I consider the two pillars upon which a financially independent life is based:</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;"><b>1. </b>Live a </span><b style="font-family: Arial, Helvetica, sans-serif;"><span style="color: purple;">frugal lifestyle</span> </b><span style="font-family: Arial, Helvetica, sans-serif;">so that you free up money that can be put to good use.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;"><b>2. </b>Find </span><b style="font-family: Arial, Helvetica, sans-serif;"><span style="color: purple;">sensible investments</span></b><span style="font-family: Arial, Helvetica, sans-serif;"> where your money </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">will work hard for you, and one day, will be able to work harder than you possibly can.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">The sensible investments can be thought of as a Powerful Financial Independence Engine </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">and the money that you save by living a frugal lifestyle it can be thought of as Fuel for the Financial Independence Engine.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">But first we need to understand the inner workings of the machine which allows the engine to function:</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>The Power of Compound Interest</i></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">Compound interest will be a ridiculously powerful ally on your quest when it acts in your favour. But compound interest can be a double-edged sword. If you get on the wrong side of compound interest then the quest becomes exponentially* more difficult. (The wrong side of compound interest is a <i>Fiendish Beast of the Night called Debt</i>; we'll talk about this in a future post.)</span></div>
<div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">When money is placed in an investment (we'll look at what types of investments there are and where to get them in a future post) then it grows according to the compound interest formula**:</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<span style="font-family: Arial, Helvetica, sans-serif; margin-left: 1em; margin-right: 1em;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipbCL6r06mdN1QLjebFrqVdNKWcGUc16t2rwefs-h4taVF2RiODsKFG4F60h_4lfDqdySiatO7p5ArQhZOMYY9o9rNYfyDmRRJbrWKoUfgPyN5Z5q-j5hBGBNXzqXyHjd_FLukuNtSeUM/s1600/compound_interest.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="70" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipbCL6r06mdN1QLjebFrqVdNKWcGUc16t2rwefs-h4taVF2RiODsKFG4F60h_4lfDqdySiatO7p5ArQhZOMYY9o9rNYfyDmRRJbrWKoUfgPyN5Z5q-j5hBGBNXzqXyHjd_FLukuNtSeUM/s200/compound_interest.png" width="200" /></a></span></div>
<div class="separator" style="clear: both; text-align: center;">
<br /></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><i>F</i> is the value of the investment, <i>P</i> is the money you put into the investment, <i>i </i>is the rate of growth and <i>n</i> is the amount of time you invest for.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">The value of your investment is larger for larger values of <i>P</i>, <i>i</i> and <i>n</i>. This makes sense:</span></div>
<div>
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;">the more you invest (<i>P</i>) the more your investment should be worth</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">the faster your investment grows (<i>i</i>) the more it will be worth after a certain amount of time</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">the longer you invest for (<i>n</i>) the more time you give compound interest to compound the growth on your investment</span></li>
</ul>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">For now, let's look at a pretty amazing example of how the growth rate (</span><i style="font-family: Arial, Helvetica, sans-serif;">i</i><span style="font-family: Arial, Helvetica, sans-serif;">) and time (</span><i style="font-family: Arial, Helvetica, sans-serif;">n</i><span style="font-family: Arial, Helvetica, sans-serif;">) can work together to produce a snowball that starts small but eventually produces an <i>avalanche of treasure</i>.</span></div>
</div>
</div>
</div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">If you can find an investment that produces real returns (returns above inflation) of 7% then an investment doubles approximately every 10 years. Using the compound interest formula we have:</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjL_45px3ovyFjaHP1-K9VryokDG6OhXWQFSHVyWMrSceyyf1HQAPbP-fatd5DpGQQuWQMXlyDTdlx4jID_Qmxoll5UE82fWSiqdNVtdJ-0wWfljS1WnG6bkiC9EBTnyLOY95WpaJLydbE/s1600/doubling_calc.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"><img border="0" height="102" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjL_45px3ovyFjaHP1-K9VryokDG6OhXWQFSHVyWMrSceyyf1HQAPbP-fatd5DpGQQuWQMXlyDTdlx4jID_Qmxoll5UE82fWSiqdNVtdJ-0wWfljS1WnG6bkiC9EBTnyLOY95WpaJLydbE/s200/doubling_calc.png" width="200" /></span></a></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">What does this mean? Let's perform a thought experiment. Imagine that you have R100. I maintain that this is actually a lot of money and should be respected, but depending on your frame of reference it's not that much and shouldn't be too hard to find (chances are you have a R100 note in your wallet right now; go and fetch it and you don't need to imagine having one). Now imagine that you invest this R100 in an investment that grows at 7% per year above inflation. In ten years time you will have the grand total of... R200. Wow, that's a bit anti-climactic isn't it? Where is this phenomenally powerful engine that I promised? Be patient, the juggernaut is just getting going. </span></div>
<div>
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;">After 20 years you will have R400.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">After 30 years you will have R800.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">After 40 years you will have R1 600.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">After 50 years you will have R3 200.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">After 60 years you will have R6 400.</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">After 70 years you will have R12 800.</span></li>
</ul>
</div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">"Okay", you might say. "That sounds like a lot of money, but it took 70 years to do that!" I'll be amongst the first to admit that 70 years is a long time to wait. But just think about what just happened. We took R100 and turned it into R12 800! This is an amount of money that could easily be spent on going to the movies, having take-aways or going out for an evening and you might not even notice spending it. But if you invested it instead of spending it, in 70 years you could have R12 800 to leave to your grandchildren as an inheritance or to donate to charity.</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">Let's be a bit more ambitious. Let's say we've managed to save up a small nest-egg of R10 000 that you were planning on putting towards something completely unnecessary like a new HD TV or a fancier car. What does that become in 70 years?</span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: center;">
<b><span style="font-family: Arial, Helvetica, sans-serif;">R1 280 000 or R1,2 million.</span></b></div>
<div style="text-align: center;">
<b><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></b></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">Okay, that's a little more like it. But still, why am I talking about investing over 70 years if I'm trying to show you how you can use compound interest to achieve financial independence in a much shorter time frame like 10 years? It's because the interest rate (<i>i</i>) and time (<i>n</i>) are not the only factors that affect the final value of your investment. The amount you actually put in (<i>P</i>) has a profound affect on what you eventually get out. I needed to talk about periods of 70 years to give compound interest enough time to work because in our thought experiment <b><span style="color: purple;">we were not being ambitious enough</span></b>. We were putting R100 or R10 000 away once off and then thinking that this is enough. Compound interest is powerful, but it won't achieve financial independence on its own. It needs something to compound <i>on</i>!</span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">The general financial advice given when saving for retirement is "save 10 to 15% of your income and you'll be fine". Only saving 10 to 15% is what means you'll be working until you're 65. You're not letting <i>P</i> (what you put in) do enough work in the compound interest formula, so <i>n</i> (time) has to make up for it.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">If we have a certain target, which will allow us to be financially independent (and we can talk about how to decide on this target in a future post), this is your</span><span style="font-family: Arial, Helvetica, sans-serif;"> </span><i style="font-family: Arial, Helvetica, sans-serif;">F</i><span style="font-family: Arial, Helvetica, sans-serif;">. </span><span style="font-family: Arial, Helvetica, sans-serif;">So how do we reach this target?</span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Start investing now.</i></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">This makes <i>n </i>large in the compound interest formula giving compound interest more time to do its thing. </span><span style="font-family: Arial, Helvetica, sans-serif;">Since we want</span><span style="font-family: Arial, Helvetica, sans-serif;"> </span><i style="font-family: Arial, Helvetica, sans-serif;">n</i><span style="font-family: Arial, Helvetica, sans-serif;"> </span><span style="font-family: Arial, Helvetica, sans-serif;">to be as small as possible for our target</span><span style="font-family: Arial, Helvetica, sans-serif;"> </span><i style="font-family: Arial, Helvetica, sans-serif;">F</i><span style="font-family: Arial, Helvetica, sans-serif;"> </span><span style="font-family: Arial, Helvetica, sans-serif;">(hello EARLY retirement), we need to increase</span><span style="font-family: Arial, Helvetica, sans-serif;"> </span><i style="font-family: Arial, Helvetica, sans-serif;">P</i><span style="font-family: Arial, Helvetica, sans-serif;"> </span><span style="font-family: Arial, Helvetica, sans-serif;">and</span><i style="font-family: Arial, Helvetica, sans-serif;"> i </i><span style="font-family: Arial, Helvetica, sans-serif;">as much as possible. But of course, we should also <b><span style="color: purple;">start the process as soon as possible</span></b> so that we maximise</span><span style="font-family: Arial, Helvetica, sans-serif;"> </span><i style="font-family: Arial, Helvetica, sans-serif;">n</i><span style="font-family: Arial, Helvetica, sans-serif;"> </span><span style="font-family: Arial, Helvetica, sans-serif;">without selling ourselves to work forever.</span><br />
<blockquote class="tr_bq " style="text-align: left;">
</blockquote>
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Invest as much as you can. </i></span></div>
<div style="text-align: center;">
<br /></div>
<span style="font-family: Arial, Helvetica, sans-serif;">This increases <i>P</i> in the compound interest formula. </span><span style="font-family: Arial, Helvetica, sans-serif;">Increasing the amount invested comes from <b><span style="color: purple;">living a frugal lifestyle</span></b> so that expenses are reduced and that there is more money to invest. This forms Pillar 1, which we'll talk about in more detail next time. It sounds so simple but there is a lot to it!</span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large;"><i>Increase your rate of growth</i></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br />Invest in something sensible that will give you as large a growth rate as possible over the long term. This increases <i>i </i>in the compound interest formula. </span><span style="font-family: Arial, Helvetica, sans-serif;">Increasing the rate at which your investment grows by <b><span style="color: purple;">choosing the right investments and investment platforms</span></b> makes up Pillar 2: this requires a lot of thought and research as there are loads of pitfalls along the way.</span></div>
<div style="text-align: left;">
<div>
<div>
</div>
</div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Making use of the mathematics behind the power of compound interest will have you saving hard initially in order to increase <i>P</i>. Then once you've reached financial independence you can simply let <i>i</i> and <i>n</i> take over. That's freedom. Your money works so you don't have to.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Mr Cent(ri)Frugal Force</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><i>* Literally. Compound interest (on investments or debts) is an exponential function. Mathematically powerful to say the least.</i></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><i>** For multiple investments of different sizes made after time intervals of different length and with varying rates, the formula is a lot more complicated, but the factors that affect the final value of an investment are the same: P, i and n - it's just that none of these are constant.</i></span></div>
<div>
<ol>
</ol>
</div>
</div>
</div>
</div>
Mr Cent(ri)frugal Forcehttp://www.blogger.com/profile/03109073391727107186noreply@blogger.com0tag:blogger.com,1999:blog-5505099062221766000.post-5991783516647686962015-05-24T09:30:00.001-07:002015-05-24T09:30:39.884-07:00The Chronicles of our Quest! towards Financial Independence<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;">Dear Awesome Person</span></div>
<div style="text-align: left;">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div style="text-align: left;">
<div style="text-align: center;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: large;"><b>Welcome to the first post of The Cent(ri) Frugal Force!</b></span></div>
</div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">My wife and I are on a Quest towards Financial Independence and this blog is a place for us to chronicle that journey. Financial Independence is not the Holy Grail, but it is something for us to aim towards and keep us focussed. The quest itself is the fun part. Through it we are learning a wonderful new way to live and think about life.</span><br />
<br />
<span style="font-family: Arial, Helvetica, sans-serif;"><b>So what is Financial Independence?</b></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Firstly, it's not actually about money...</span><br />
<h2 style="text-align: center;">
<span style="font-family: Georgia, Times New Roman, serif; font-size: x-large; font-weight: normal;"><i>It's about freedom. </i></span></h2>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6dlGhFTcG9b5uUB5tKWc4etZJ1pvZeYn28oYEoV_CXI1QD1Av7mmZl7WE9kgiO97vpkV2vfKrcI_5odvQ60Aw0Q0E9ntBnChgrQypsmbPNA4Ito1uLNMAf5-P3c8lMz-DvjabOZ57Mj0/s1600/flyingbirds.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="428" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6dlGhFTcG9b5uUB5tKWc4etZJ1pvZeYn28oYEoV_CXI1QD1Av7mmZl7WE9kgiO97vpkV2vfKrcI_5odvQ60Aw0Q0E9ntBnChgrQypsmbPNA4Ito1uLNMAf5-P3c8lMz-DvjabOZ57Mj0/s640/flyingbirds.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="font-size: 13px;">Photo credit <a href="https://download.unsplash.com/photo-1420708392410-3c593b80d416">Oliver Berghold</a> (<a href="http://creativecommons.org/publicdomain/zero/1.0/">Public Domain</a>)<br /></td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;">Freedom to choose what work you do. Freedom to work part-time, for free for an NGO or not at all. Freedom to work because you want to and not because you have to. Freedom to spend time with your children (we don't have any yet, but this is a big motivator for us).</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">So where does money come into it? It turns out that although money can't buy happiness it can buy some or all of the above freedoms. Here's the slightly mind-bending part. Money can be used to <i>buy</i> freedom by <i>not spending</i> it<i>. </i>If this doesn't make sense to you then I hope this concept becomes clearer through future posts.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;"><b>Standing on the Shoulders of Giants</b></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Much of what I have learned about managing our family's personal finances is from Overseas Masters which I started following in the middle of 2013. I was already frugally minded before I began reading personal finance blogs on financial independence and early retirement, but these writers have served to validate and incubate my early thoughts as well as give rise to new ones.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;"><a href="http://www.mrmoneymustache.com/">Mr. Money Mustache</a>, <a href="http://www.madfientist.com/">The Mad Fientist</a>, <a href="http://jlcollinsnh.com/stock-series/">jlcollinsnh</a> and <a href="http://earlyretirementextreme.com/">Early Retirement Extreme</a> are great storehouses of information on living frugally, investing and the journey towards financial independence.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;"><b>Financial Independence in South Africa</b></span><br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhAswtZQigddg1i8n1FxTqG0VI1s1e5x070ROnFjLYzNoKH0ULJRZesmPzMf1xXjSprjUE5B1YCvgLIHOL87Y8cSr8RNjAA-hNR5qFz8rOI-GS7hmb37oC5kx-eXf2PdYK-IGKpl0MO9g/s1600/61940442_60319a79e1_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img alt="" border="0" height="256" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhAswtZQigddg1i8n1FxTqG0VI1s1e5x070ROnFjLYzNoKH0ULJRZesmPzMf1xXjSprjUE5B1YCvgLIHOL87Y8cSr8RNjAA-hNR5qFz8rOI-GS7hmb37oC5kx-eXf2PdYK-IGKpl0MO9g/s640/61940442_60319a79e1_o.jpg" title="" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="font-size: 13px;"><span style="font-family: Georgia, Times New Roman, serif;"><b> Photo credit <a href="https://www.flickr.com/photos/lollie-pop/61940442/">Lollie-Pop</a> (<a href="https://creativecommons.org/licenses/by/2.0/">CC-BY 2.0</a>)</b></span><br />
<div>
<span style="font-family: Georgia, Times New Roman, serif;"><b><br /></b></span></div>
</td></tr>
</tbody></table>
<span style="font-family: Arial, Helvetica, sans-serif;">I also have read (and still read) some personal finance sites more relevant to our South African context. <a href="http://www.iol.co.za/business/personal-finance">IOL Personal Finance</a>, <a href="http://www.moneyweb.co.za/">MoneyWeb</a> and <a href="http://mayaonmoney.co.za/">Maya on Money</a> are some of these websites. The forums on <a href="http://mybroadband.co.za/news/">My Broadband</a> are also a really useful place to ask questions, answer questions or even to simply observe conversations that unfold in some of the threads.</span><br />
<div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">The websites that I've just mentioned are useful, but for the most part they are far too tame. They generally tend to assume that the readers are aiming to retire at 65 by saving 10% of their incomes. Now this <i>might</i> be fine if you <i>really</i> love your job and you <i>want</i> to work until you're 65. But if you're like me and you're a little more ambitious (okay, a lot more ambitious) and you want the ability to be free decades before normal retirement age then these resources just aren't going to cut it. The Overseas Masters are really good and most of what they have to say is general and can be applied anywhere in the world, but some aspects of living in a <i>specific place</i> require <i>specific tactics</i>. So sharp as they are, the overseas masters don't <i>quite</i> cut it either.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">This is where I hope this blog can fill a gap. I've done quite a lot of research on how things are in South Africa and this blog is an opportunity to share that research with a wider audience than my wife. I don't have all the answers so I'm hoping for lots of comments from and interesting discussions with readers.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Onwards, to Freedom!</span></div>
Mr Cent(ri)frugal Forcehttp://www.blogger.com/profile/03109073391727107186noreply@blogger.com3