"Make it your mission to understand & invest wisely. Everyone has the potential to succeed in their search for true wealth & happiness & everyone can be successful in their pursuit of financial freedom." Contrarian Invest

Saturday, 30 March 2013

Tips for first-time property buying

Buying your first property is a process that can be fraught with confusion. This simple list will set you on the path to home ownership.

1.       Save up for a deposit
Banks are far more likely to approve your home loan if you have a deposit saved up. So as soon as you start considering house hunting (and preferably before), start putting away that extra cash. Having a deposit saved up means that the bank doesn’t have to take all the risk on your property, so of course they’ll be more likely to approve your bond. Being strict about putting money away before you buy a home is also good practice for repaying your bond later.

2.       Manage your existing credit
Your credit record is your most valuable asset when applying for a home loan. This means that you should have a record of paying back credit responsibly. Sadly, the banks won’t grant you a large credit amount until you’ve shown that you can be responsible with paying back smaller amounts, so get yourself a credit card, a store card or a bank loan and pay the installments on time.

3.       Get your paperwork in order
The banks will require three months of your most recent bank statements, a pay slip, your ID and a proof of residence. You will also be required to fill out a document showing your income and expenditure. Make sure you have a copy of all of these documents readily available for when you find that perfect home.

4.       Work out how much you can afford
A bank will work out your affordability based on your disposable income after deductions and expenses, but will not grant you a home loan for which the repayments are more than 30% of your gross monthly income. This can be mindboggling maths, so use an affordability calculator to work out your maximum home loan.

5.       Be realistic
Take a long, hard look at your lifestyle and make a list of the factors that will suit your needs. If you travel a lot, don’t buy a house with a big garden that requires lots of maintenance. If you’re going to be living alone, buy a smaller apartment in a better area. If you’re thinking of getting married and having kids in the next few years, buy an affordable house with an extra room, rather than an expensive apartment in the heart of the city.
Buying for the long term means that you won’t have to go through the stress of house hunting and the expense of transfer again too soon. Even though it’s important to get a foothold on the property ladder as soon as you can, think strategically to make sure you’re making the right purchase.

6.       Run a credit check before you start
Some companies or individuals don’t follow the proper procedures for a blacklisting, so the first time many people find out that they’ve been blacklisted is when they apply for credit.

7.       Do a lot of hunting before you buy
Start house hunting a while before you actually need to buy to give yourself a sense of what you can afford and what compromises you might have to make. Use a comprehensive website, such as PropertyGenie.co.za to get started and check out your options, then start going to show days.  Educating yourself in this way means that when you see your dream home, you’ll know if it’s too good to be true or the real deal.

8.       Don’t lose hope
Buying a home – especially in the first-time buyer bracket – can be a little disheartening when you work out how much money you are going to have to spend and what you can actually get for that. Don’t ever buy out of desperation, but rather wait for the right thing to come along.

9.       Apply to multiple banks for your home loan
Each bank has its own specific set of lending criteria. To improve your chances of getting your home loan approved in time, and of getting the best interest rate, submit your application to as many banks as possible at the same time. The latest ooba statistics show that 28.7% of ooba’s applications that were declined by one bank were approved by another.

10.   Use an expert originator to get you the best deal on your home loan
Getting a home loan approved involves lots of paperwork, some of which can be very confusing. It gets even more complicated if you take the advice above and apply to more than one bank. Because of this, it’s a good idea to use the services of an expert originator to submit your application to multiple banks.

* This report was prepared by ooba

Monday, 25 March 2013

Plant small financial seeds today

This is a favorite saying of mine. "Plant small financial seeds today, so that you may reap the rewards & sit in the shade tomorrow." By this I simply mean that by committing yourself to saving small amounts of money today, you will find that over time it will gradually compound & grow to bear a larger sum of money in the future.

Some people believe that you need to have lots of money to start investing, but just investing R300 a month can add up to a significant lump sum. 

Around nine years ago I started saving a tiny amount of R300 a month in Satrix 40 index (www.satrix.co.za)  which simply tracks the performance of the 40 largest South African companies.
Today that investment is worth R55 000 and growing!
You do not have to start off with a large amount of money. Satrix allows one to begin with a minimum debit order of R300 per month or a minimum lump sum of R1000.
Over time shares in listed companies on the Johannesburg Stock Exchange outperform cash. 

Certainly if I had invested the money in a bank account it would be nowhere near the same value that it is today. However the value of the investment has had to ride out big moves in the stock market as we went through the 2008-2009 financial crisis. 

Despite one of the biggest market collapses in history the returns have still been significant.
You need to understand the nature of the market and not become concerned with short-term falls in value.

As a young person wanting to invest each month you should invest in growth assets that can outperform cash. As mentioned, in the short-term (up to two to three years) the stock market can be volatile and the value of your money can fall if there is a market crash.
However if you are investing each month this can actually be to your benefit as you are able to buy more shares with the same amount of money.

A good starting point is to invest in a basket of quality listed companies either through a unit trust or through an exchange traded fund (ETF) offered by companies such as Satrix www.satrix.co.za and Absa http://etf.absacapital.com. ETFs are low-cost investments that track the performance of the stock market. Satrix presents itself as the cheapest way to get exposure to shares.

You will need to check the minimum investment amounts as they usually start at R300 per month however there are several unit trust funds that offer investment amounts for R200 per month which include Sanlam, Absa and Stanlib.
However, check the fees first as some of them charge an upfront fee of 5% even if you do not use a financial adviser.
Fees have a bigger effect on your total return than the fund manager’s performance so they do matter.

Sunday, 24 March 2013

Unlocking your Home Equity to settle debt

If you are feeling the crunch of the depressed global economy and trapped in never-ending debt repayments, the idea of getting out of the debt trap with just consolidating your accounts and debt into your home loan may sound too good to be true.
One can actually consolidate, weather the financial storm and cut your monthly debt costs by using equity in your property.

The plan is designed specifically to help you recover from your current negative monthly cash flow to a more positive, stable and affordable position. And in doing so, solve your short term financial problems.
What is equity and how will you benefit?
Equity is the difference between a property’s market value less the outstanding bond amount.

Below is an illustrative example:
Say you've  purchased a property and bonded it for R600 000. Since then you have paid in and and decreased the loan amount to approximately R450 000, whilst the market value has increased to R850 000.

This means you have equity of R400 000 in your property (Market Value R850,000 less Outstanding Bond Amount R450,000 = R400,000 Equity. This equity could be used to consolidate your accounts. Here’s how:

Before consolidation

Loan amount
Interest rate
Home loan
R450 000
R5 760
Motor finance
R160 000
R3 934
*Credit cards
R35 000
R3 500
Personal loans
R55 000
R1 733
R700 000
R14 927

After consolidation

Loan amount
Interest Rate
Home loan
R 700 000
R 8 960
You can save R 5 967 per month!

* The credit card instalment is based on a revolving amount and is calculated at 10% of the outstanding amount.

Sunday, 17 March 2013

Why the Rule of 72 is important to know

Those who know me personally know that I enjoy numbers and maths in particular. In my previous blog post i briefly touched on the mental math shortcut Rule of 72.

The Rule of 72 is a great mental math shortcut to estimate the effect of any growth rate, from quick financial calculations to population estimates. Here’s the formula:

Years to double = 72 / Interest Rate
This formula is useful for financial estimates and understanding the nature of compound interest. 
  • At 6% interest, your money takes 72/6 or 12 years to double.
  • To double your money in 10 years, get an interest rate of 72/10 or 7.2%.
  • If your country’s GDP grows at 3% a year, the economy doubles in 72/3 or 24 years.
  • If your growth slips to 2%, it will double in 36 years. If growth increases to 4%, the economy doubles in 18 years. Given the speed at which technology develops, shaving years off your growth time could be very important.

You can also use the rule of 72 for expenses like inflation or interest:
  • If inflation rates go from 2% to 3%, your money will lose half its value in 36 or 24 years. (As you can see 1% makes a BIG difference!)
  • If college/university tuition increases at 5% per year (which is almost faster than inflation), tuition costs will double in 72/5 or about 14.4 years. If you pay 15% interest on your credit cards, the amount you owe will double in only 72/15 or 4.8 years!
The rule of 72 shows why a “small” 1% difference in inflation or GDP expansion has a huge effect in forecasting models.
By the way, the Rule of 72 applies to anything that grows, including population. Can you see why a population growth rate of 3% vs 2% could be a huge problem for planning? Instead of needing to double your capacity in 36 years, you only have 24. Twelve years were shaved off your schedule with one percentage point.

Wednesday, 13 March 2013

How you can pocket R500,000 by saving just R30 a day for 12 months

It’s a fact, R900 doesn’t buy you much these days, not even a trolley full of groceries; perhaps a dinner for two at a moderately upmarket restaurant and a few nights out a month to the movies. 
Finding R900 to save isn’t hard either. Many may disagree with this statement but if you hear me out, I will share how saving just R900 every month (R30 per day) for just one year can snowball into quite a small fortune. All you need is a little time on your side. Time is the friend of a good investment and the enemy of a mediocre one.

Allow me to justify the above statement with a quick scenario. Assume you are a smoker who smokes a pack of cigarettes a day. Assume that you've given your budget the once-over and found that you spend about R30 for a pack of cigarettes a day which is equivalent to R900 per month.
What you don't realise is that you potentially and literally burning up to R10,800 per year on your deadly smoking habit.

Now, if today you were smart and opted to invest your R10,800.00 smoking habit cash once off without ANY further contributions in an investment fund like Satrix ,offering a conservative rate of say 12% you would find that in a span of 5 years you'd have accumulated a 'healthy' sum of R19,033.29! If you're age 30 and were to invest R10,800 with no further contributions for a period of 35 years at a conservative rate of 12% per annum then at age 65 you would end up with a sum of R570,235.89

The better rate you can find for your investment, the better and faster your money will grow. I personally enjoy investing in ETF's like Satrix (www.satrix.co.za). The best-performing ETF over the past few years has been the Satrix Divi Plus, which tracks an index of shares that provide good dividends. The minimum monthly investment in Satrix is about R300 and the fees are minimal.

I also quite often use the rule of 72 to quickly determine how long it would take to double my money.
The rule of 72 is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, you can get a rough estimate of how many years it will take for the initial investment to double itself.

For example, the rule of 72 states that if I invested R1000 at 10% would take 7.2 years (72/10) = 7.2) to turn into R2000.
As with any investment, you want the best returns at as low a risk as possible, and preferably a savings or investment vehicle that is flexible enough to allow you to deposit extra or, in an emergency, withdraw your money at short notice.
You may be immediately attracted to the obvious safe banking options or “solutions” such as a debit order from your current account into a separate savings or notice account. But these generally offer very low rates of return. Looking further afield, you should find ways to earn a better return without necessarily taking on more risk.

Wednesday, 6 March 2013

The 80/20 rule in investing

The law of the few

Have you heard of the 80/20 rule? The 80/20 rule, also known as Pareto’s Principle or law of the ‘trivial many (80%) and the critical few (20%)’, was named after Vilfredo Pareto, an Italian economist and political sociologist who lived from 1848 to 1923.

This rule states that in many aspects of business and life, 80% of the potential value can be achieved from just 20% of the effort, and that one can spend the remaining 80% of effort for relatively little return.
What could an Italian economist from a century ago have to do with successful investing today?
Vilfredo Pareto noted back in 1906 that some 80% of the land of Italy was owned by just 20% of the population.  He then developed his principle by observing that 20% of the pea pods in his garden contained 80% of the peas.
This observation eventually led to what is now known as the Pareto Principle or more commonly, the ‘law of the few’ or the 80/20 Rule: that 80% of the effects or outputs are often derived from 20% of the causes or inputs.
All fields of life

The 80/20 Rule is a gem of a principle because it appears to occur in so many fields of life.

In business? You might find that 80% of your sales (and complaints!) are derived from 20% of your customers.

80% of your company sales are made by 20% of the sales team. 

20% of your efforts produce 80% of the results.

In health and safety? Do 20% of the hazards that cause 80% of the injuries or accidents?

20% of your activities will account for 80% of your success.
In customer service? Microsoft found that by fixing the top 20% of the most reported bugs, 80% of the errors and crashes could be eliminated.

Wealth? Does just 20% of the population hold 80% of the wealth of a nation? Often. The same applies to the wealth of the world.  The law of the few even seems to apply to subsets of the income range: the world’s richest 3 men own as much as the next 7 put together.
The implication of all this? Focus on getting the big decisions right.
How do we apply this to investment?
Warren Buffett once said that we don’t need to make too many great decisions; we just need to limit the quantum and the magnitude of the bad ones.
Another way of saying this is that if we lose too much we can’t win overall. This is well demonstrated in the table below:
% asset falls in value
% recovery to break even
Impossible to recover

If an asset falls in value to zero, it is worthless: it can never recover. The implication of the table above is to seek assets with which show proven growth over the long term, and leave the speculative vehicles to the speculators.
Less can be more…
The best property investors are often those who make fewer decisions. What do I mean by that?
Well, the most successful investors I have seen are very often those who have bought and held on to prime location properties over a long period of time, rather than those who are constantly buying and selling in order to time the market.
The high transaction costs and the effect of capital gains tax ensure that high-frequency trading is usually an impractical approach to property investment.
Remember that 80% of your outputs are likely to come from 20% of your inputs.
Successful property investors should therefore concentrate on making fewer but bigger decisions. Due to the use of leverage, property investors can often make a huge difference to their net worth even by only acquiring a handful of assets.
It’s all about the power of focus.

Sunday, 3 March 2013

How to reduce or eliminate your debt with the Debt Snowball Method

Debt is a major problem in this country. While not everyone has store credit or a credit card, those that do typically carry a balance. The interest rate on a credit card balance is usually between 10-30% per annum.
These high interest rates make it difficult for people to pay down their debt - especially if only making the minimum payment.

In fact, just making minimum payments can make even the smallest balance over a decade to pay off and thousands of Rands in finance charges. It’s no wonder getting out of debt seems so hard.There are plenty of strategies you could use to reduce or eliminate debt. One debt reducing strategy that has worked for hundreds of people is the debt snowball strategy. The method was made popular by Dave Ramsey’s ‘ 7 steps for getting out of debt and getting your financial life in order’.

The plan is quite simple, takes very little time to setup and most important – you can see results on a regular basis to keep you motivated.
Once you have made the commitment to stop increasing your debt-load, the next step is to setup a plan to payoff your debt.
Here’s how the Debt Snowball Plan works:
1.  List all of your debts in order of smallest balance to largest with the minimum payment on each.

2.  Also list the interest rate on each.  If you have two similar balances, list the highest interest rate account first as shown in the example below.

3. Determine how much you can pay towards your debts each month.  Make the minimums on all of the accounts except for the first account (smallest balance) on the list.  Put any and all extra money towards this account.  Maybe it’s an extra R50 a month.  It is important to pay at least the minimum on all your debt accounts to avoid late fees and a hike in interest rates.

4. Once the first debt account is paid off, take the money (minimum payment + extra) being paid on  account #1 and apply it to what you were paying on account #2. 

Repeat until all accounts are paid off.

Finally, keep in mind that this process still takes time. 
There is no magic method of paying off debt, so realize that it will still take months or even a few years to become completely debt-free. But what we're doing is putting a process in place to make sure that you can get out of debt as soon as possible. You can speed up the process if you continue to pay even more money towards your debt as your budget allows. 

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