Who wants to save more?

This is not such an easy question to answer.

Many of us may shoot up our hands, quickly realizing that what follows is a tough call-to-action: “Then start saving!” So we shrivel back and think we’ll rather start saving next month, or when we get our next increase.

Others, already encumbered with tough monthly expenses, may take a slightly more cynical response off the bat, realizing that saving often feels like an impossible task in our current world-economy.

But deep down, most of us want to save more. We don’t have to be sold on the benefits of saving.

What we need is a workable solution to actually saving more! 

Self-help books on this topic are a dime a dozen, but here are some ideas from Behavioral Economist Wendy de la Rosa. She wasn’t happy with how much she was spending, and like many of us, felt like she couldn’t stop. Here are two behavioural changes that she employed in her own life to reduce her spending and increase her saving.

  1. Take aim at your small, frequent purchases

Big purchases are easy to reign in – but it’s the small ones that are a doozy. 

Eating out is a frequent purchase that many of us make regularly, but, savings-wise, it’s death by a thousand cuts. A lunch here, a smoothie there — it all adds up and decreases our savings ability. It’s not just the big dinners or take-outs for main meals, it’s the small snacks and convenience foods that we spend on when we haven’t put proper planning into our meal prep.

You may have other small ‘luxuries’ that you afford yourself, but if you spend longer than 30-seconds thinking about them, you could probably avoid them.

A helpful hack to reduce these is to switch from using a credit card for daily spending, and using cash or a capped debit card. Using a credit card to pay for meals on the fly or last-minute lunches keeps us detached from the accumulating costs until we receive our statement a month later. But, spending a finite amount of cash from our pocket or seeing our balance drop on our debit account keeps us far more in tune with just how much we’re spending and influences our behaviour.

  1. Commit your Future Self

De la Rosa says: “Fundamentally, we humans think about ourselves in two different ways: there’s our present self and there’s our future self. We have an optimistic view of our future selves. Our future selves are the one who will work out, who will call our parents more, who will save for retirement. And one reason we don’t save is because we believe that our future selves are going to take care of it. We forget that our future selves are actually the same as our present selves and that our present selves need to start doing this good thing now.”

Here’s a great hack that she offers – plan to save a percentage of your tax refund. It doesn’t have to be a massive amount, but it’s something! In their research they found that if they asked clients how much they would like to save BEFORE they received their refund, it was 10% more than those who were asked after they received their refund.

Our present self… is actually more likely to make better decisions than our future self! 

We can apply the same to our annual bonus, or payback from our rewards schemes. Deciding today, and committing to that, is far more effective than saving as an afterthought.

One of the key points to saving more is looking at the behaviours that need to change in our lives. Financial success is based on financial behaviours – not just knowledge. There is a lot of time spent on financial education, but if it doesn’t change our choices for the better – they’re just words on a page or sentiments in a conversation.

Start with one thing you’d like to change, and take it one behaviour at a time.

Why Mental Health needs our attention

The journey of developing your life can be challenging on your mind and overall well-being. Prioritizing mental health can help us build the resilience we need to find fulfillment at work and in our personal relationships. 

Often we focus on physical health and the list of things we want to accomplish. It’s important to remember that our body and mind always work together. We need to take care of both!

What is mental health?

Being mentally healthy is defined by having positive characteristics in terms of how we feel, think and behave in daily life. It also influences our ability to cope with stress and conquer life’s challenges.

This doesn’t mean we no longer feel anxiety, frustration or stress. Rather, we learn to accept that hardships are part of life. Holding a healthy mental space empowers us to find ways of reacting better to whatever pain or challenges we face.

Learning to pay attention to your mental health will teach you to reframe your mindset – from preparing for the worst that could happen, to expecting the best that could happen.

Here are 3 practices to help develop and maintain a healthy mental space:

  • Remember to look inside

Introspection is a healthy habit to integrate into your daily routine. Being introspective also teaches you to be mindful of your thoughts and feelings as well as your actions.

Through practising introspection you’ll learn to identify thoughts and the physical or emotional sensations that tend to contribute to your cycles of stress and dis-ease. From there you’ll look to find solutions on how to address those sensations to more positive ones.

Meditation is one of the best ways to look inside. You learn to control your breathing and focus your mind. You discover that your thoughts are controlled by you and not the other way around.

  • Become more active

Again, your mind and body always work together. Improving your mental health comes with improving your body.

The wonderful thing about working out is that it can be done at home. The Coronavirus lockdown may have kept you indoors but you could still keep fit. Apps and videos of effective 5- to 10-minute daily workouts are in abundance. 

Keeping fit doesn’t only mean you need to pound weights or run long distances. Dancing, playing activity-based games with friends and family can also help you become more active and improve your physical health. The hormones that are released during these activities boost your mental health considerably.

Simple things like gardening or cleaning your home also contribute to your physical and mental health.

  • Have a purpose

Finding purpose and establishing a vision can help you create meaning in your life because you’ll have something that drives you. An inspiration that pulls you towards all that you wish to accomplish.

Purpose can be found in your work. You can choose to focus on work that challenges you to be more productive and improve your service to others. Volunteering in old-age homes, charities and non-profit organisations are other heartfelt ways to establish purpose in your life.

It’s also possible to find meaning in the relationships you build. Focus on building fulfilling and mutually beneficial relationships. Socialise more with people who will be empathetic and supportive and less with those who put you down and are constantly in competition with you.

Manage your expectations. Be patient and compassionate with yourself. Results will come even though it doesn’t seem like it now. We need to pay attention to our mental health because that is what helps us reframe our minds and look towards a happier future instead of focusing on the uncertainty and stress of our current situation.

The difference between Medical Aid, Medical Insurance and GAP Cover

It is easy to think that the terms Medical Aid, Medical Insurance and GAP Cover refer to the same thing. Although they all serve to help you afford medical care, there are some subtle differences. 

Getting a clear understanding of these words will help you get savvy with your options. If you already have health coverage you’ll be more informed about the benefits and extent of your health plan. However, many of us sign up for this type of cover, but over the years (especially if we don’t claim often) we can easily forget the massive role that these products play in our financial portfolios.

Medical Aid or Medical Insurance, it’s all medical cover, right? 

Yes and yes. But, one of the key differences is that medical insurance products are not governed by medical aid regulations. In 2018, updated Demarcation Regulations stated the following:

  • Medical aid schemes fall under the Medical Schemes Act No. 131 of 1998.
  • Medical insurance products are governed by the Short-term Insurance Acts No. 53 of 1998.

 

The guidelines of these laws actually play a crucial role as they differentiate the offering and extent of the cover of these two types of medical cover.

For instance, medical aid schemes are required by law to pay in full for Prescribed Minimum Benefits – a.k.a PMBs. The payment may be limited when you go to a doctor who is not on your medical scheme’s designated service provider network (the one they choose for you).

They’re not required to offer funeral cover, personal accident disability or cover for any loss of limbs.

Moreover, payments of in-hospital benefits are made based on the National Recommended Price List and healthcare professionals use this price list to determine the base price of their services. 

In addition, there may also be yearly limits for procedures.

How does medical insurance differ?

The purpose of medical insurance is to protect your financial assets as well as promote a lifestyle of health and wellness. It is considered more affordable because it mostly focuses on out-of-hospital expenses including prescribed medication and meetings with your GP, optometrist or dentist. Often the amount you would be able to claim is based on a set procedure cost, not what the hospital or doctors actually charge you – which means that some procedures could leave you well covered (with money in the bank) whilst others could leave you heavily under-insured.

Other benefits include cover for funerals, accidental injuries and/or disability caused by an injury.

Pre-existing conditions may not be covered by your medical insurance. Just like your home insurance can only pay for damage that happens to your house after you’ve joined and not for damage that happens before that.

These are just a few differences – these products are highly complex so it’s always best to chat through your personal situation before making and decisions to shift or change products.

What about Gap Cover?

Gap cover is also an insurance product. It does not cover the full amount for hospital procedures as it works in conjunction with your medical aid – covering where your medical scheme falls short. 

For instance, in cases where your chosen doctor charges more than your medical aid’s rate, the difference will be taken care of by Gap cover. It literally covers the gap. (this gap can be as much as 400%)

Depending on your medical aid options, Gap cover can be provided for:

  • Oncology shortfalls
  • Sub-limits
  • Medical aid co-payments

These differences do not mean you should take up everything at once. Whilst GAP cover is generally considered a must-have, helping you choose medical aid or insurance options that are most suited to your lifestyle and your family setup is what we will do together in your financial planning sessions.

If you haven’t reviewed your medical cover, it’s best to do so towards the end of the year as most medical schemes don’t allow for changes or upgrades during the year. 

How much is enough?

Medical aid (including insurance products) contributions need to form part of our overall financial planning. Every year these products are adjusted slightly – both in how much they cost in monthly premiums and in what they cover. These increasing costs can feel burdensome and unnecessary to those who seldom use their medical cover, but they remain a crucial part of our financial planning.

Unforeseen medical expenses can completely decimate our savings and future opportunities if we don’t have some form of cover in place.

The tricky question – for EVERYONE – is how much cover is enough?

Often we think of really hard scenarios, like a freak accident or the life-changing diagnosis of cancer or another dread disease. But the reality is that there are so many scenarios and we can’t possibly plan for them all. And, if we have a run of good health, we might feel like we have the space to reduce our medical cover – especially given that budgets are being stretched tighter than ever and private medical care doesn’t come cheap.

Everyone’s situation is unique, so it’s never 100% appropriate to base financial planning on averages, but a good understanding of trends is helpful in guiding us to making prudent decisions when there are so many variables to sway us.

In a late 2018 article for New24, Jillian Larkan (then head of health consulting at GTC), advised that their benchmark is around 10% of the household income, for the whole family. This is less if there is higher confidence in the state-provided medical care.

It’s quite easy to understand how this will become a grudge-purchase for those who reach the end of a tax year having had zero claims on their medical aid. For those who have benefitted, it’s a no-brainer.

The general rule-of-thumb is that for those members who are younger, healthier and have no dependents, a lighter medical plan is sufficient. It’s not all-encompassing but the average risk for that member is considerably lower. For members who are older, have dependents and may have developed underlying health conditions, a more comprehensive (and more expensive) medical plan would be most likely.

Inside of a good financial plan, a contingency should be made for possible short-falls in all scenarios. It’s wise to remember that in every scenario there will be unforeseen outcomes, if we think we are ‘completely’ covered for ‘any eventuality’ we are setting ourselves up for frustration and disappointment.

We are now living in a world where even the best government or state-provided medical care is not the first choice for most people. Having access to private medical care gives us increased autonomy in our decisions when a health tragedy has already placed strain and stress on our lives.

You may not need to spend as much as 10%, or you may need to be budgeting closer to 15%. Depending on your lifestyle and your current responsibilities, your personal financial plan needs to have a medical cover review every year around November as most providers only allow for changes and upgrades once a year.

Pre-Lockdown vs Post-Lockdown Spending Trends

The largest factor in our wealth creation, and our wealth protection, is our behaviour. How we choose to save and how we choose to spend are the habits that will determine if we are able to grow our money over time, or if we will erode it over time.

There are other factors, certainly. We can’t forecast all the transitional events in our life, nor precisely when they will happen – so attitude and external factors also play a role, but even these two can be considered influencers of our behaviour.

22Seven recently conducted research on the top 10 spending categories in the City of Cape Town (and certain out-lying suburbs and metros) to understand how the Black Swan of COVID-19 and lockdown influenced consumer behaviour in those areas. Whilst these are geographically unique they help us understand the trends in other major cities too and can help us find deeper meaning in our own spending habits.

Unchanged habits

Spending on groceries remained a top priority both before and after lockdown. This is partly because we can’t go without food, and also because they were the only stores which we could, and needed to, visit during the lockdown period. Two other consistent areas were on cellphone (and data) and transport costs. 

Spending habits that dropped

Entertainment and takeaway meals pretty much zeroed out, but started showing more growth as industries opened up and lockdown lifted – but the caution of consumers has clearly played a role in reshaping this habit. With many informal traders and small businesses unable to operate, ATM and cash withdrawals also bottomed out. The fact that cash is a physical payment method, and the virus being contagious, and that ATMs require public touchpad engagement would have played a considerable role in the change of this habit too.

22Seven also said that: “Home & Garden and Health and Medical also dropped off the list completely post lockdown. Home & Garden spending decreased mainly because those who offered the services were not allowed to operate and many of us had time to attend to those services ourselves while we were at home.

You may [be] wondering how counterintuitive it is that spending on Health and Medical related expenses dropped off the list during the lockdown? Well, it boils down to two things mainly: firstly, the health-seeking behaviour of [those surveyed] would have dropped during the lockdown period. People would’ve put off any non-emergency trips to their healthcare professionals to avoid contact with people. Fewer trips to your doctor also mean fewer trips to the pharmacy, which equals less spending.

Secondly, people would’ve stocked up on their essential medication before the lockdown period started to avoid having to visit pharmacies, and increasing exposure to others, once the lockdown commenced.”

Spending (saving…) habits that improved

According to 22Seven, “Investments, Savings, Insurance and Card Repayments all climbed up the list. While there was a portion […] who saw a reduction in or lost their incomes completely, those who had stable incomes during the lockdown suddenly had extra money left over – mainly because they could spend their money on fewer goods and services.“

This proved to be a good habit-forming contributor as debt and card repayments increased and both long- and short-term investments were bolstered with the extra money that was available to those still earning salaries.

It’s helpful to take some time to review how big events have affected us, not just financially, but emotionally, relationally and mentally too. All of these will play into the habits that we form and reform around our wealth, and to our perception of value. 

Some habits we may have forgotten through the trauma of an event and would want to work on again, other habits we may decide to release and form new ones that have greater meaning to us and our family.

If you’d like to read even more, here’s the link to their article:

https://blog.22seven.com/2020/07/visualised-pre-lockdown-vs-post-lockdown-expenditure/

Why we need losers in our portfolio

There is a strange behavioural effect where investors tend to sell winners early and hold onto losers for longer. You would think that investors would offload their losers as soon as possible and hold onto their winners so that they keep winning, but the opposite is often found to be true. This is known as the disposition effect.

This effect is thought to occur because people value gains and losses differently. Specifically, people dislike losses more than they like gains. This explains why it is easier to sell a winner and hold onto a loser. If you are holding on to an unrealized loss, then selling that position would prove that you made a bad decision picking that stock. On the other hand, selling a winner immediately affirms your investment guile.

The curious nature of the disposition effect lies in the fact that even seasoned investors make emotional financial decisions. It’s not to say that selling realised gains and waiting for underperforming parts of your portfolio to mature is necessarily bad. We could argue that you NEED some losers in your portfolio.

If your entire portfolio is doing well at the same time, then it probably means that your investments are relying on the same social and economic factors. This, in turn, means that if those factors trend downward then your entire portfolio will react in the same way.

Eliminating any underperforming parts of your portfolio eliminates the potential for them to do well in the future, when the current lead performers take a back seat.

The name of the game has always been diversification. In fact, you should be EXPECTING some elements to underperform at times. There is a difference between a bad investment and one which is not currently shooting for the moon. By placing your eggs in multiple baskets you are spreading your risk and protecting your wealth.

This is also why it’s crucial to have options that are both local and offshore. Local may feel like a loser when offshore is appearing stable, but the balance of volatility and stability helps create more predictable returns in the long run.

Your portfolio is like an orchard, harvest the fruit but be weary to raise an axe to the trees. Some trees require a longer time to bear fruit and the long-term strategy is often the best one.

ETF not EFF

Not to be confused with the EFF (the South African political party or the lesser-known Electronic Frontier Foundation…), ETFs have been gaining popularity in investment portfolios for about a decade.

ETFs (exchange-traded funds) were first developed in the early 1990s by Nathan Most, they offer both retail and institutional investors a great passive investment option.

Nathan initially started thinking about the ETF option in this way:

“I started thinking about a warehouse receipt holding the shares in the fund, which could then be divided up into pieces,” said Most in a 2004 interview with CBS MarketWatch, recalling his background in commodities trading. “You could reassemble the pieces and get back the stocks, but otherwise only the pieces would trade.”

It took him about six years to finalize the offering that we now recognize as ETFs.

“I never thought they would be this big,” said Most. “But the ETF was designed with the investor in mind, and they have low fees. Also, ETFs are a natural fit for stock exchanges, which have gotten behind them.”

Andrew Goldman, in his 2020 blog on ETFs vs Stocks, draws a much richer definition that speaks more directly to those looking to enjoy some DIY investing lessons. He puts it like this:

“The difference between a stock and an ETF is like the difference between a can of soup and a whole grocery store. When you buy a stock you’re investing in a single company [a can of soup] — Apple for instance. When that company does well, the stock price goes up and so does the value of your investment. When it goes down? Yipes! When you buy an ETF (which stands for Exchange-Traded Fund) you’re buying a whole collection of different stocks [the whole grocery store]. But more than that, an ETF is like investing in the market as a whole, rather than trying to pick individual ‘winners’ and ‘losers.’”

This is a very general definition that is painted with broad strokes, but it helps show that ETFS offer benefits like:

  • Automated diversification
  • More discretion when it comes to buying and selling
  • Lower cost entry and management
  • Higher level of transparency
  • Can be more tax efficient

ETFs are not the be-all and end-all of investing and they’re not the answer to volatility in the markets – but they offer a healthy space to develop savings habits and understand the markets a little better without having to spend all of your investment budget in one place.

As the markets mature, these products are going to start to offer complex sub-types (like Leveraged ETFs) and will require more prudent and experienced management, so even if you do want to learn a little on your own, make sure you bounce your ideas off your financial adviser first.

Otherwise, remember this: a robust portfolio succeeds only in the scope of its diversification and time to grow with the markets. Don’t place all your bets on one horse and, unless you’re an investment specialist, don’t go it alone.

If you’d like to read even more, here are some great articles:

https://www.marketwatch.com/story/etf-inventor-nate-most-dies-at-90

https://www.wealthsimple.com/en-ca/learn/etfs-vs-stocks

https://www.investopedia.com/articles/investing/020916/etfs-can-be-safe-investments-if-used-correctly.asp

Stay abreast of your healthcare cover

Whilst October is Breast Cancer awareness month, cancer has become a disease that was touted in 2018 as the second leading cause of death. It’s a tragedy that has most likely affected your family, and the families of your friends, colleagues and neighbours.

The World Health Organization claims that between 30-50% of cancers can currently be prevented by avoiding risk factors and implementing evidence-based prevention strategies. 

Firstly, we should consider the categories of external agents that cause cancer in order to be able to reduce our risk. There are physical carcinogens, such as ultraviolet radiation, chemical carcinogens such as tobacco smoke, and biological carcinogens, such as infections from certain viruses and bacteria.

Checking in on your healthcare cover is important, but you can also reduce your risk by taking care of your own health too. Here are some ideas…

Avoiding ultraviolet

The sun’s UV rays are damaging. Dermatologists agree that we should be using sunblock on exposed areas of our skin, every day. You can apply a broad-spectrum sunscreen of SPF 15+ and re-apply every two hours or after swimming or exercising outdoors. 

Other strategies that can be adopted to minimize UV risk is to avoid direct sunlight during the peak ultraviolet radiation period (2 hours either side of noon accounting for 60% of the day’s ultraviolet radiation), or to wear protective clothing such as hats and sunglasses (Note: a wide-brim hat is preferable and the sunglasses should have a UVA/UVB protection certification on the label).

Minimizing unhealthy habits

The products we consume are inevitably interacting with our biology. Tobacco use is the single biggest risk factor for cancer and is responsible for approximately 22% of cancer-related deaths worldwide. While tobacco may be the big factor that most people seem to know about there are other habits that can lead to increased risk of cancer such as being overweight or obese, excessive alcohol, lack of physical activity and unhealthy diet choices with low fruit and vegetable intake and too much meat.

It isn’t only about what you should avoid, but what you should be pursuing. Leading a physically healthy lifestyle with a balanced and nutritious diet is beneficial on so many levels.

Early detection 

Cancer is more likely to respond to effective treatment when identified early, reducing the chances of cancer mortality. Early detection depends on three measures: awareness, clinical evaluation and access to treatment. 

The diagnosis and treatment is up to the medical professionals and the financial cover that we are provided, but we do have influence over our own, and others, awareness. Cancer can be an uncomfortable subject to broach, but if simple conversations lead to an increase in early detection then a little discomfort is worth it.

Markets don’t make you money

Markets don’t make you money; your habits… make you money.

As creatures of habit, we ultimately become our own best friend, or our own worst enemy. This is why it’s important to be mindful of how our emotions affect our choices and influence our behaviour.

We can remind ourselves of this time and time again, but still we might find ourselves slipping into old habits and allowing emotional decisions to vilify our investment strategies.

This is largely due to the fact that if we step back and take a broader look at the market performance of the past three to five years, most local markets have underperformed. Many will say that only offshore has been showing growth, but even that is another way of saying that the ‘grass is greener on the other side of the fence.’

We all know that the grass is greener where it’s watered!

But here’s why this concept throws us so easily: performance doesn’t follow calendar years.

We do. We follow calendar (or financial) years. The reality is that three bad years doesn’t necessarily mean that your investment strategy is wrong. There will ALWAYS be a better performing asset class, share or fund. There will always be that temptation to jump ship when we see another vessel moving ahead a little quicker than ours.

And this is typically where we lose our money. This behaviour assumes that the markets will make us rich, and forgets that it’s our habits that make us wealthy. Markets yield the best returns over time, and not at a specific time, which speaks to the importance of following the ‘buy and hold’ strategy rather than the ‘buy and sell’ strategy.

Emotional awareness and diligent behaviour have the biggest impact on our portfolio. Managing these two key elements to our future wealth are not easy as both can be easily swayed under the right conditions – and poor market performance (especially after a Black Swan) creates these exact conditions!

Don’t try to go it alone when you’re feeling like this.

Having an objective partner on your side to help you process the emotional turmoil that rides the wave of a crashing market is invaluable to building your wealth. People who work with an adviser typically enjoy 1-2% better returns; over 25 years that can be almost double the return of someone who invests without an adviser.

They will also be able to remind you that maintaining your premiums during volatility allows you to purchase shares or allocations at cheaper prices (effectively acquiring more stock) and benefit your portfolio even more in the future.

Remember, it’s not the markets that will make you wealthy; it’s your habits.

Why hobbies help

Time is our greatest investment opportunity – we should invest the time that we have in a diverse portfolio of activities that will provide us with positive returns.

Having a solid routine helps us to squeeze utility out of our time. However, if we get stuck in the same routine for too long it can start to feel monotonous and laborious. Especially so if we are spending our down time on low value activities such as watching TV or browsing social media.

Sometimes we need a break, but that doesn’t mean we shouldn’t be doing or achieving something with our time. A hobby can provide us with a sense of purpose, an outlet for stress, a creative challenge or all of the above!

Career coaches have confirmed that having a hobby can help you be better at your job. Not only does it show your employers that you have passions and a drive to do something with your time, it also helps to prevent burnout. When we are bored at home our workload can prey on our idle minds, a hobby provides us with a welcome distraction – engaging our brain on an enjoyable and unrelated pursuit.

With the massive success of websites like Etsy (an e-commerce platform focussed on handmade goods) it is clear that hobbies can do more than merely fill our time. Many hobbies are practiced in solitude and as such we often don’t realise how much our skills have progressed. Whether you are selling succulents, making bespoke leatherworks or teaching a craft, there is always an opportunity to turn a hobby into a side-hustle.

Hobbies can also help us adapt to retirement. Many people are left wondering what they will do with all of the extra time they have on their hands once they retire. But you will never hear that from a golfer, woodworker, painter or fisherman!

Perhaps the most important facet of a hobby is the (often indirect) social aspect. It provides us with interesting stories to tell. It lets us explore and play and be young at heart, shirking the stresses of life, one game of Bridge at a time. It connects us with people on a level that is fun.