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SAFEGUARD YOURSELF FROM FINANCIAL STRUGGLE AND UNCERTAINTY IN THE CASE OF DEMENTIA

Despite the rising incidence of dementia globally – The World Health Organization (WHO) estimates one new case every three seconds – and the risk of losing mental capacity in old age, few individuals plan for this possibility.

Dementia is caused by a variety of brain illnesses that affect memory, thinking, behaviour and ability to perform everyday activities. The WHO estimates the number of people living with dementia worldwide will almost triple to 152 million by 2050.

September is Alzheimer’s awareness month, an international campaign by Alzheimer’s Disease International to raise awareness and challenge the stigma that surrounds the illness. Financial management is one of the first tasks which deteriorate with the condition, leaving people struggling to do simple tasks such as paying bills or managing their tax affairs.

“Most people don’t like to think about death, dying or incapacity,” says Mark Hawes, certified financial planner at Alexander Forbes. Figures from the Masters of High Courts back up this assertion, revealing that more than 80% of South Africa’s working population don’t have wills.

“If you have been diagnosed with dementia, the best way to avoid unnecessary financial burden or being taken advantage of financially, or otherwise, is to put plans in place immediately. If one day you are not able to look after yourself, you and your family should know who these responsibilities will fall to.”

Most types of dementia are progressive. Therefore, the earlier it is identified the better. In addition, the easier it is to put the necessary preparations in place. Very importantly, while our faculties are still with us we can and should be involved in the important decisions for our own future.

At the very least, it is time to ensure that your wishes are documented, understood and are willing to be carried out by all involved. Naturally the inverse is true. For the caregivers and the persons tasked with the respective areas of responsibility, making sure that you understand and are willing to carry out the wishes of the affected person (within reason) is paramount in the early days of diagnosis.

“It is therefore important to allocate someone you trust with different areas of your life. Consider your options and where you have existing policies in place, double-check what you are covered for.”

Putting your plan in place simply gets everyone pulling in the same direction. Do this for at least three areas with the help of a trusted professional:

 

  1. Set up or review your will

To ensure that this is done accurately, you need to be fully informed about what assets and other financial products you have. Importantly, remember that all retirement funds fall outside your estate and so beneficiaries should be nominated on each retirement fund respectively. In addition, bring in your trusted and professional financial adviser to make sure your legacy planning is effective, efficient and accurate to ensure that your wishes and priorities are met.

 

  1. Choose your healthcare professionals and caregivers

Understanding the expected treatment and what your lifestyle may look like in the years to come will provide insight into what facilities and care you may require. This information puts a sense of control and independence back in the affected person’s hands. It will create a great sense of comfort that the challenging journey ahead will be manageable and on your own terms. Of course, it is always recommended to include your loved ones when making the decisions – especially the ones who are expected to carry out your wishes, if only to understand if they have the capacity to do so. The cost of care for those with advanced dementia should also be factored in, as full-time nursing can be expensive. Knowing your expected care and the respective costs puts you back in control.

You can then compare your requirements with any existing insurance policies to see where you can provide the financial resources. Importantly, as cash flow may come under pressure for you and your family, you would also be able to see which policies are no longer a priority and can be cancelled. In addition, you will be able to allocate your savings and investments toward your expected expenses or make alternative arrangements with the people in your support structure – especially your family where available.

 

  1. Who will conduct your financial transactions on your behalf?

The Covid-19 pandemic has seen increased reports of fraudsters targeting unsuspecting and vulnerable people. Those with dementia who are already struggling to use ATMs or do internet or telephone banking may be more prone to being targeted or simply telling strangers their bank details. Now more than ever identity theft is a real concern.

It is therefore highly recommended that a trusted and responsible person or family member is appointed to conduct financial transactions on behalf of the affected. For high net worth people, a special trust can be set up and preferred trustees (along with an independent professional trustee) appointed to ensure the financial affairs and assets are managed effectively. Again, legacy planning is crucial to helping the affected person to rest easy.

Many people are unaware that a power of attorney is invalid if a person is no longer of sound mind, and financial institutions will not assist until the person is placed under administration or curatorship.

Therefore, it is important that this person is aware of your lifestyle and preferences. This can be simply from what groceries you buy to which financial institutions and structures your make use of. The latter should be considered together with your trusted professional’s financial adviser.

Hawes says it is important to know what policies one has and what they cover. “You need savings to cover your cost of living when you’re alive and no longer working. Understand your medical aid and what they will cover – at minimal, you should have a hospital plan and gap cover.”

Hawes also advises introducing your trusted confidant to your certified financial planner, in the event that something happens.

“Many people only bother to find out their family history after something happens to them. Find out if you have a history of cancer or heart conditions, Alzheimer’s or dementia in your family. By having these difficult discussions now, a person is better able to decide how their money should be used, and is less likely to be financially exploited at a later stage.”

 

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Finance

UNDERSTANDING FINANCIAL LITERACY

By Rita Cool, Certified Financial Planner at Alexander Forbes

 

Financial literacy is more than understanding how to work out a percentage, it is understanding how your finances impact your life. There are four fundamental pillars to financial literacy – debt, budgeting, saving and investing – which you should understand before you can achieve financial well-being.

 

Earning – The money that you receive for doing work, passive income from investments or annuity income from other sources. You don’t only earn by selling your time or goods but by earning dividend income, interest or commission. The more you earn the more you potentially have to spend.

 

Saving – This is creating a safety net by having money available in an emergency. Mostly done in a bank account, Money Market account, Tax Free Savings Account (TFSA) or access bond where the money put aside could get a positive return, e.g. interest gained or interest saved on bond repayments. Savings should not be exposed to volatile investments as you can’t take the risk that your money is less than what you put away just when you need to use it. Ideally this could be between 3-6 months’ worth of salary, so that if something happens where you can’t earn an income, or you need money for an expensive car repair, you don’t go into debt. Saving can also be used for short term purchases, for example to replace a fridge when it breaks so you don’t have to buy on credit which saves you the interest payments. Or you can save for a short term goal like a holiday.

 

Investing – This is normally done for a longer period and the value of your investment can go up or down, depending on what you have invested in. You can invest in a company privately or invest in shares of a company. You can also make use of a product through a Linked Investment Service Provider. These are companies that invest in a range of assets on your behalf through products like unit trusts, preservation funds, Retirement Annuities or TFSA. Your retirement funds are also invested and your retirement savings are therefore affected when the financial markets go up or down.

 

Rita Cool

Spending – Everyone has expenses and has to spend some of what they earn. The trick is how you spend your money. Do you have a budget of what needs to happen with your money or do you spend everything you see in your account?

 

Borrowing – In most cases you should try to avoid borrowing money but it can also be beneficial in the correct circumstances. Borrowing money because you can get more return than the cost to borrow it is called leveraging. You can borrow money to buy a house that will increase in value over time and that gives you an asset over time. You can also borrow money to buy a company or to expand an existing one.

 

Protecting – In all cases you should protect your assets as well as income. You can take out insurance which pays in the event of your asset being stolen or damaged. You can take out life cover to give your family an income in the event of your death or take out disability cover to protect your income if you get sick and can’t work.

 

Budgeting: A budget is a list of all your fixed and flexible expenses set off against all your income to see if you have enough money to pay for everything each month. If you don’t have enough income you either have to cut your expenses or earn more. This is like splitting a cake between everyone who you need to pay. Don’t promise future cake so that eventually there is no future cake.   Fixed expenses can’t be changed – like a bond or rent, car repayments and school fees. Flexible expenses are things that can change like entertainment and food. Don’t forget haircuts, car registration fees, monthly bank charges or birthday gifts. Remember to budget to pay yourself first by saving for retirement. This should also be a fixed expense. This does not mean treating yourself with gifts but investing in your financial security and financial future.

 

Interest Rate – This is the cost of borrowing money or lending money. If you borrow money you have to pay the lender interest. This can be a fixed rate or linked to the prime rate. You also get paid an interest rate for a positive bank balance and if you invest in bonds you get a fixed interest rate, or coupon rate. You will always get less interest for money you lend than for money you borrow. So don’t sit with money in the bank while you have expensive debts. Pay off your credit card or personal loans with this money. If the money in the bank account was your safety net, your paid off credit card could be your safety net in an emergency but until then you have the benefit of not having to pay high interest rates on the outstanding credit card.

Interest is normally shown as a percentage which means “parts of a hundred”.  Cent means 100, the same as there are 100 cents in a Rand. As an example, every R100 you borrow you have to pay back another R9 on top of the R100. On a bond of R100 000 your interest each year that you owe that money is R9 000, or R750 per month. You also still have to pay back the R100 000, so the interest you pay to borrow money makes the overall purchase price of an item much more expensive.

 

Compound interest – This is the benefit of getting interest on interest or growth on growth. At the beginning it doesn’t look like your money is growing that well but over time, if you reinvest the growth your investment grows faster and faster without you having to do extra work.

 

Debt – If you have a lot of debt, the interest you pay becomes very expensive and eventually it is possible that you can’t pay off all the debt repayments. If this happens you need to work out a debt repayment plan. It is possible to consolidate your debt to reduce monthly payments, but this is only achieved because the loans are paid over a longer time and in the end you pay even more in interest. Your debt doesn’t reduce by consolidating it, it increases. If you can work out a debt repayment plan it might be possible to pay your debt sooner and therefore cost you less interest, than if you consolidated your debt.

 

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Finance

FROM COVID TO CURRENCY CRISIS?

One hallmark of the United States’ superpower status is the primacy of the dollar. All regimes rise and fall. There are reasons to believe the US dollar is at risk of losing its status. How likely is this, why, and what might follow?

There are several ways to measure dollar primacy.

First, the US dollar accounts for 62 percent of global central bank reserves, according to the International Monetary Fund. The euro is about 20 percent, and the Chinese yuan 1.9 percent.

Second, in payments, the dollar accounts for 40 percent of cross-border transactions intermediated by SWIFT, a global messaging system for corresponding banking. The yuan: under 2 percent.

Third, in foreign-exchange markets, the dollar is on one side of about 90% of swaps.

And fourth, US Treasuries are considered the ultimate safe haven, which is why foreigners hold nearly $7 trillion of them.

Dollar primacy made sense in the 1940s when the Bretton Woods arrangement cemented its reserve status. The US economy accounted for more than 50 percent of global output, with Europe and Asia devastated by war.

Jame DiBiasio

Today the US accounts for around 15 percent of global GDP. China now accounts for around 18 percent, in purchasing-power parity terms (although the US economy is still larger in nominal terms). The vast discrepancy for the US and China between their economic positions and the influence of their currencies is stark.

Economic prowess is not the sole determinant of a currency’s power, although it suggests long-term directions. The US outpaced Britain as the world’s biggest economy in 1871 but it would take seventy years before the dollar displaced sterling as the leading currency.

Moreover, the tussle between the dollar and the pound was not straightforward. Late nineteenth century America was powered by its farms and factories, but financially it was immature, its banking system haphazard. American merchants had to conduct foreign trade in sterling, not dollars.

London had been the world’s financial center, with the pound at the heart of its money markets, since the founding of the Bank of England in 1694. Despite Britain’s relative economic decline, the gold-backed pound was a reliable, trusted system – an example of the network effect, made valuable by the sheer number of institutions using it.

The dollar only began to compete when the US established the Federal Reserve in 1913, bringing some stability to its banking system. In the 1920s the dollar became a reserve currency on par with sterling, but the Fed botched the 1929 Wall Street crash and the dollar slipped. Only after the devastation of World War II did the dollar triumph. Even then it remained tied to gold, until Richard Nixon floated the currency in 1971.

Since then we have lived in a world of fiat money, money that is based on the power and prestige of government rather than any intrinsic value.

That time also marks the appearance of electronic financial networks.

Techno-capitalism, cheered on by the Reagan-Thatcher model of government, has driven globalization and free capital flows. Since Nixon’s time, America has also supported the rise of China, as part of its overall promotion of free trade and open markets. This US support was initially to counter the Soviet Union but in the 1990s, buoyed by the end of the Cold War and US corporations’ eagerness to outsource labor to China, the pro-engagement argument took on a life of its own.

As America exported jobs it also exported dollars. It fended off challenges from the yen in the 1980s and the euro from 1998. And the US remained blind to the instability of laissez-faire capital flows because the growing list of crises – Latin America, Japan, East Asia, Russia – was “over there”. Domestic problems were viewed as scandals, the accounting frauds of a few bad apples, rather than symptoms of a broader problem.

The 2008 Global Financial Crisis, and its sequel in the eurozone, nearly destroyed the status quo. Even China had to respond to the economic fallout by pumping its economy with credit. But in the US, although the banking system was stabilized, the response was not the sort of austerity demanded of emerging markets. Instead the Fed slashed interest rates and began purchasing Treasuries and other securities, to bring even long-term rates as low as possible.

Japan had been doing this sort of thing for decades, and the eurozone followed suit. The developed world has abandoned laissez-faire in its capital markets, a trend exacerbated by reckless corporate tax cuts made by US Republicans in 2018.

By now, however, China had clocked three decades of heady growth. A cheap and skilled workforce combined with good infrastructure made China the workshop of the world. Its vast middle class hinted at a giant consumer economy in the making.

China’s monetary policy is however immature. It maintains a managed peg to the dollar, along with the rest of Asia (except Japan). China has been a huge importer of direct investment but not financial flows. On the contrary, China has been a vast exporter of capital – it’s a major buyer of US Treasuries – despite its hunger for financing its growth. China has preferred to finance this growth through forced savings among its financial institutions (and therefore its people).

Since the 2000s, Chinese leaders have attempted to rebalance the economy by reducing debt-funded infrastructure and real-estate spending (which support its exports) and growing a domestic consumer market. These attempts always crash into the Communist Party’s insistence on controlling all levers of power and bolstering the privileges of state-owned enterprises over the private sector.

Although both the US and China pursue flawed policies, the status quo might have continued for a long time, but the COVID-19 pandemic has accelerated their respective paths.

China responded with a brutal but effective lockdown. The West has unleashed record borrowing to try to salvage its economies. The Federal Reserve has expanded its securities purchases to levels that were unimaginable even during the scariest moments of the GFC.

This raises the question of the sustainability of the currency regime. China and other holders of US Treasuries are now earning almost zero yields. Given America’s future liabilities (pension and healthcare costs), its handling of the GFC shows that it is almost certain to continue to borrow rather than cut spending or raise taxes.

Such spending can be a net benefit if it supports economic growth. If the US invests in, say, its infrastructure and education system, it would be laying the groundwork for long-term prosperity. This may yet happen, but even so, Treasury holders are looking at a grim forecast.

Central banks and global investors will seek alternatives. The yuan is starting to look more attractive. China has its macro problems. But it is the only major economy running a conventional monetary policy, which is to say it is paying investors a yield. Chinese stocks and bonds are now part of global investment indexes. Even as the Trump administration attempts to freeze China out of the global economy, US money managers and banks are making a beeline to participate in China’s financial markets.

The network effect and the sheer weight of Wall Street will keep the dollar dominant for some time. China must still earn investors’ trust. Its introduction of a digital yuan, however, will make transacting the currency much easier. China is laying the groundwork for a new financial system, based on technologies such as blockchain, that may well come to challenge the status quo, starting in emerging markets.

Just as the US in the 1910s undertook the reforms to create a credible financial system, China is trying to do something similar today. It has a long way to go and it faces internal political contradictions (comparable to Japan’s challenges in the 1980s). The US could also reform its monetary and fiscal policies, breathing new life into the dollar regime.

We are probably entering a phase of competition between the dollar and the yuan, and there is no predetermined outcome. America may not get to enjoy the luxury of a gradual transition, though: just as the Suez Crisis of 1956 destroyed British pretensions about the pound, an escalation of the US-Sino conflict could have a similar effect.

The irony is that the biggest winners from a healthy rebalancing among currencies would be ordinary Americans. Dollar primacy benefits Washington, which increasingly relies on the world’s dependence on the dollar as a tool to impose punishments on its enemies. And it benefits Wall Street, the heart of the American dollar export machine. But this arrangement means more debt at home and more jobs sent abroad.

For America to invest in itself it must make it unattractive for its own companies and financiers to send dollars overseas. It can try to do so of its own volition – or risk being forced.

 

Cowries to Crypto: The History of Money, Currency and Wealth by Jame DiBiasio and illustrated by Harry Harrison is published by OANDA, a global leader in online multi-asset trading services. It will be available from 1 September on amazon.co.uk, priced at £19.99.

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