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Wealth Management

SAVINGS 101: UNDERSTANDING CERTIFICATES OF DEPOSIT

by Tricia Joyce

 

Everybody knows how important it is to have savings. With money set aside, you can pay for major expenses like tuition, a car, or even a home with relative ease. Savings can also serve as a safety net in times of need and unexpected situations like a pandemic. And more importantly, a healthy amount of savings allows you to head into the future with more financial security. After all, as certified financial planner Gerard Visser recently pointed out to us, it’s never too late to get started on saving for retirement.

There are so many options for savings accounts that it can be overwhelming to choose the right one for you. However, knowing your options is the first step to gaining more control of your future. In this article, we’re going to discuss one type of savings account: certificates of deposit.

 

What is a CD?

A certificate of deposit, or CD, is a type of savings account that is a time deposit. This simply means that it comes in predetermined term lengths and an expiration or maturity date.

The term lengths vary from bank to bank. It can be as short as 21 days or as long as a decade. The average term lengths that most banks offer fall between 3 months and 5 years. The availability of options for term lengths makes CDs attractive to short-term and long-term investors alike.

 

What are the pros and cons of CDs?

No withdrawal

With CDs, the main difference from traditional savings is also its biggest disadvantage. As with all time deposits, the catch is that you agree to keep your funds untouched within the duration of the term length. That means you can’t withdraw your money until its maturity date, unlike traditional savings accounts.

Penalty for early withdrawal

If you really need to withdraw from your account, you can — but note that it comes with a fine. How much you have to pay varies per institution, but The Balance warns that it can be subtracted from your initial deposit. If you’re lucky, the penalty will be the interest your account earned. The second case is definitely more favorable because you keep the same amount of money you invested. However, you still lose the interest that makes CDs more attractive in the first place.

Higher interest rate

That said, a CD is generally a safe investment and ideal for people who don’t need immediate access to their assets. The interest is one of its major selling points because the rates are higher than traditional savings accounts. With the magic of compounding, you can earn more interest on interest than you would in a low-yield account. In the context of savings, CNBC points out that compound interest works in your favor compared to compound interest in terms of debt. Next to term length, the interest rate, which is calculated in annual percentage yield (APY) for CDs, is one of the most important considerations you have to make.

Better financial planning

The fixed term lengths and APY can also be useful for financial planning. This is where a CD calculator can be useful. Marcus states that by using a high-yield CD calculator you can find out how much interest you can earn by inputting your initial deposit and term length. Say for instance you deposit $25,000 into a CD with a term length of 12 months. Using Marcus’ APY, you can earn $275 in interest that year effortlessly. Knowing this number can help you more accurately predict your financial outcome and put together a realistic timeline for your financial goals.

 

What is CD laddering?

If you don’t want to commit to a long-term CD, consider experimenting with a CD ladder. It’s a saving technique wherein you deposit into multiple CDs with different maturity dates. For example, you can deposit $1,000 each into CDs with one-year, two-year, three-year, four-year, and five-year term lengths. This gives you the benefit of high interest rates, meaning better returns, without having to tie all your funds into one untouchable account.

To play it more strategically, Money Under 30 suggests staggering the CDs based on your future needs. Figure out what expenses you have in the future to know how to purposefully use a CD ladder. Factor in, for example, expenses like the college tuition of your child next year or a real estate purchase in the next five years.

 

What do I do when it matures?

When a CD hits maturity, it enters a short grace period. It’s typically one to two weeks in length and it allows you to withdraw your funds without a fine.

Then, you have three options:

  • Deposit your savings into a different (non-CD) account;
  • Deposit your savings into a CD account with a different term length; or,
  • Automatically renew your account.

If you think a CD or a particular term length is not the right choice for you, the first two options are available. If you didn’t take action during the grace period, banks will automatically renew your account at the same term length. Don’t forget to read the fine print and mark your calendar!

To sum up, a CD is a safe option for short-term and long-term investments. Compared to traditional savings accounts, the returns are higher. Even if you’re only investing for one year, you can earn more in interest. The biggest trade-off is the term length, so carefully consider if a CD, or a particular term length, best fits your needs. If you’re expecting major expenses soon, consider investing in a short-term CD instead or using a CD ladder. The high APY still makes it a better option than traditional savings accounts.

 

Wealth Management

DON’T RISK IT ALL WITH NON-COMPLIANCE

By Paul Sleath, CEO at PEO Worldwide

 

Did you know non-compliance costs more than twice the cost of maintaining or meeting compliance requirements?

Yet, companies continue to overlook proper compliance procedures, choosing to ‘wing it’ or do it on a shoestring budget instead.

We get it. Today’s business owners have a multitude of priorities to juggle, top of which is turning a profit and growing. When you’re focusing on driving success, compliance can easily fall by the wayside.

But success is of little consequence if a government entity dissolves your company because you failed to comply with certain legal requirements.

Keeping on top of regulations

In the corporate world, compliance involves adhering to a wide range of laws and standards designed to protect your employees, customers and other stakeholders — and generally making sure you “do the right thing”.

No matter what industry or type of business you work in, compliance is a big deal. But when you’re looking to expand your operations into markets all over the world, it’s an entirely different ballgame.

As you grow and move into new jurisdictions, you’ll encounter a whole host of new regulations — from tax returns and statutory filing to international employment rules about payroll — and face much higher compliance costs than operating solely in one location.

Many countries require that filings and contracts are made in the local language and change their regulations frequently. Without a contact on the ground, it can be difficult to keep up. Each country will also have its own authorities and governing bodies to deal with.

For example, in the US, you have the Occupational Safety and Health Administration (OSHA) to contend with while companies operating in the UK will need to comply with the Health and Safety Executive’s (HSE) standards.

 

Compliance across borders

The point is, no two countries are the same, and when you’re trying to operate across multiple locations, things can get messy.

Late filing in Denmark could lead to your company being dissolved within a few months. In Serbia, the tax regulations are so confusing that many companies have taken to paying extra tax where they have no liability just to ensure they don’t get stung with any penalties.

If you’re expanding into Spain, it’s worth knowing that terminating employee contracts is notoriously tricky, and you’ll have to budget for a severance fee (which equates to 33 days of salary per employment year).

In Singapore, you’ll be responsible for sending the monthly payment (including both yours and the employee’s respective contributions) to the Central Provident Fund (CPF) — a key pillar of the country’s social security system. This payment has to be sent by the 14th of the following month.

A couple of notable points to bear in mind if you’re expanding into Germany is that employees can only be leased for a maximum of 18 months. After this, you must hire them permanently or let them go. Chain leasing is also prohibited, meaning the company holding the licence must contract directly with the party receiving the labour.

And if you’re global expansion journey is taking you down under to Australia, you’ll need to pay a Fringe Benefit Tax (FBT) if you’re providing certain benefits to your employees — even if a third party provides them.

Without this knowledge of local regulations, you quickly (albeit unintentionally) run the risk of non-compliance and find yourself on the wrong side of the law.

So, what could happen if you don’t comply?

There’s no way around it, if you fall foul of compliance, you’ll end up paying for it — one way or another.

Penalties come in multiple forms. The most common penalties for non-compliance are fines, which may be levied against the company or individual directors.

However, one of the most financially damaging events a company faces is having their products blocked at the border or being forced to destroy merchandise due to compliance issues. In some cases, non-compliance can even result in the mandatory closure of ALL operations within that country or imprisonment of the directors.

Even if your organisation is not given an actual penalty, the inconvenience and costs of righting the mistake, damage to the company’s reputation and possible loss of contracts could prove disastrous.

But the highest cost of non-compliance is business disruption. When found to be non-compliant, you may be forced to implement changes before business can resume, which can have a knock-on effect on other areas of your organisation.

Whether you’re looking for a PEO in the UK, US, Spain or Singapore, compliance should be your top priority. So, it’s worth seeking the help of a Global PEO with local knowledge of your chosen country to ensure you always remain on the right side of international employment laws.

That’s where we come in. At PEO Worldwide, we ensure you remain compliant at all times by taking full responsibility for hiring, contracts, employee benefits, payroll and termination if needed. To find out more about our global employment services, don’t hesitate to get in contact.

 

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Wealth Management

FOR PE TO SNAP UP “GOOD” COMPANIES, THEY MAY NEED TO WADE INTO “BAD” ECONOMIES

FINANCIAL MARKET

By  Martin Soderberg, Partner at SPEAR Capital

 

There’s no shortage of global challenges for investors currently, especially for those concerned with private equity (PE). PE and risk managers with their fingers on the pulse are turning to often overlooked opportunities in emerging markets. As Martin Soderberg discusses, while there are arguably higher levels of risk associated with such investments, the key is being able to identify good companies – and some of these may be found in bad economies.

While the current state of global markets and the enduring pandemic are anything but favourable for fundraising, some estimates indicate that up to $2.5 trillion in unutilised capital was sitting in PE houses globally earlier this year, simply waiting for the tide to turn. The McKinsey Private Markets Review 2020 reveals that $1.47 trillion of investor capital was deployed through the PE asset class globally in 2019. This represents impressive growth of private market assets under management by 10% for the year, on the back of total growth of 170% for the past decade. While, as any risk or asset manager will tell you, past performance is no guarantee of future results, the existing levels of available capital (if prudently allocated) have the potential to extend this decade of growth through the COVID-19 storm.

The International Monetary Fund (IMF) has already announced that it expects global growth to contract by 3% for 2020, representing a revised downgrade of 6.3 percentage points from January 2020. The IMF concluded that a revision of such magnitude over such a short period is an indication that the world is in the midst of the worst recession since the Great Depression and in a far worse position than during the Global Financial Crisis of 2009. While some would argue that investment in any country is potentially unstable in the current recession – evidenced by prices in investor safe havens such as gold skyrocketing to all-time highs, almost testing the $2,000 level this week – stability exists within key sectors such as healthcare and fast-moving consumer goods (FMCGs). This was exemplified late last year through Nigerian edtech learning platform uLesson’s closing of a $3.1 million seed-level round led by TLcom Capital, to address infrastructure and learning gaps in Africa’s education sector.

Martin Soderberg

Population growth and urbanisation typically drive consumption in these and other sectors. Sub-Saharan Africa has experienced growing numbers of first-time migrants into cities and leading economic nodes, with pre-COVID estimates that 50% of Sub-Saharan Africa’s population will be living in cities by 2030. In addition, burgeoning middle classes and the younger populations of developing nations is resulting in increasing levels of disposable income. At a media briefing in June, however, the IMF projected that Sub-Saharan Africa’s economy will contract 3.2% in 2020 – double the contraction forecast earlier in April. FMCGs will have taken a knock across all markets and varying recovery periods, which also ought to be borne in mind. So PE firms need to revise their approaches to investor engagement, strategy and transparency to convince, secure and guide investor capital into emerging markets presently.

 

Finding the right quality asset

There is of course a definite need for macro analysis of the country your investment or acquisition target is stationed in. Along with the six different forces macro environments typically consist of – namely Demographic, Economic, Political, Ecological, Socio-Cultural, and Technological – under the current coronavirus circumstances additional consideration by investors and risk managers also needs to be given to the COVID-19 policies and responses being implemented by the countries these companies operate within, as well as the fiscal measures being implemented. Although these are particularly complicated and extraordinary variables to attempt to measure, their impact on GDP contraction as well as debt-to-GDP ratios within the countries concerned can potentially be forecast in the short- to medium term.

With this in mind, it’s worth identifying scalable entities with realistic potential for regional expansion where instilling a balanced measure of operational and strategic influence is possible at management and board levels. A recent example is PE firm Mediterrania Capital Partners, which focuses on growth investments in SMEs and mid-cap companies in North and sub-Saharan Africa, acquiring a stake in Akdital Holding, which operates five clinics in Morocco.

It’s important that liquidity management takes precedence over solvency, which often serves as an indication of top line growth. At the same time, one must also take into account worst-case scenarios within the markets one is investing in and plan accordingly for crisis scenarios, such as debt, liquidity options and operational costs that can be scaled back.

In addition, micro and macro risk management should be thorough, particularly in light of escalating trade wars between developed nations and instances of seemingly nationalistic legislation being passed that may be unfavourable to specific emerging markets and spur further GDP contraction. Furthermore, evaluation of local political risk and the potential for obstruction or intrusion at investment and operational levels should be borne in mind.

The lockdown conditions associated with COVID-19 have also significantly impacted logistics planning and provision, across borders to neighbouring states as well as overseas. Furthermore, we’re in a period of increased currency volatility which has a knock-on effect on export and import potential. However, such limitations create broader opportunities for PE firms to generate further value by concentrating greater focus on ESG in the markets in which they already operate. Such focus is typically undervalued, yet has the potential to generate greater revenue while ultimately attracting further investment – providing firms are willing to transparently evidence tangible progress..

 

PE and foreign direct investment scepticism

When entering and engaging with companies that have scalable investment potential in emerging markets, one should expect varying degrees of caution by companies in emerging markets, which is sometimes misinterpreted as protectionism. Historical injustices in many Sub-Saharan nations have understandably dented local confidence in foreign direct investment. Furthermore, companies will be wary of recurring instances where opportunistic investments by PE entities rendered relatively worthwhile returns for investors but created debt rather than any genuine value for the company concerned.

Therefore transparency and the ability to wear your PE credentials on your sleeve is paramount, such as evidence of accelerated revenue growth, increased capital expenditures and expanded profit margins in the financial reporting of your existing portfolio. If your portfolio is little more than smoke and mirrors designed to conceal debt as well, slowing revenue growth or capital expenditure as a percentage of sales declined and little evidence of revamped strategies and additional management perspective, then you’re setting yourself up to fail.

There will be continuing debate for some time to come as to whether reluctance to invest in emerging markets will be a PE stumbling block, given the hunt for yield. Thoroughly investigated company investment opportunities have to be afforded genuine investment value in terms of expansion and enrichment, not only for yields to materialise but also for the yields to be worthy of the investment itself. While now is the time for PE firms to begin putting in the groundwork, as much as an additional year, by conservative estimates, may need to be factored in before capital can realistically be deployed. But for those who carefully identify unwavering trends in emerging markets over the next six to 12 months and articulate genuine opportunities to investors, there is scope for the PE asset class to exhibit substantial growth over the course of the coming decade, while capitalising on the “good” companies blooming in “bad” economies.

 

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