By Jaco Prinsloo – Financial Planner at Alexander Forbes
As the year unwinds and we head into the holiday season, I know what you are thinking. Now is the time to spend and spoil yourself for a year of hard work – however this time of the year gives you a chance to take a moment and think about savings and ways you can invest your hard-earned money.
Saving vs Investing
One reason you should be saving is it allows you to spend more in the future. Saving is delayed spending to fund near future expenses and short term goals. Investing is aimed at growing your wealth by investing in income-generating assets allowing you to accomplish bigger life goals in the long term future. The question should you save or invest, is the choice between what you want now and what you want in the future.
Save to spend
To save you have to spend less than you earn. The difference can then be saved in a safe place for upcoming events like a wedding, deposit on your first home or an emergency fund. Your savings need to be easy and quickly accessible as savings are normally for goals you want to tick off the list in the next 1 – 3 years or unexpected expenses. Because of the shorter savings period, the savings growth will be lower compared to a long term investment but the growth will be stable and predictable. Savings is a great place to park your money for a while but if you leave your savings for too long you might find that you can buy a whole lot less in the future due to the eroding effects of inflation. To get inflation-beating returns you need to invest.
Invest to grow
At some point, all of us want to stop working or maybe become our own boss. By investing you are buying assets that can generate an income in the form of interest, dividends, rental income, and profits. To earn an income you invest in bonds, stocks, property or business. The cost of higher long term investment growth is short term uncertainty as economic conditions change and prices move up and down over the short term. With a longer investment period, you get higher returns because of the power of compounding growth over time. Investing requires patience and tolerance as your investment might be locked up for a long period as wait for the magical effects of compounding to grow your assets.
Why you need to save and invest
To illustrate the case that you should save for the short term and invest in the long term to let’s compare an R10 000 investment in a savings account at an annual interest rate of 6% to the same investment in a local share portfolio over the past 3 years. After 3 years you would have had R11 910 in your savings account and your share portfolio would have have not grown at the same rate as the market has barely moved over the last 3 years. However is we extend the investment period to 20 years the money in your savings account would be
R32 071 compared to R105 450 in the share portfolio at an assumed growth rate of 12.50%. That is why you need to both save and invest, save for easy access to your money and invest for long term inflation-beating returns.
The savings and investment plan
You can turn spending into saving by deciding what your goals and planned expenses are for the next 1 – 3 years and what you want your life to look like in 10 or 20 years. Looking at your short term goals start by saving 10% of your income towards an emergency fund big enough to cover 3-6 months’ worth of expenses. You can use a savings account or a money market unit trusts fund to store your savings. Once you have sufficient savings in place you can start investing. Depending on your goals you can start investing in your child’s education or your retirement. For long term investment, you can use tax-free savings accounts, low-cost property unit trusts or retirement annuity funds.
The great thing about savings and investing is you don’t need to earn a certain salary to start, anyone can do it and you can start today. The goal of saving and investing is to put enough money away so you can spend without going into debt and have enough assets to be financially free. If you are planning on starting, why waste time? There is no time like the present.
IS PRIVATE PLACEMENT LIFE INSURANCE THE PERFECT PRODUCT FOR GLOBAL HNW FAMILIES
By Louis Zuckerbraun, Managing Director, GMG Insurance
Everyone wants to know that their family will be okay after they die and will do whatever they can to ensure that. That’s as true for high net-worth individuals (HNWIs) as it is for anyone else. But in an age where families are spread across the globe, leaving the kind of legacy you want can be incredibly complicated.
One product that could make things a great deal more simple is Private Placement Life Insurance (PPLI).
Originally conceived in the US, PPLI is rapidly gaining traction across Europe. Not only is it more efficient than traditional forms of life insurance, allowing the investments within the policy to hold many more types of assets and asset classes, it can also be a useful way to overcome specific issues such as management and control, beneficial ownership and substance.
While PPLI is gaining popularity across the globe, it’s still a relatively unknown product set, even among the HNWIs it would most benefit. It’s therefore worth looking at exactly what PPLI is.
Effectively an investment wrapped inside an insurance policy, a PPLI policy’s cash value depends on the performance of the investments within it. These investments can include hedge funds, mutual funds, and other potentially lucrative assets. Ultimately, it’s down to the policyholder to choose what kinds of investment they’d most like to have, meaning that they have a lot more freedom than they would with an ordinary life insurance policy.
Depending on the jurisdiction, a PPLI policy can also provide significant tax savings. In the US, for instance, the Internal Revenue Code treats insurance differently than it does investments. So, by packing an otherwise taxable investment in a tax- free policy, investors can reap big rewards on the investment, as well as the death benefit, tax-free.
But PPLI policies aren’t just beneficial from a tax perspective, they’re also useful for anyone with a global family.
A PPLI policy is generally by nature a globally focused vehicle. So, for instance, approved banking partners and advisors in Switzerland can work with US persons, to provide an investment vehicle that has a global focus.
The policy would purchase global funds and be managed by a global advisor who is outside the US but understands the US market. This makes it perfect for anyone who wants to diversify from traditional United States Dollar denominated investments but wants to maintain tax compliance and work with international advisors.
This solution works very well with a global family who may have, as an example, a child studying in London, or with international businesses, and who wish to build exposure globally in a tax efficient and US compliant manner. An international PPLI policy would be very beneficial to the family.
Further, the policy can be denominated in Swiss Francs, US Dollars or Euros depending on the needs and strategies of the policy owners or beneficiaries and still pay tax efficiently to the US persons.
These features also mean that a PPLI policy can be a useful replacement for, or supplement to, a family trust, especially if a tax authority is unlikely to accept the trustees as the legal owner of the assets held in the trust.
A clear choice
With more and more families living in different geographies, a PPLI policy is therefore an option that should be playing a much bigger role in the mainstream. It provides an accepted and compliant solution to the planning challenges faced by ultra-high net worth and high net worth families.
While life insurance, in general, provides a mechanism for estate tax planning, asset protection and investment flexibility that cannot be beaten by any other compliant tool, PPLI provides the flexibility and protection that informed high net worth families increasingly require.
If you’re looking a purchasing a PPLI policy, however, it must be managed by professional insurance and legal advisors who understand the product.
FINTECH IN AFRICA: WHY THIS MUSTN’T BE A DECADE OF WASTED POTENTIAL
Albert Maasland, Chief Executive Officer at Crown Agents Bank
The current COVID-19 pandemic is an unprecedented crisis of our times. As with many global disasters, emerging and frontier markets are likely to feel a devastating impact. The Institute of International Finance has already reported the largest capital outflow from emerging markets ever recorded. The extent of the effect is being debated, but efforts to reduce the impact must become an absolute priority.
One of the most important things we can do in the long term is remember how far these regions have come in the last few years and remind international players of their enormous potential. In 2019, technology startups that operate on the continent received a total of $1.3 billion in funding. Investors and financial services players alike have observed the considerable growth and adoption of fintech in Africa. Fintech is one sector that could show resilience during this crisis, as online services become essential and the use of cash is discouraged worldwide. Africa has seen its fintech industry develop and thrive of late and this must not be overlooked as we look to the future.
The fintech ‘hub’bub
According to the GSMA, Sub-Saharan Africa is still the “enduring epicenter of mobile money”. The region accounted for over 60% of the $690 billion that was transacted via mobile money in 2019 and has more than 150 million more registered accounts than the next highest region, South Asia.
The market conditions that make Sub-Saharan Africa so ripe for the adoption of mobile money range from the population being predominantly young and tech-savvy to an established history of not having sufficient financial infrastructure. Mobile wallets have brought better security and the ability to make international payments to the unbanked. Investors noticed.
Fintech became Africa’s best funded startup sector in 2019 as venture capital aimed to support and capitalise on the huge potential for growth. Visa, Worldpay and Mastercard are among those global financial players who have entered into collaborations with African fintech ventures, such as B2B payments company Flutterwave.
While Kenya saw the birth of M-Pesa, more countries are embracing fintech and becoming hubs on the continent. Nigeria saw the highest number of startup deals last year and startup investment grew nearly five fold compared to 2018.
E-commerce, financial products for SMEs and payments technology are among the areas receiving funding. As entrepreneurialism receives more support and international attention in Africa, the gaps in financial systems are being plugged.
Changing the definition
With all these developments and emerging services, traditional measurements of financial inclusion have needed to adapt. Financial inclusion metrics have previously been based on the number of adults with a bank account at a financial institution. According to the Global Findex from the World Bank, the share of adults with an account at a financial institution rose by 4 percentage points from 2014-2017, while those with a mobile money account nearly doubled—to 21%.
Mobile money accounts or mobile wallets are now a fundamental part of financial services in Africa. For investors and entrepreneurs, that translates to more information about the market, behavioural data about consumers and e-commerce possibilities. In essence, it amounts to opportunity.
These benefits also become apparent in international aid and charity work. It’s easier than ever for international development organisations to get funds directly to their aid workers and to individuals who need them safely. Remittances last year, which reached $550 billion, were three times that of official global aid volumes. 80% of these transactions were made to emerging markets, and the minutes and pennies saved in each transaction through the efficiency of mobile payments are invaluable to those most in need of these funds.
As financial inclusion makes great strides and financial technology has transformed the African startup landscape, we must not lose this progress. We must continue to value the benefits in bringing those excluded into the financial ecosystem and the unique opportunities presented in areas like Sub-Saharan Africa.
We’ve seen what real innovation looks like in the tangible changes fintech has had in Africa: doing things differently and creatively to improve the status quo. Investors should continue to watch and support these markets, and the financial services industry more widely should take heed of the lessons learned in the markets we too often believe to be behind us.
In the coming months, the importance of digital services and fintech in particular will become more palpable. Nigeria’s tech scene is already beginning to contribute to efforts to combat the COVID-19 pandemic. Africa was poised for an impressive decade and we must do what we can to remember and realise the potential of the world’s youngest population.
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