This is the second part of a two-part article, in which Dean Gerber provides a few more of his money hacks and ideas to improve your own scorecard.
Read Part 1 here.
8. Currency spread vs commission
When buying foreign currency for travel or investment purposes, be very careful about the costs associated with the conversion from rands to the foreign currency. Many currency conversion providers advertise 0% commission on the exchange of your money and people assume they are getting a good deal.
However, they more than make up for this in the difference between the spot rate that the currency trades at and the rate at which they sell it to you (this is called spread). It’s important to ask what rate you are being quoted and compare the rate to other institutions. Don’t assume that you are being charged a fair rate just because the storefront looks legitimate or the provider is in an airport.
Incidentally, when you swipe your credit card overseas, you normally pay around a 3% spread to the bank, which is fairly standard and you can use 3% as your comparison baseline when buying currency. I definitely recommend using your credit card overseas as well as drawing cash out of ATMs, rather than buying from money exchange stands.
Also, be aware when making foreign purchases, booking hotels, paying for flights etc on your South African credit card that if you cancel your booking or return your purchase, you will pay a spread on both sides of the transaction – i.e. 3% when you buy/book and another 3% when they refund the money to your card.
A foreign restaurant once charged R60 000 to my card by mistake and then refunded me with no issue. But when I looked at my bank statement, I had lost R3 600 on the spread for the refund to my card.
Additionally, when you move lump sums of money overseas for investment purposes, you can pre-negotiate your rate with the bank prior to the transaction by phoning their currency exchange department to book a rate.
Most banks and financial institutions have room to negotiate on the rate and it would be foolish to just accept the rate quoted to you online or by your banker.
9. Consider using an interior designer to help furnish your home
Most people assume that using an interior designer to furnish your home is a practice reserved for the wealthy. But it can often make financial sense for people on a budget as well. Aside from the obvious benefits of time saved, convenience and expert advice, there is also a financial benefit. Most designers will charge you for their work in one of two ways:
- A percentage of the total spend for the project; and
- By retaining discounts/kickbacks that they receive from the various stores and suppliers.
If they charge a percentage of spend, the designer will pass on the savings and discounts that they receive from the stores directly to you. Most design stores will not provide any discounts directly to the public, but will normally give the designer a 10% to 15% discount depending on their spend with the store during the year.
So, if the designer is charging you 15% of the project spend, most of the cost can be neutralised by the store savings. The downside to this model is that if items are on sale at the store, you have to choose between the sale price and the designer's discount (you can’t get both).
For the second method of billing, if the designer keeps the discounts/kickbacks that they receive from the store, you are more than likely in a neutral position financially, assuming that the store would not have provided you with a discount directly. The designer might end up costing you nothing or close to nothing for their time and advice.
They can also save you money by having custom furniture designed and made or by replicating expensive imported store furniture. They are normally very savvy in terms of where to get the best deals, since they spend a lot of time in stores and know what is available in all of them, when the sales are etc.
You should obviously provide them with a very definitive budget. Lastly, you could even try to convince your designer to shop using your credit card, so that you can also earn credit card loyalty points on the spend.
10. Avoid transaction costs on large assets and investments
Most people don’t take transaction costs and tax consequences into account when making investments or buying large ticket items like houses and cars. Although I am a strong proponent for buying what you can afford, I often advise friends to stretch their budget and spend a little extra to buy the house/car that they might want in two or three years’ time, rather than one that they can easily afford today.
It sounds counter-intuitive, but buying and selling most assets within a short period of time normally attracts expensive transaction costs (like legal fees, initiation fees, transfer duty etc) as well as tax.
It often makes sense to buy houses, cars and investments that you are willing or likely to hold for a longer period of time to avoid these costs. For example, if you buy a R2m house, you will pay somewhere in the region of R125k in legal, transfer and initiation fees.
If you sell the house in three years’ time to buy a larger one, not only will you pay estate agents commission of 5% to 7% on the sale, but you’ll have to pay legal and transfer fees again as well as moving costs. The more aware you are of your financial situation and what your financial situation might be in a few years’ time, the more calculated risks you can take and the further you can stretch your income to avoid these costs.
11. Section 12J VC investment tax incentive
A Section 12J fund is a venture capital fund that provides its investors an upfront, full tax deduction on the capital invested. The government has provided this tax incentive to encourage investors to get involved in and start up new businesses in specific industries.
Although there are many large institutions providing access to 12J funds, these schemes are normally quite convoluted and it is very important that you have the correct know-how, have done your due diligence and are comfortable investing in riskier assets before taking the leap on a 12J fund.
All things being equal though, from a tax savings perspective, this could be a more desirable investment than a pension fund/retirement annuity or an addition to your pension fund, which also provides upfront tax savings.
My main issue with pension funds and RAs is that they only allow you to access a small portion of your capital after you have reached retirement age. The remainder of your capital is used to purchase an annuity, payable periodically for the rest of your life.
However, if you don’t foresee yourself retiring in the traditional sense, or want to have access to your capital prior to your retirement to invest in other opportunities, it’s difficult to imagine your money tied up for the rest of your life, no matter what the tax benefit.
12J funds allow investors to withdraw their funds after five years, although it might not necessarily be the right move to pull your money out of the fund at that point. 12J benefits are also only available for a limited window of time. You still have a few years left should you want to invest in one.
12. Take time value of money and opportunity cost into account daily
These are not always intuitive concepts. If you have had a financial education, you were most likely taught them at university. But it’s frustrating to see that most people don’t understand or apply them in their everyday lives.
I saw a perfect example recently: a friend of mine buys houses, renovates them for a year and sells them at a higher price. Ignoring all other costs, if he bought a house for R2m, spent R300k renovating the property and then sold it for R2.5mil, he usually thinks he’s done well.
Not necessarily. For two main reasons:
- R2m today is not equivalent to R2m in a year from today. R2m now is probably worth closer to R2.2m in a year from now (after interest and inflation), meaning that his actual cost price was R2.5m. No real profit was made on the renovation (This is time value of money).
- It also depends what else he could have done or how much he could have made with the R2m and with his time spent. His money could have been earning interest or it could have been invested in another business, etc. (Opportunity cost.)
The crux of the matter is this: anything you spend your money on now – clothes, cars, jewellery, etc doesn’t only cost you the amount that you spent now. It costs you what you could have earned on the money if you hadn’t spent it.
But it gets worse. The return that you could have earned on the money you spent is worth exponentially more over the remainder of your life, since it compounds on itself. Even more money could have been earned on the return made on the original unspent money.
Over 20 or 30 years, this could make a life-changing difference. That’s why “The rich get richer” and why almost all investment advisers encourage you to start investing early. Every financial decision you make when you are young should be measured against the decisions you could have made, and those decisions have a compounded effect on your financial position when you are older.
Albert Einstein and later Warren Buffet said it best: “Compound interest is the wonder of the world”.
* Dean Gerber is a regular personal finance guest columnist on Fin24. He works at VAT IT and is a residential property investor. The views expressed are his own and do not constitute financial advice. Dean can contacted on: firstname.lastname@example.org.
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