Monthly Archives: April 2017

Let’s Learn About Financial Planning For Soon to Be Parents

Starting a family is a very exciting experience and well done for taking the first step to planning for your family’s financial future.

You have mentioned that you have medical aid. I would strongly advise that you review the medical aid plan that you have, to make sure that you have comprehensive cover for all the required gynaecologist visits and that your hospital is in close proximity to your home.

Is gap cover essential?

Indeed, gap cover is essential, as it covers the shortfall that often occurs for when you have a medical procedure. The shortfall arises from the difference in what the medical scheme pays and the actual cost of the medical procedure.

I would also recommend that you consider sickness cover – should you experience any complications in your pregnancy. Sickness cover is a benefit that pays out the equivalent of your monthly income in the event of illness, injury or sick leave and can be a solution for when you are unable to work in the short term. The sickness benefit also provides cover during a period of special leave (sabbatical, unpaid maternity leave, etc.) of up to a period specified by the provider of the cover. See Sanlam’s sickness benefit (IS3) here as an example.

In preparation for your pregnancy, I would encourage you to start saving for all of your child’s immediate expenses: from the monthly spend on items such as formula, diapers and a baby’s caretaker, to their education.

Investment vehicles that you could consider are a tax-free savings account or a unit trust portfolio, where you are able to have access to the saved funds – as and when you need them. Also, consider short-term to long-term strategies to best meet your family’s financial needs. For example, in saving for the child’s immediate needs – you could invest the money in a portfolio that is suitable for the short- to medium term, while saving for the child’s education can be put in a portfolio that is geared towards a long-term strategy investing in growth assets and equities, considering the investment time horizon and risk profile.

You have indicated that you will have two months’ paid maternity leave. Once the baby is born, you may want to have an extra month at home – so make provision for any extra unforeseen expenses. Furthermore, contact your employer human resources department and ask them about the process of claiming from your UIF (Unemployment Insurance Fund), as well as the expected payment from the fund.

Debt management

It is also important to have a debt reduction plan in place to try to alleviate your debt burden.

Teamwork is key… work together with your husband and find creative ways to see where you can cut down on in the family budget, so that you can have more money to allocate to your savings. I would recommend that you cut back on some luxury lifestyle items and also review your current life policies to ensure that you are adequately insured.

Other debt reduction strategies you could consider is paying more for your car repayments – this will shorten the debt-repayment period and save you on the interest. The same can be applied to your credit card debt as well. You could also start paying off the debt with the lowest debt amount first, tackling your debt one at a time.

Caring About A Credit Score

If you believe everything you read about your credit score, you’d think it was the most important component of your financial health. Without a good credit score and history, the experts say, it’s more difficult to qualify for a mortgage or car loan – and more expensive, too, because you won’t get the best interest rates. In many states, bad credit can even raise your insurance premiums, cost you a rental apartment, or make it harder to get hired.

While all of that is true, it doesn’t tell the whole story.

First off, there are several credit scores out there. While it’s important to nurture your credit scores by using credit responsibly, your FICO credit score could be different from the one VantageScore reports, and lenders may use a different one entirely — so obsessing over one score can be a fruitless exercise.

More importantly, as Dave Ramsey famously notes, your credit score is not a measure of your financial health at all.  “All it tells you is whether you are good at borrowing money and paying it back. That’s it,” says Ramsey on his blog.

Think about it. There are few ways to build credit without borrowing money. While your credit is undoubtedly important — especially when it comes to achieving certain life milestones, like buying a home – your credit score doesn’t necessarily dictate whether you’re “good” with money or wealthy at all.

Six Reasons I Stopped Worrying About My Credit Score

With that in mind, I stopped caring about my credit score a few years ago. I do track my score and new accounts opened for free on Credit Karma, but that’s mostly just to prevent fraud and identity theft – not to judge my score.

Here’s why I just can’t care anymore:

I would rather be debt-free than have a perfect credit score.

FICO, the most popular credit scoring agency, uses several weighted factors to determine your credit score, including payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). Believe it or not, these rules make it so you can be penalized for becoming debt-free!

My husband and I have enjoyed steady credit scores above 820 for a while now. But when we paid off one of our rental properties earlier this year, we both saw our credit scores drop by 20 or more points. The sudden drop took place because we paid off a 15-year loan and reduced the average length of our credit history tremendously. In other words, because we paid off and closed a line of credit, our scores took a hit.

That’s a racket if I’ve ever heard one, and yet another reason I refuse to worry when my score fluctuates. I would much rather be debt-free than keep my credit score hovering in the 820 range.

I want to make decisions based on what’s best for our family, not on what is best for my credit score.

Taking that one step further, I refuse to let my credit score dictate our financial lives. If I had been overly worried about my credit score, I may not have worked so hard to pay off our rental property early. Perhaps I would worry about prepaying our home mortgage as well, and quit making extra payments there, too.

At the end of the day, I know what’s best for my family — and it’s not carrying around a bunch of debt for the next 20 to 30 years. So, I say to heck with my credit score; now that one of our rentals is paid off, we’re working hard to pay off our primary residence and our other rental as quickly as we can. If our scores drop when we pay off our primary residence, so be it.

If I don’t have the cash, I can’t afford it.

Admittedly, I realize it’s easier to ignore your credit score when it’s a good one. A lot of people might question what I would do if my credit score took a sour turn once we become entirely debt-free. What happens if I need to finance a new car, for example?

The thing is, I have zero intentions of borrowing money ever again. If I don’t have the cash, I can’t afford it… period. That rule applies to vehicles, vacations, home remodeling projects, and any other expense you can dream up. And really, I would rather drive a skateboard than have a car payment ever again.

I own my own home, and have no plans to move.

While you should pay special attention to your credit score if you plan to buy a home, those of us in our forever homes may not need to worry too much. We’re in the home we plan to raise our children in, and we now owe a lot less than half our home’s value. As a result, we never plan to move. And if we do move in the very distant future, we should have the cash to pay for our new home in full.

We have a healthy emergency fund.

When it comes to maintaining debt freedom, having a healthy emergency fund has been huge for us. While the size of our e-fund ebbs and flows based on our earnings and the time of the year, we frequently have more than six months of cash expenses to use in emergencies.

Because of our emergency fund, I don’t need a boatload of credit at my disposal. I use credit cards to earn rewards, but we’d be fine if our accounts were cancelled for any reason, including lack of credit or a waning score.

A FICO score over 720 has diminishing returns.

To qualify for the best rewards credit cards, a home mortgage with the lowest interest rates, or personal loans with the best terms, you usually need a solid job history and income, a record of responsible credit use, and a FICO score of 720 or above.

You know what you get for a FICO score of 800? Or 850? Honestly, not a lot more.

When it comes to your credit score, there’s a point of diminishing returns. While earning and maintaining a good credit score is absolutely a smart move, there’s no award for a perfect FICO score – no cookie, no trophy, no nothing.

Final Thoughts

Your credit score is important – especially when you’re first starting out. But once you’re fairly established financially, it’s much easier to see credit for what it really is. As Ramsey says, your FICO score is nothing more than a measure of how well you borrow money. That’s why it’s possible for people with mountains of debt to still have extremely high credit scores.

As for me, I just can’t care about my score anymore… and I refuse to play the game. While an 850 FICO score is something to be proud of, I’d rather be wealthy and debt-free.

Learn More About Emigration and Taxation

Q: My son has been working in Hong Kong for the last nine years. He remitted R3 million to South Africa over a few years to build a property here. He has not emigrated formally and has not submitted any tax returns to the South African Revenue Service (Sars) for nine years.

In 2008, my son requested that his tax practitioner contact Sars to terminate his tax number as he was going overseas. He was under the impression that all was in order. He has a bank loan of R3 million in South Africa, secured by a property worth R6 million. He tried to repatriate some of the funds back to Hong Kong but Sars would not issue a clearance certificate. He also tried to apply for a clearance certificate to invest the R2 million offshore but Sars insisted on him submitting tax returns for the last nine years. He has since applied for and been granted a Hong Kong passport and has relinquished his South African residency and citizenship.

As he is no longer a South African resident or citizen, we would like to know how his property investment in South Africa will be treated, i.e. will this investment and his funds be blocked in South Africa forever, or will he be permitted to move some funds out the country in future without having to submit tax returns to Sars for the past 9 years?

A: South African taxes are based on residency, which becomes extremely important when determining what taxes are due. Although your son has relinquished his South African passport and citizenship in favour of Hong Kong and no longer resides in SA, he has a property in SA and remains a registered taxpayer with the South African Revenue Service and has not formally emigrated. Sars views this as “world-wide wanderings” with the intention to return to South Africa at some stage. The fact your son purchased a property in South Africa whilst in Hong Kong reaffirms this.

Your son would need to look at the South African residency test  –“ordinarily resident” which must be interpreted under our common law and suggests that you are “ordinarily resident” in the place you would regard as your permanent “home” … the place you would tend to return to after your world-wide wanderings. Therefore if you left SA with the intention to come back after a period of time, you would still be “ordinarily resident” in South Africa and subject to world-wide tax in South Africa, no matter how long you lived “temporarily abroad”.

Fortunately foreign earnings from employment will be exempt from taxation in SA provided you are out of the country in aggregate of more than 183 days, of which more than 60 days were continuous. However, all your other income and any capital gains would be subject to taxation in South Africa, even if taxed in the country where you are living. You will get some relief from double taxation only if the country in which you live has a Double Tax Agreement with South Africa.

Therein lies the issue and why Sars will not issue a tax clearance certificate, especially as his tax returns for the last nine years have not been submitted.

Although your son has been working in Hong Kong for the last nine years, earning an income and paying his taxes in Hong Kong, he was at the same time still registered as a taxpayer at Sars. As long as he remains a registered taxpayer with Sars he is still obliged to submit tax returns annually irrespective of the fact that he was not earning an income in SA, and would only become a non-resident taxpayer once he formally emigrates.

However, as he has an asset in SA being the property he purchased, and due to SA exchange controls, I suggest he remains a taxpayer to allow flexibility to move these assets at a later stage should he wish to do so.

South Africa’s current exchange controls allow for individual taxpayers to transfer up to R10 million per annum offshore with a tax clearance certificate and R1 million per annum without tax clearance as part of your annual travel allowance or gifts and entertainment.

This in effect means that your son can move R1 million out of the country every calendar year without any tax clearance required.

However, any amount above R1 million would require an application to Sars for tax clearance. Assuming your son was not earning any income from the property or any other source of income in SA over the last nine years, he could simply submit nil tax returns for every year, bringing his tax returns up to date which in turn should solve his problem and to ensure Sars issues the required tax clearance certificate for his offshore investment.

The only reason why Sars is not issuing the tax clearance is because he remains a resident taxpayer who’s tax returns are not up to date. I believe once he has brought his taxes up to date he would be granted the tax clearance.

I wouldn’t formally emigrate unless he had no assets in SA or didn’t plan to have any future assets in SA.

More Information About Pension fund and RA

Q: I am a 54-year-old male member of the Transnet Pension Fund. I recently responded positively to my employer’s advice for increasing monthly premiums. I have realised that Sars does not consider pension fund contributions for tax relief when submitting yearly returns. I am therefore thinking of reversing my decision, rather increase my Retirement Annuity, which I have with a financial institution, for tax returns purposes.

Please advise if it is a right decision.

A: As of March 1 last year, irrespective of whether you have a pension, provident or retirement annuity (RA), you will qualify for a tax deduction of up to 27.5% of your taxable income (subject to a maximum of R350 000 per year). This limit applies to the total contributions you make to all retirement funds in the tax year.

Prior to March 1 2016, members could get a deduction of up to 7.5% on their own contributions, and no deduction on their employer contribution. Post 1 March 2016, you will now pay fringe benefit tax on the employer contribution, but at the same time get a deduction on both your own and your employer’s contribution by way of a reduction in taxable income, subject to the limits referred to above. This will leave you in the same position as before March 1 2016, as long as your contribution is below the limits mentioned above. By increasing your contribution to the employer pension fund, you get the benefit of the effective tax deduction monthly and you won’t have to wait until you file your tax return (as is the case if you contribute to your own RA).

I would advise you to speak to someone in your HR/payroll department as you should be receiving the full tax deduction for the total contributions if they are below the limits mentioned above. Any contributions in excess of these limits will be carried into the next tax year.