Healthy Financial Living: Managing Personal Finances in South Africa

By Garth Coppin

The press has regularly published reports on the amount of debt the average person has. This book is aimed at those who want to improve their financial skills and aims to be of assistance to those who want to live healthily from a financial perspective. It is particularly for those living in South Africa. The book also covers the author's journey towards financial health over his working life. The right attitude towards finances is regarded as a crucial issue in the book. It covers areas most people have to deal with in relation to finances, such as budgets, use of credit, acquiring assets, children, savings, insurance, taxes, retirement funding and giving. It includes graphs and tables to illustrate points, including guidance on using graphs. Templates for budgets and estimating amounts needed for retirement are also included in the book..

• Language: English
• Publisher: Garth Coppin
• Release date: May 7, 2015
• ISBN: 9780620658874

Garth Coppin

Garth Coppin is a chartered accountant who retired in 2013 from Ernst & Young, a Big 4 accounting firm, after being a partner for 25 years. He continues to serve on various professional committees and is involved in his church. In addition he is now also an author with his book ‘Financial Reporting for Directors in South Africa’ having been published shortly before this book. He is married with three daughters and in 2015 completed the Cape Town Cycle Tour for the 22nd time.

Book preview

Managing Personal Finances in South Africa

Garth Coppin

Copyright 2015 Garth Coppin

ISBN 978-0-620-65887-4

Smashwords Edition

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Table of Contents

Chapter 1 – What this book is all about

Chapter 2 – Using graphs and data

Chapter 3 – Compound interest

Chapter 4 – Attitude towards finances

Chapter 5 – Consumer Price Index

Chapter 6 – Budgets

Chapter 7 – What money is spent on

Chapter 8 – The use of credit

Chapter 9 – Housing, vehicles and appliances

Chapter 10 – Children

Chapter 11 – Savings for goals and retirement

Chapter 12 – Insurance

Chapter 13 – Taxes

Chapter 14 – Retirement funding

Chapter 15 – Giving

Chapter 16 – Other issues

Chapter 17 – Reflections

About the author

Chapter 1 – What this book is all about

To drive a motor vehicle legally I need to prove that I have mastered the necessary skills to drive a vehicle and am able to drive on roads without being a danger to others. How do I prove I am allowed to drive a car legally? I can produce a driving licence which needs to be renewed periodically to show my eye sight is still good enough for driving.

What proof do I need to show that I have the necessary skills to manage finances before being allowed to manage my own finances? Nothing, absolutely nothing, even though the potential damage can, like driving mistakes, be devastating. A lack of financial skills is not a barrier to being able to carry out financial transactions, such as being able to buy, sell, borrow or invest. Financial mistakes have the potential to ruin a person for the rest of their life and can affect family members as well.

It is worth considering how well South Africans are managing their finances. Recent comments in the press indicate the following:

The amount of debt of South Africans when compared to their annual income is, on average, much higher than it was in previous years

A large number of South Africans have impaired credit records

A relatively small number of people are able to retire comfortably financially

A large portion of the public wants to learn how to save more.

Accordingly this book is aimed at those who want to improve their financial skills and aims to be of assistance to those who want to live healthily from a financial perspective.  Life will judge whether people have ‘passed’ the test of living financial healthy lives. As a person gets older it is likely to become more difficult to improve their financial health, but not always impossible. Accordingly, if a person has the right approach to finances early in their working lives, it improves the chances of them having healthy finances when they reach the end of their working life.

In a book I was reading recently (What are the Chances of That, by William Hartston), it said that 88% of people in the United Kingdom see financial problems as a trigger for depression. This book is written from a South Africa perspective and so if the views of South Africans are similar to the British, then there seems to be a need for help on financial issues. This book is about what I have learnt about the various aspects of personal finances over many years and my views on financial issues; which I believe others should be considering. In some areas there are not right or wrong ways of doing things, but different ways of doing them, and so this book is about the various areas to the considered from a financial perspective, the choices available and in some cases the way I chose. Even if a person was to follow the ideas noted in this book, it wouldn’t guarantee financial success, but it should help that person on the way towards living in a financially responsible manner.

I started thinking about how to live healthily from a financial perspective about the time I started working, which is now over 40 years ago. I heard a quote then to the effect that few people are able to retire with financial comfort in South Africa. If I recall correctly the number was about 6%, which still seems to the current number. At that time I didn’t have much financial knowledge on how to achieve that goal, or even know whether I would be able to accomplish it, but I started out trying to ensure that on a daily basis I was able live without too much financial stress. This book is about what I have learnt along the way. As I have reached retirement with sufficient funds I believe I have achieved that goal, even though I have had to cope with various challenges along this way. This book reflects on my learnings and what I think others should be thinking about in relation to their personal finances.

For the purposes of this book I define financial health as living with limited financial stress during one’s working life with the ultimate goal of being able to retire without financial strain.

People should be able to manage some of their finances on a ‘do-it-yourself’ basis, with some requiring more help in certain areas then other. This book is aimed at those wanting more information on the ‘do-it-yourself’ aspects of personal finances. This can help them gain more confidence in dealing with the various areas of personal finances themselves as well as assist them dealing with professional advisors. That said, there are always some areas where it would be wise to use professional advisors, particularly in complex areas, issues subject to change and areas not commonly dealt with. While a person might want to save on the advisors fees, in some cases this might be a case of ‘penny wise, pound foolish.’

While authors generally know the contents of their books before they write them, I have another objective in writing this book; namely to learn. This is because one should continue to be open to learn even as one ages. One lesson I learnt about a dozen years ago, which I wish I had learnt while I was at school, was that we have different learning styles. Winston Churchill did poorly at school probably because it didn’t cater for his way of learning, namely learning by writing.

Accordingly this book will contain information that I will learn from writing, because that is also how I learn. While I don’t by any stretch of imagination claim to have the same literature skills as Churchill, who won a Nobel Prize for literature, hopefully this book will help some to improve their financial health. There are some areas where I want to obtain more information, but I suspect that in other areas I will gain additional insights from reflecting on issues being written about.

What the rest of the book is about

Before the various aspects of personal finances are considered in detail in later chapters of this book, there is merit in having a quick overview of some of the major issues to be covered in this book.

In order to make sense of financial issues, there are some useful starting points; these are dealt with in chapters 2 and 3. Often when looking at financial issues graphs can be used to help give a picture and as they say ‘a picture is worth a thousand words.’ Accordingly chapter 2 will give some tips on the use of graphs and data.

Albert Einstein is widely rumoured to have once said that compound interest is the most powerful force in the universe. Whether this is correct or not compound interest plays an important role in the creation and destruction of wealth. Chapter 3 is devoted to dealing with this topic.

A person’s attitude towards finances is, in my view, the most important determinant for influencing whether people live healthily from a financial perspective. Chapter 4 deals with attitudes, as well as identifying those who are less likely to be able to achieve financial health.

For those who earn a salary, whether salary increases match the consumer price index (CPI) can be important to that person. Chapter 5 explains how the CPI is determined, whether increases in CPI can be expected to match the increases in the expenses of individuals and how to use the CPI to manage expenses.

The ability to manage expenses is the most likely cause of financial problems.  A budget is the best way to manage expenses, but unfortunately this is avoided by some. Chapter 6 gives guidance on how to set budgets and to track actual expenses.

Chapter 7 deals with some major categories of expenses and other payments. Using financial records I have kept it shows that expenditure by category can change over time and also how some expenses compare to the CPI over time. This chapter also notes that by monitoring cash flows that this can help to focus on whether the amounts spent on the various categories is appropriate or not.

In this day and age it can be easy to obtain credit. Chapter 8 comments on the use of credit, when credit is appropriate and what ‘bad’ credit is.

Following on from the use of credit, Chapter 9 deals with the financial aspects of housing, vehicles and appliances as these are important aspects of being able to live comfortably in South Africa and as credit can be used to acquire them.

Most families have children and as much as they can be a joy, they can be a cost for many years. Chapter 10 comments on the financial aspect of having children and eventually weaning them off their parents financially.

While having expenses being equal to or being less than income is an important starting point in looking at financial health, saving is also important. This can be savings for unexpected expenses, a dream holiday, an expensive new ‘toy’ or for retirement. Accordingly chapter 11 deals with optional and obligatory savings.

One area of grudge purchases is insurance. Chapter 12 covers short-term and long-term insurance, including medical aid cover and why insurance is necessary.

Benjamin Franklin said, The only things certain in life are death and taxes to which one unknown person responded:  Death and taxes may be certain, but we don't have to die every year. Income tax can be one of the largest expenses we incur, even though we might hate paying it. Some people go to the effort of avoiding paying tax and might end up regretting this at a later point, whilst living with a guilty conscience in the meantime. Taxes are covered in chapter 13. This covers all forms of tax we pay such as income tax, Value Added Tax (VAT), Capital Gains Tax (CGT), estate duty, transfer duties and rates. While the ability to reduce taxes legally is limited, this chapter mentions the more common ways the payment of taxes can be reduced or postponed.

Chapter 14 deals with retirement funding. It covers the common ways people can accumulate funds for retirement; whether pension or provident funds are sufficient for retirement; the different types of annuities that can be used to obtain monthly pensions; what expenses should be changing upon retirement; when to retire and the use of lump sums. It also covers how to prepare for retirement, as well as the extent of funds needed for retirement.

Whatever our financial situation there will always be those that are less fortunate than ourselves. Chapter 15 provides comments and thoughts for consideration concerning giving of time, effort and money to worthy causes and my views on lotteries.

Some remaining issues are dealt with in chapter 16. This includes holidays (including timeshares), the use of loyalty schemes, providing sureties and an area that has the potential for major problems, namely managing finances as a couple.

Finally, chapter 17 summarises some of the main points of this book and sets the scene for those who want financial health and who have the will to take the necessary action. It also notes what I learnt while writing this book.

What the book doesn’t cover

For the sake of completeness it is also important to know what this book doesn’t cover. The book focuses on what a person might do with their income, namely their expenditure and investments, but not on how to achieve income. The book is suitable for those who earn a salary, but doesn’t deal with issues such as how to maximize a salary, whether and when to change jobs, including whether to move to another town or city, or how to choose an appropriate job or career.

For those who work for themselves, including entrepreneurs, this book can also be used to assist with living in a financially mature way, as long as a reasonable amount is allocated towards living expenses. For those who only receive large amounts irregularly the book can still be used profitably, but some adaptions might be necessary. For example, the fact that it could be a few months or longer before the next amount of income is expected to be received should be taken into account when determining one’s standard of living. This includes having discipline in spending amounts received over a period, instead of all at once.

While the book covers investments, it explains the various types of investments, but is not intended to be used as investment advice, as what is an appropriate investment can change over time, This is because an appropriate investment needs to take into account the current and expected future economic circumstances, a person’s risk appetite, the related tax consequences, the ability to dispose of assets if needed, but can also change as retirement approaches. A financial services advisor is a person registered to provide such advice on which investments people should be investing in and should be consulted on specific investments when people need assistance when deciding on investments. Those who are not a financial services advisor are however allowed to provide factual information on the various types of investments available. Accordingly this book provides factual information on investments; in addition I am not in the business of advising others on their investments but a person who has managed my own finances successfully with some help from advisors.

Some people may need to make use of professional advisors to help them manage their financial affairs. This can relate to insurance, investments and tax affairs and can include the use of trusts and off shore investments. Those that need such advice should be able to afford to pay the necessary fees for such advice, but this book should assist them in assessing whether they are being given appropriate specialized advice.

The state of some people’s finances could be such that it is too late to just follow the suggestions in this book. They might need to take drastic steps, including going into debt review or insolvency, which involves courts to stop creditors taking action against them and agreeing upon a repayment plan. Those in this unfortunate situation should consult with those with the appropriate skills and experience, as this book is intended for those who have the ability to manage their finances without the need to involve courts.

Chapter 2 – Using graphs and data

When dealing with financial information it is often useful to make use of graphs. It can be useful when viewing continuous information, such as the share price of a company over a period of time. It is also useful when comparing information, such as whether a share price has increased more than the inflation rate, or to make sense of a lot of data, for example, when comparing the relative share price of a number of companies over a period.

It is for this reason that graphs can be useful in quickly obtaining an understanding of data. However, readers need to be aware that they may get a misleading picture from just a quick look at the information presented. Accordingly they need to understand what the graph is trying to represent, including what data has been captured. Some graphs can give a distorted trend, which I suspect in some cases might be deliberate, therefore graphs should be used with caution.

Let’s look at some examples.

Periods covered in graphs

Table 2.1 - Comparing share prices of two companies

Table 2.2 - Comparing share prices of two companies

In both tables the share prices of two companies are compared over a period of time on a relative basis. This means the actual share prices are adjusted so that they are both assumed to be 100 at the beginning of the period. For example, if at the beginning the share price of Company A is R20, it is multiplied by 5 to get 100. The actual share price throughout the period is also multiplied by 5, so while it shows 130 at the end of the period in Table 2.1, the actual price is R26 (130/5). The same applies to company B; if its price at the beginning is say R5, this price is multiplied by 20 to get 100 and while Table 2.1 shows 110 at the end, the actual price is R5.50 (110/20).

Now assume you had the opportunity to spend R1,000 on buying shares in either Company A or Company B. If you looked at Table 2.1 you would say that over time Company A’s share price has performed better than Company B’s, because over the period Company’s A share price has increased by 30%, while Company B’s share price has only increased by 10%. Based on this you might decide to invest in Company A purely on the graph.

If we look at Table 2.2 and had the same choice you might decide based on the graph to invest in Company B, as its share price has increased by 28%, while Company A’s share price has only increased by 20%.

If I told you that Company A and Company B were the same in both tables then your investment decision might be more difficult. What you weren’t told was that Table 2.1 covered a 6 year period, whereas Table 2.2 covered the last three years of this six year period, so Table 2.2 is in essence the second half of Table 2.1 with the share prices adjusted, so that their starting points are the same.

When using graphs such as the above be sure to understand what period is being covered by the graph and what starting point has been used and why. I suspect that sometimes the starting point that is used is deliberately selected to bolster a point the presenter wants to make. Normally when comparing prices over a period it is better to use a longer period, say 5 or 10 years, unless that is not appropriate (e.g. the company was only listed, say, 3 years ago). Be careful if the period seems arbitrary (e.g. 2 years 4 months) without explanation, as this could indicate that a biased picture is being painted. While the period might be justified, for example, to show the increase in prices from when a share price index bottomed out, this should be clear from comments accompanying the graph.

Compression of information

Table 2.3 - Share price over 6 years

Tables 2.4 and 2.5 - Share price over 6 years

Table 2.3 and 2.4 both graph a share price over a 6 year period, but in table 2.4 the price increase seems to be steeper than in Table 2.3. In fact the same share prices are used in both graphs; but in table 2.4 the graph is more condensed horizontally which has the effect of accentuating the changes.

Normal vs logarithmic scale

When Table 2.4 and 2.5 are compared, they are the same size, so that the effect of condensing information horizontally is removed. In this case, the price increase in Table 2.4 seems steeper than in Table 2.5. Again, the same share prices are used in both graphs; it is just that the vertical scale has changed to a logarithmic scale in table 2.5, which reduces the impact of increases. Accordingly caution needs to be taken in understanding the scales used in graphs.

It might seem that the use of logarithmic scale is misleading, but this is not always the case. When data is presented over a long period, e.g. 30 years, particularly where information (e.g. average house prices) has been impacted by inflation, if a normal scale is used the increases might be exaggerated. A normal scale shows prices increasing steeply in later years, but if a logarithmic scale is used it typically gives a better view of the trend of prices, namely whether they are fairly even over a period, as can be seen in tables 2.6 and 2.7 below.

Tables 2.6 and 2.7 - Amounts increasing annually by 6%

Starting point on graphs

The graphs used so far use lines to indicate changes, but other types of graphs can also provide pictures that can be misleading, unless the reader is alert to this. Consider tables 2.8 and 2 9 below.

Tables 2.8 and 2.9 - Dividends over the past 3 years

These graphs show the dividends that a company paid over the past three years. Table 2.8 suggests there have been large increases over that period, whereas in Table 2.9 it seems the increases have been more modest. In this case the dividends are exactly the same, namely 100 cents in year one, 105 cents in year 2 and 115 cents in year 3. What is different is where the graphs start; Table 2.8 starts at 90 cents which has the effect of accentuating increases, while in Table 2.9 it starts at zero and gives a true picture of the increases.

Accordingly where a graph starts can affect how information is understood.

Using percentages vs amounts

The next example is one I realised recently I was party to in giving information that was probably misleading, as I was the treasurer of the organisation involved. The graphs in Table 2.10 were used in the raising of money for two projects. The graph shows progress made, with giving towards project 1 being 90% of the budgeted income, with giving for project 2 being 103% of what was budgeted. What the graph didn’t show is that the budget for project 2 was only 4% of that of project 1. So while the graphs suggest that the projects were of similar size and that on an overall basis the giving was close to the budgeted amount, this was definitely not the case, with the surplus on project 2 having hardly any effect on the deficit on project 1.

Table 2.10 - Comparison of actuals with budget using percentages and not amounts

Condensed data

This chapter so far has dealt with information given in the form of graphs, but information can be given in other forms as well. The information in the table below is typical of information given in the press on unit trusts.

Table 2.11 – Value of investments over one and three years

This table indicates that holding unit trust Y would have been a better option than unit trust X both over one and three years. Now let’s look at other information on the same unit trusts, with unit trust X being the local units and unit trust Y being the foreign units.

Table 2.12 – Price of units over 15 years

The following comments arise when considering this graph:

While table 2.11 shows that over a  one and three year period unit trust Y (foreign) had a better performance than unit trust X (local), but over the fifteen year term in the above graph this is not the case, with the local