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Financial decisions that may come back to haunt you

Some financial decisions can have far-reaching repercussions.

We’ve all made mistakes with our money, whether it’s spending too much money on an overseas trip or not asking for a raise. However, some financial decisions can have far-reaching repercussions which you may come to regret in time.

Lending money to a friend

Although you probably mean well, lending money to a close friend or family member can have disastrous consequences. Very often, loans to friends or family are open-ended with no fixed timeline for repayments and no agreement on interest. This can create uncertainty and stress for both you and the borrower, which in turn can lead to underlying relationship tensions. Without a set deadline for repayment, the borrower may not have any sense of urgency to repay the loan especially if there was no agreement on interest. 

Asking for your money back can be awkward and those who prefer to avoid confrontation may shut down communication with the borrower to avoid the topic altogether. This, in turn, can make family gatherings or social functions particularly uncomfortable. 

Another risk of lending money to a friend is that they may consider you an easy source of capital and continue to ask for more money. As much as they may need the funds, lending them money does not necessarily help them take control of their financial problems – and you may just be enabling their bad money habits. 

Casual loans to friends and family are particularly risky because there is little guarantee you will ever get your money back. You may not need the money at the time of lending it, but there may come a time when you need your money back – which is where the real tension arises. 

You should also take into account the lost opportunity cost of not having that money invested and earning interest for you. Lending money to others can cost you financially and emotionally and can do untold permanent damage to your relationships.

Emigrating as a knee-jerk reaction

Emigrating from South Africa is a very expensive exercise regardless of where you choose to move to. If you are planning to emigrate as a knee-jerk reaction to, for instance, a political event or crime, make sure you do your homework and understand the financial implications of such a decision. 

There are costs involved in every step of the process including the application process, medicals, visas, travel costs, agency fees and shipping costs. Relocating a pet can be enormously expensive as it includes costs such as shipment, inoculation, veterinary check-up, clearance fees, container costs and possible quarantine.

Don’t underestimate the amount of cash needed to pay deposits on shipping, home rental, and school and university fees. 

If you plan to access your retirement funds as a result of emigration, bear in mind that you will have a far lower tax-free portion resulting in a heavier tax burden for you. Also, once you have completed your financial emigration process, your local banking and access to credit in South Africa will be affected as you will be considered a non-resident of this country.

Another important consequence is that financial emigration triggers a deemed disposal of your worldwide assets for Capital Gains Tax purposes. This means you may be liable for CGT on assets which you only expect to dispose of at a future date. Your fixed property is exempt from this although you will be required to pay CGT on the disposal of your property. 

If you are planning to move to countries such as the UK or Australia, you will need to factor into your accounting the extremely large difference in the cost of living including basic necessities such as rental, transport, food and furniture. 

However, one of the biggest emigration costs which people tend to overlook is the time-factor and lost opportunity during the time it takes to complete the emigration process. Planning an emigration is administratively intensive and takes an enormous amount of time. 

Packing, planning, travelling, unpacking, job interviews, embassy interviews, looking for schools and house-hunting all take time and can impact on your ability to generate an income during the process.

Cancelling your medical aid

Cancelling your medical aid is a particularly risky thing to do because you are likely to be financially penalised in the form of Late Joiner Penalties if you ever want to re-join a medical aid. This is because all medical schemes are required to maintain a reserve level equivalent to 25% of gross contributions, and those members who joined the scheme earlier in life would have contributed towards building those reserves. 

If a member chooses to leave a medical scheme and then re-join later in life, he is considered to be anti-selecting against the medical scheme which remains viable as a result of cross-subsidisation of the old and sick by the young and healthy.

If you are over the age of 35 and choose to re-join a medical scheme after some time, the scheme may choose to apply a Late Joiner Penalty (LJP). When imposing an LJP, the medical scheme will take into account the number of years that you belonged to a South African medical aid – known as ‘credible coverage’ – and penalise you for the years of non-membership after the age of 35. 

The LJP ranges from 5% to 75% of your risk premium depending on your years of non-coverage and is imposed for the entire period you remain a member of a medical scheme.

Disinvesting when markets drop

When stock markets go down and the value of your share portfolio decreases, you may experience fear and panic and be tempted to disinvest your money. However, if you are invested for long-term growth, the wisest approach is to keep calm and stay invested. Fear and panic are very often the first reactions to a drastic drop in the value of your portfolio, and these emotions can cause investors to make irrational decisions. 

The reality is that volatility happens and the worst thing to do is ‘panic-sell’, especially if your long-term objectives have not changed. Instead, investors should consider the market downturn as a sale where shares are discounted for a brief period and look for opportunities to buy more shares in anticipation of a market upturn. 

Avoid watching the markets obsessively as this will cause greater anxiety and may tempt you into trying to time the markets. A market downturn is always temporary and remaining invested will ensure you are optimally positioned to gain from market upswings when they do eventually happen.

Not submitting your tax returns

Failure to submit a tax return on time may land you on the wrong side of the law and can cost you dearly. In terms of the Tax Administration Act, if you do not file your tax returns you may be subject to administrative non-compliance penalties. These penalties are fixed amounts based on a taxpayer’s taxable income and can range from R250 up to R16 000 a month for each month that non-compliance continues – making non-compliance very costly. 

Further, if you wish to borrow money in the form of a home loan you may require a Tax Clearance Certificate, and this can only be obtained if all your returns are up to date and filed appropriately. 

Sars has also embarked on an initiative with the NPA to prosecute non-compliant taxpayers who fail to submit their returns, which could lead to a criminal record.

Not making full disclosure on your insurance policy

Failure to make full disclosure regarding your health when applying for insurance cover (life, disability and severe illness) may result in your claim being repudiated or jeopardised. Material medical non-disclosure can affect your insurance claim as the insurer may regard you as having acted in bad faith. This information is used to determine whether further medical information is required or whether any pre-existing conditions could affect underwriting decisions. 

If you have failed to disclose material information to your insurer, the insurer can decline your claim and deal with the policy as if the non-disclosed information had been provided at the outset. Rather err on the side of caution and provide your insurer with too much information as opposed to too little. 

Be honest with the information you provide in respect of how much you drink per week, whether you are a smoker, any hazardous activities you partake in, and how frequently you travel. If there are any changes in your occupation, smoker status, hobbies or travel, be sure to advise your insurer of this information as soon as possible.

Going into debt to pay for your wedding

Going into debt to pay for a wedding is one of the biggest mistakes young couples can make. The wedding industry in South Africa has grown significantly, with weddings becoming more and more elaborate. Whereas twenty years ago, a wedding entailed a ceremony followed by a guest reception, some weddings now take place over several weeks including engagement parties and official photoshoots, bachelor and bridal weekends away, elaborate kitchen teas at top-end hotels, pre-wedding dinners, custom-crafted wedding favours and even post-wedding functions. 

Borrowing money to fund an elaborate wedding will leave you and your spouse paying off your wedding debt for months, or even years, after the event. The problem with this is that it can prevent you from opportunities to purchase property, upgrade your vehicles or further your education. 

Financial stress can place enormous tension on newlyweds, especially if they are already paying off student loans and trying to establish their careers. Instead of spending money on an elaborate wedding which only lasts a day, invest your money in your marriage which will hopefully last a lifetime.

Retiring too early

Before retiring, you need to be sure that it is financially (and emotionally) the right thing to do. The transition from full-time employment to retirement can be particularly stressful, especially if you have concerns about outliving your capital. 

For someone retiring early, it is essential that their retirement plan – which covers a longer-than-average time – is adequately stress-tested to cover all eventualities and that it is not based on overly-optimistic assumptions. 

Together with your financial advisor, you will need to make sure that your plan has some flexibility and a cushion if things don’t work out as you have planned. Developing an early retirement plan that doesn’t include a ‘worst-case scenario’ is dangerous, and you may want to consider delaying retirement to increase the size of your nest egg. 

Working a few years longer will mean you’ll have more years to contribute to your retirement fund and your capital will have more time to compound. Further, do not underestimate your expenses in retirement. Although many people believe their expenses will decrease dramatically in retirement, this is not always the case. 

Firstly, retirees have more time on their hands and tend to spend more money on socialising, hobbies and entertainment. Secondly, if you have a family further afield, you will likely spend money on travel expenses. 

Finally, as you age it is only natural that your healthcare expenses will grow. Even with a comprehensive medical aid and gap cover, there will be medical bills, co-payments and associated costs that you will need to foot the bill for, especially if you require home nursing or frail care. 

Another consideration is that re-entering the job market after the age of 55 can prove to be particularly challenging, especially with new technology rapidly increasing the pace at which we need to adapt.

ADVISOR PROFILE

Craig Torr

Crue Invest (Pty) Ltd

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