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Commandments of a Cheapskate 3

The big decision: What to do with your fortune.
Picture: Shutterstock

A market commentator recently asked me what I planned to do with the money I’ve saved and invested by being a cheapskate.

I was taken aback.

Surely any self-respecting journalist who amassed a fortune after receiving inflation-related increases and sidestepping several rounds of retrenchments would retire at 35, buy an island and splurge on a lifetime’s supply of Moët?

(Presumably, they would have to be skilled enough not to be prosecuted for insider trading or be first-in first-out on a Ponzi, but since journalism is a noble profession that is incredibly unlikely. The fact that I’m still writing cheapskate articles from the comfort of a newsroom and not from a prison cell probably also provides some insight into my risk appetite. Or my acting skills. You decide.)

Truth be told, the 2.3 of us fortunate enough to be in this position, consider it a very good month when we don’t have to buy the chicory blend.

The uncomfortable reality is that the average, middle class salary-earner will not become a millionaire by saving and investing and actively managing their lifestyle downwards. Yet, it is still a valuable financial principle and can go a long way in providing the necessary buffer when there are financial bumps in the road.

Here are some points to consider:

Things will go wrong

Unforeseen expenses are part of life. I recently had a bit of a health scare. Being young, fit and healthy I only have a hospital plan and of course, specialists and GPs who don’t have the luxury of working from a brightly-lit, air-conditioned hospital theatre charge for it in advance in harde kontant. I couldn’t quite figure out why the plastic surgeon’s receptionist wanted a head and shoulders photograph when I made the appointment. After receiving the bill, the only reasonable conclusion I can come to is that they charge a consultation fee based on how much work the picture suggests necessary.

With unemployment at a 14-year high, and the economy still under pressure, retrenchments are a reality. On Thursday, Sibanye Gold became the latest mining group to announce potential layoffs in a restructuring exercise.

I was quite surprised to learn that there are industries that actually pay a multiple of salary as a bonus. If you work in one of the M industries – media, mining and manufacturing that is – you will know what I mean when I say bonus and retrenchment packages look awfully much alike. During the best financial year of my journalism career (newspaper sales only fell about 10%) we received two weeks’ salary as a bonus. I thoroughly enjoyed the sit-down dinner at McDonald’s.

But the retrenchment story is no longer limited to these industries. Pick n Pay announced in July that it had retrenched 10% of workers, while the JSE said it would cut approximately 14% of its full-time staff.

Your ability to earn an income is your most valuable asset. What would you do if you lost your job?

Returns are expected to be lower going forward

The bull market that followed the financial crisis offered a fantastic return injection to South Africans saving for retirement. Even where fund managers underperformed, investors often still enjoyed stellar returns. It may even have compensated where investors didn’t save enough.

Research conducted by the Old Mutual Investment Group shows that investors in a Balanced Fund with a 60:30:10 exposure to shares, bonds and cash would roughly have earned an after-inflation return of 7.6% over a 56-year period. Over the past three years the fund only outperformed inflation by 2%.

Going forward, it expects the same fund to offer a real return of 3.7%. That is less than half the return investors were used to!

Of course any projections about future performance should be taken with a pinch of salt, but the message is clear: Investors won’t be bailed out by returns in the near future. All else being equal, investors will have to save significantly more to get to the same position.

You will likely live longer than you think

Fifteen years ago, only 1.3% of the South African population was older than 75, according to data from Statistics South Africa. By 2016, this group was 1.7% of the total population. The portion of the South African population older than 80 grew from 0.6% to 0.8% between 2002 and 2016.

Having to support yourself in retirement for 20 or 30 years is a tough ask, even if you have enough money. What if you don’t have enough, like most South Africans?

In a recent interview, Sunel Veldtman, chief executive officer of Foundation Family Wealth, argued that the whole idea of retirement at 60 was outdated.

It is a very important point. Many South Africans won’t have any choice but to work to age 75 or 80, but employers may force them to retire at 60 and they will have to supplement their income in another way.

At the same time, medical needs often greatly exceed people’s ability to pay for healthcare in retirement. I attended a presentation by Alexander Forbes on this topic some time ago (read the article here). While I’m no poster child for healthy living (my eating habits will probably make even the most hardened dietician cry) the figures were so staggering that I immediately started looking at broccoli pictures daily.

It is tough out there. You can’t plan for every eventuality, but putting yourself in a position to weather the storm is what financial planning is all about.

Of course, you could also use your fortunes to buy that island – 0.001% of it. From personal experience I can tell you that chicory tastes much better when you have your feet in the sand.

(Just make sure there is a property somewhere on the island. We don’t want to upset Uncle Mag.)

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I didn’t realise how dire the financial journalism industry was until I read an article in the FT weekend (essential reading). The FT will pay a journalist per article about 100 pounds. Even the lucky few who are employed get no benefits like in the old days – they are bottom of the food chain. My advice to Inge (who seems a very nice lady) – marry an ex japie living in Aus – that way won’t have to worry about spiralling medical costs. Govt recently added a us$120,000 lung cancer treatment to it’s PBS list. Means we will get it for $32. Oh yes I’m single (recently widowed) & wld tick all the boxes – except age!!!!!

*lol* Robert…hahaha…very witty comment enticing Inge to make a move to Aus with you 😉 You’re damn cunning sir!

Perhaps she’s married(?) Note sure. (indeed, a very decent lady IMHO, listening to past RSG Geldsake on local radio)

But there’s a bigger issue: if Inge moves in with you (if she’s married, she’ll have a find a divorce layer quickly! *lol*), most on your time on Moneyweb-comments section will be diverted away to your new spouse. Who then back here in SA will open most of the comment sections? I’m not going do it. We need you sir! Stop worrying about women…rather continue giving us more critique/comments. Most of us like (I think?)

Cunning and a cad- I like that! My recently passed away wife (from the free state no less) was 12 years younger than me. A client remarked “I suppose you expected her to look after you when you got old”! My reply – no it wasn’t but if it was – I got it seriously wrong! She was only 58 when the dreaded C got her ( thus my interest in cancer biotech stocks). Living with someone in Aus is a real issue – esp where one party is much wealthier than the other. The moment co-habitation starts yr assets are split down the middle even if you have a pre nuptial. Interestingly this situation doesn’t happen in sa (it does in uk – my other citizenship. No I was being serious
abt finding an ex japie. A very rich Jewish client of mine decided it was time to marry – found a recently divorced lady in joburg & 3 months later was living in a R60 m home in Sydney!

So what does the average, middle class salary-earner earn?

R18700 according to TradingEconomics website

A month?! If so that is a VERY low bar for being middle class. That is less than minimum wage in most of the developed world.

Even taking into account that SA is cheaper than the developed world, a middle class salary has to be multiples of that, surely. Or else SA is misusing a common (though admittedly vaguely-defined) term in English.

@gtech: In SA people think middle class is having your kids in private school, a beemer, a house maid and a gardener. That is NOT middle class. To people in other countries, including the developed world, that is uppper middle class or even higher.

Middle class is a used toyota on the driveway, a small family home and the kids in government school.

Good article Inge, entertaining informative and very relevant. To my mind, financial planning is something everyone MUST do right from the first paycheck. You must do it yourself and stay committed. Yes, by all means involve a financial advisor/planner but dont abdicate the responsibility of your planning to them. Use them to sense-check your plan and progress. The victims of destitution in retirement are mostly those that ‘thought’ they had enough pension ammo but didn’t actually run any numbers themselves during their working life.

So you want to own an island? Have you no ambition!

Very good article, Ingé. The cold reality is this. At an investment yield of 9% p.a. (beating inflation of 6% by 3%), if you want to provide for 25 years of inflation-linked income after retirement, you need approx. R2m of capital for every R10,000 p.m. of income at retirement. Is 25 years enough? Who knows? I know it’s anecdotal, but the number of faces on my mother-in-law’s retirement village’s annual over 90 picture keeps on increasing – five years ago there were 5, then 7, then 9, then 11, and the latest 15.

R2m is a little on the low side in my opinion. You’re looking at R3m per 10k at 4% withdrawal, and if returns stay at 3% per annum above inflation, then a 3% withdrawal rate would get you closer to R4m per 10k, assuming no fees or taxes.

I know you mentioned 25 years, but there’s little difference required to get it to last 30,60 or forever since the withdrawals are small amounts relative to the capital base.

You can check my numbers if you want to: Inflation at 6% and yield at 9% gives you a resultant rate of 2.83019%. If you start with R2,129,671 of capital and draw R120,000 per annum, increasing by 6% per annum, the capital will be exhausted after 25 years. The capital will peak at R2,573,759 after 12 years, after which you will start to consume capital. Your required income in year 25 will be R515,024 per annum.
Be that as it may, the message remains that very few pensioners or would-be pensioners realise this in time to do something about it.

This was a nice read!

Hi Inge, I love the articles you are posting, I am learning so much even from others on the comments, I appreciate the tips from other, how to live like a cheapskate 🙂 Great stuff can’t wait for another, next article.

Thanks for the great (and witty!) feedback everyone. Would have started writing the columns much sooner if I knew there could be dates in store! 😉

Interesting article Inge 🙂

Can I remind readers, on your previous 5 May article, you mentioned according to the Oxford Dictionary a cheapskate is defined as “a person who does not like to spend money”.

Now if one analyses it more thoroughly, for example, if it’s someone’s goal/habit to spend “more wisely” (i.e. not accepting just to pay a sticker price; or think twice before buying if you really need it vs want it)…then it implies the difference saved by spending less, got to go somewhere else, right? So one still spend, but channeled elsewhere…

Simply by saving the difference (even it’s small…the habit remains good) in Unit Trusts, or ETF’s or any retirement asset…surely one end up still “spending”…but the big difference one spent on one-self first, and not lining the pockets of others who relies on consumerism to make a healthy profit.

Nope, to be a “cheapskate” is nothing wrong and at same time while spending as little possible, rather PAY YOURSELF FIRST (into your own savings vehicles), than blowing the budget to satisfy the shop-owners & their advertisers. Just the channeling of one’s “spend” which is wiser.

Being “cheapskate” (referring to consumerism) is one of the foundations to become quicker financially free later in life (i.e. without debt). Those that spend the max on every change in fashion (be it clothing, cars, decor, etc.) are actually prisoners of consumerism. The advertisers of goods and products have you where they want, eating out of their hand! (…and the Bank for earning interest from your outstanding debt).

Tip: Inge, since the “Living like a Cheapskate”-article series bear some similarities of TV-series shows, it’s becoming YOUR “franchise”. Why not make a business from it, write a book(s), and get it trade-marked, and earn income from it 😉

Commandments of a Cheapskate: Chapter 4.
Quality always trumps quantity, and you must understand the law of diminishing returns. The first bite is the sweetest. One Lindt chocolate ball daily beats a bag of cheap choccies. One small cuppa joe over five mugs of chicory. And of course, one lunch date with an intelligent journalist beats… you know… .

End of comments.

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