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From buying a house to saving for retirement and changing a retirement annuity, Maya Fisher-French dispenses sage advice.
Sikhumbuzo writes:
Iwould like to know how to become credit worthy again. I was placed under an administration order. I have approached some service providers to rescind, but to no avail, and I currently cannot open an account any more. I am working but cannot make ends meet with my salary.
City Press replies:
There are three aspects to this financial situation: how to improve your credit score; how to rescind an administration order and, finally, whether more credit is a solution. Credit bureau Compuscan provides the following tips:
1. How to improve your credit score:
. Work according to your budget and within your means when purchasing on credit.
. Ask the credit provider (when applying for credit) to show you how much you will pay every month, to prevent over-indebtedness.
. Pay all instalments on or before the due date.
. The higher your utilisation, the more your credit score will be negatively affected.
. Work towards having a good mix of accounts on your profile. Different types of accounts hold different scoring weights. You will improve your score more if you can show good repayment behaviour on a secured account (such as a home loan or car finance) rather than on an unsecured account. It also counts in your favour if you have revolving credit, for example a credit card or a store card. However, your repayment behaviour is much more important than the type of accounts you have and you should not open accounts just to try and improve your credit score.
. The score also looks at your number of recently opened accounts. If you open new accounts one after the other within a short period of time, your score will be affected negatively.
. Another factor is the length of time of good repayment behaviour. Making regular payments over an extended period of time will result in your score improving.
. Try not to rely too regularly on payday loans. This too creates the impression that you are reliant on credit to survive and this poses a risk to lenders.
. Talk to your credit provider if you are unable to make a payment due to unforeseen circumstances, to see if an alternative repayment agreement can be reached.
. Never ignore a letter of demand for payment or a summons to court for non-payment.
2. How to rescind an administration order:
Removing the order will definitely have a positive effect on the consumer’s creditworthiness but will have no effect on their credit score as it’s not taken into consideration. It is also illegal to apply for credit while under administration.
The administration order can be removed from the profile under the following circumstances:
. All listed creditors have been paid and the administrator has lodged a section 74U certificate, whereafter the order lapses.
. The order is rescinded in terms of section 74Q, which can include an application that a consumer’s finances have improved sufficiently.
. The order reaches its five-year retention period on the bureau, which is calculated from the date on which the order was issued by the court.
If a consumer wants to approach lenders to rescind their administration order, it is advised that they approach their administrators (the firm that manages the administration) to be present.
3. Taking on credit to make ends meet
It would not be advisable to apply for additional credit as the consumer will not be able to afford the repayments of their credit commitments. The consequence of not being able to afford the repayments can lead to the consumer becoming over-indebted or the situation in which they are unable to meet the requirements to get access to further credit due to a low credit score.
CAN I AFFORD A HOUSE?
Ntombifuthi writes:
I am a 28-year-old teacher and I would like to apply for a home loan of about R550 000. The only debt I have is for a car. The repayments on the car, car insurance and a life insurance policy come to R5 000 per month. Is it logical for me to apply for a home loan of this amount?
City Press replies:
The repayment of a home loan of that amount would be in the region of R5 400 per month. You also need to consider additional expenses such as mortgage insurance (this is life cover that settles your debt if something happens to you), building insurance, rates and taxes, electricity, water, and maintenance.
As a rule of thumb these additional expenses add around 50% to your mortgage repayments so you need to calculate if you can afford to spend about R7 000 – R7 500 per month on a home.
Keep in mind that if you do take a home loan, your home and car together would be costing you nearly R13 000 per month. So, you need to look at your current expenses and see if you can afford it.
One way to stress test your budget is to live like an owner before you commit to the house. Work out the difference between what you are currently paying on rent and the R7 500 you would pay as a home owner.
Take this difference and start to put it away each month to build up a deposit of R50 000.
This deposit will reduce your mortgage or cover additional fees such as bond registration and municipal deposits.
Moreover, your ability to save towards a deposit will prove to the bank that you have financial discipline and can afford the house, which could result in a lower interest rate on your mortgage.
In undertaking this exercise, you will find out if you really can afford this expense without having already committed to the loan.
If currently a home is not affordable, focus on paying off your car as quickly as possible – once that is paid off, your home affordability will improve.
HOW CAN I GET BETTER RETURNS FOR MY RETIREMENT SAVINGS?
Levy writes:
I have been saving R5 000 a month in an Absa Depositor Plus account for the last 24 months and my interest is not pleasing.
I am thinking of diverting it either to increase my pension fund contributions or to invest in a tax-free savings account such as Satrix.
I do already have enough money put aside for emergencies.
City Press replies:
A product that earns interest rates like Absa Depositor Plus’ is great for short-term but not long-term investments like retirement for which you need your investment to grow faster than inflation.
It is also worth meeting with a financial planner to find out how much you really need to be putting away for retirement.
If you have a pension fund with your employer, this can be a very cost-effective way to increase your retirement benefits, as you receive a tax deduction up to 27.5% of your salary.
You could consider putting a portion of the R5 000 into a tax-free savings account like Satrix that is invested in the stock market.
You are limited currently to a maximum contribution of R33 000 per year (R2 750 per month) and although it is not tax deductible off your salary, the growth is not taxed which means it is available as a tax-free lump sum that you can access at any time.
You could also use it as an additional investment for retirement, as you would then have an income from your pension as well as access to an additional tax-free lump sum.
Again, a good financial planner would be able to provide a financial strategy to maximise both these options.
What you do need to keep in mind with any market-related investments is that the value will rise and fall in the short-term.
Don’t panic if initially your investment on paper underperforms an interest-bearing account.
Stay the course as, over time, the markets do outperform cash.
Also remember that, when markets fall, your monthly debit order is effectively buying more shares or units as the price of those shares or units is lower.
HOW DO I BUILD UP TO SAVING 10% OF MY SALARY PER MONTH?
Mitch writes:
I am busy reading the Maya on Money book, and I am interested in understanding more about how exactly the “save more tomorrow” plan works. Could you provide an example?
City Press replies:
Nobel prize-winning economist Richard Thaler created a concept called “Save More Tomorrow”, where you save just a small percentage of your annual salary increase each year and within six years you are saving 10% of your salary.
For example, you receive a 7% annual salary increase, but you save 2% of your salary – effectively giving you a 5% increase.
To see how this works in practice, assume someone is earning R20 000 per month and receives a 7% increase to R21 400.
. Rather than living off this full R21 400, you open an investment and start to save 2% of the new higher salary, or R428. This still leaves you with a take-home salary increase of nearly R1 000.
. In year two your salary increases to R22 890. You calculate 2% of your new salary (R458) and you add that to your monthly savings. So now you are saving R858 per month.
. In year three your salary increases to R24 492 and again you save an additional 2% of your new salary or R490. You are now saving R1 376.
. In year four your salary increases to R26 206 and you add R524 to your savings, increasing it to R1 900.
. In year five your salary increases to R28 040 so you add another R560 to your investment, bringing it to R2 460.
. By year six your salary has increased to R30 000, you add 2% or R600 to your investment and are now saving R3 060 – which is 10% of your salary.
You can also use this method to boost your company retirement fund by asking your HR department to increase the percentage of salary you contribute each year.
WHAT DOES IT COST TO CHANGE MY RA?
Bahle writes:
I want to change my retirement annuity from Old Mutual to 10X Investments. What are the implications?
City Press replies:
It depends on whether the Old Mutual retirement annuity is a traditional policy or investment-linked.
If it is the latter then there are no surrender fees and it is just a matter of filing in forms and waiting for the admin process to be completed.
If, however, it is a policy that has surrender fees, you will have to pay these, which will reduce your retirement fund value.
It is worth investigating further and to fully understand the financial consequences.
If the annual fee is significantly lower with 10X and you have many years to retirement, then the payment of a surrender fee may be worthwhile.
But do the numbers first.
