A couple of years ago I was retrenched. I have always been relatively responsible with my finances, so the loss of my job was not a complete disaster for me. My thought process was: “I lost this job, I’ll just do something else. Anyway, I have nine months of expenses saved up, so I have a cushion”. My heart was also not into the job anymore, so the whole situation ended up being a bit more of a relief than a worry.

What I did not realize at the time and soon discovered was that my expenses before and after the job loss were drastically different. You see, I had negotiated not to pay any rent or celphone use during the employment period. This was my first real job so I had never realized how much a celphone package costs! I had anticipated paying some rent, but never took into account having to pay for a normal celphone package. Health Insurance was also going to be a whole lot more expensive.

This is what I mean with compound risks – one bad event causes others.

Another good example is illness.  You’re Medical Aid only covers a certain amount. If your costs are above the threshold of what the Medical Aid will pay, you will have to sell assets, or even your house to cover extra expenses. You have also now lost your income, since you cannot work. Will a 9 month Emergency Fund last this type of financial onslaught?

It depends.

These days there are many different insurance products that can provide a protection against these adverse circumstances. These include income replacement policies, disability insurance and hospital plans, for example. An “income replacement policy” provides income in the case of an adverse event, such as a job loss, for a certain time period. “Disability insurance” provides income if you are disabled and cannot work, while a “Hospital plan” provides cash for every day that you are in hospital without specifying what you should spend it on.

These could provide you with the cushion that you need if multiple events occur.

Is this risk worth the premiums to pay for these new policies? You will have to decide based on your personal risks and needs. It is worth consulting a financial planner to check on your risk profile and needs.

Having a Emergency Fund is great, but I think it is prudent to also supplement your own resources with relevant insurance products. This way, there is a good possibility that you are covered if multiple bad events occur.

Kevin Mzansi

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I was very interested in finding out so I did some investigation. After mulling it over for some time I realized what the magic ingredient to his wealth is. What did Michael Jackson know about more that anything else? Music, of course….

His secret was: “Invest in what you know”.

When Michael Jackson was earning millions as an artist, he bought a half-share in the the catalogue of “Beatles” songs and of Elvis Presley (after the houses and cars, of course). From that point on, he was making royalties every time a Beatles or Elvis Presley song was performed anywhere. Was he investing in stocks, bonds? Not so much…

Let’s think of other wealthy individuals:

What does Bill Gates know? Computers
What does Warren Buffet know? Investing
What does Patrice Motsepe know? Mining contracts

You see, the composition of their wealth is along the same pattern as Michael Jackson’s.

Why does investing in what you know work?
You understand the market. If you invest in a car company, you know that the inputs are parts and labour and at the end of the manufacturing process a car comes out that can be sold. If something goes wrong, you understand why and you can judge whether the investment is worth holding onto. Let’s say that you own Toyota stock and they get a lot of their revenue from selling Corollas. You have recently been car-shopping and compare the Corolla to other cars and see the other cars have better features. You can figure out why Toyota’s stock price is dropping.

Why is it difficult to stick to this mantra? We know the real money is made in the cutting-edge sectors, for example, “cloud computing”, miracle drugs or nanotechnology. The new technology company has the potential to grow much more than the company that makes pasta.

You want to invest in a hot area? Let’s take “cloud computing” as an example. Inputs to cloud computing? uhm….What exactly is cloud computing? uhm….It may be a growth area, but you don’t understand what it is at all. If new technology were to appear that makes cloud computing obsolete, you would not be able to judge whether it is a threat or not and end up holding onto a dying company.

A drawback of “Investing in what you know”, however, is that you end up with a concentrated portfolio of industrial and consumer stocks. You are putting all your eggs in very few baskets.

What can we us, normal folk learn from this?

When you are feeling adventurous about investing, you should dabble in the sectors you understand. In the sectors that you don’t understand, let the experts do the investing. This will stop you from buying something exotic and then hoping it will magically rise. There are a lot of people who know more about these technologies than you do and you can use the leverage of their skill, for example investing in a high-tech mutual fund or ETF….

Everyone also needs diversification to lower investment risk. It is really risky to invest in only one thing, because you can end up losing everything if something goes wrong with the investment. Even these successful entrepreneurs assign a big part of their wealth to an adviser to invest in the adviser’s area of expertise.

At one time or another we all need to step out of our comfort zone to chase the rates of return that could make us very wealthy. Seek out skilled professionals to guide you in your quest to become the next Warren Buffett  and make sure that you are always diversified.

Kevin Mzansi

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On one side, sunk cost can be positive:  You have the motivation to push your projects through to completion.

The darker side of sunk cost: You feel like you have to complete a certain choice you have made, even though there are now alternatives that make more sense.

What made me think about sunk cost? A very inspirational story, actually.

I have a dear friend who studied Economics in university. He landed a great job at Accenture and began his career as a management consultant. Great job, good money, good prospects: he was on his way! The funny thing was, When we had conversations, he would always talk about wanting to be in medicine. We lost touch for a couple of years.

A few days ago I received a request to join his LinkedIn network.

I was shocked!

A year after I last saw him, he had gone back to university and started another undergraduate degree, in Biology. He finished the degree in three years, did a Masters for two years and then spent another four years in Medical school. He is about to become a doctor.

How many of us would have had the guts to ignore all the time and energy invested in four years of university?  How about all the work in starting a lucrative career? Would you put it all aside for something different? How about something that may or may not occur in nine years time?

His story just blew me away!

I am sure that there are millions of people sitting in jobs and careers, right now, that they truly despise. Somehow they are held back by “all the hard work they had done to get to this point”.

We also tend to get caught up by sunk cost in relationships: we try to make a relationship work because we have so much invested in it already. We do this irrespective of how bad the relationship actually is.

How is this related to personal finance?

A lot of us hold onto stocks because the companies are good companies. We hold on, even though we know that going forward, the prospects for the company are not so good. A case in point: Kodak. Kodak is the company that manufactures photographic film for cameras. They declared bankruptcy this year. Kodak used to be a great company. There are millions of investors who continued holding Kodak shares because of its past.

In investing, the most important thing is how the companies in your investment portfolios will add value in the future. Their illustrious past does not matter. Do you know that of the original Dow Jones Index components (a stock index in the USA), only one, General Electric is still in the index? The Dow Jones index is supposed to be composed of the thirty “best of the best” companies in the US.

Even the best investments will lose money if you focus on sunk cost and not on future prospects.

Don’t let the phenomenon of “sunk cost” and your ego stop you from making the right moves.

Kevin Mzansi

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This week has been my birthday week and I decided to take a little digital sabbatical.

They say that technology should be slave to the person and not the other way around. These days it so so easy to conduct instantaneous communication with everyone electonically that we sometimes forget that real relationships happen outside the digital world and not in it. I think everyone should take digital sabbaticals every now and again to remind themselves that life does not have to be a constant Facebook status update or Twitter feed.

From Monday onwards you will continue to find insanely useful and entertaining content here on Mzansifinance.com. I aim to post something new at least every Monday, Wednesday and Friday. Hope you all have a wonderful weekend and I will be back on Monday.

Kevin Mzansi

Image by Will Clayton

We used to look up and down the street and see everybody flaunting their possessions. Now, our friends are sitting in beautiful destinations around the globe, enjoying the good life and we chase after that.

I have a very dear friend of mine, who lives in the Cayman Islands. Every time she uploads any pictures to Facebook, it is normally of her having a party, sitting on a yacht, swimming with Stingrays or out at a chic restaurant. It’s almost like a continuous liquor commercial: a bunch of scantily-clad, model-looking types enjoying themselves on a beach or at a trendy spot. She normally uploads these pictures every week or two. In short, it looks like she has had a continuous party since she moved to the Caymans about six years ago. When I’m feeling down, I tend to open up my Facebook page for some cheer. It’s quite amazing: I always find another album of her newest escapades on my timeline.

Imagine how dull life looks after that!

We are, in fact, getting a very biased view of our online friend’s lives. Does anyone ever load pictures when they are sitting on the couch watching TV? How about feeling depressed after a breakup? Never…One has to realize that the majority of pictures uploaded to social media sites are of “special” occasions. Most of us are just getting on with our day-to-day lives. Is it worthy of a snapshot to put on the web? Probably not…

The truth is that we are all chasing a warped view of what “success” looks like. When we “keep up with the Joneses” I don’t believe most of us are doing it consciously. Not many people go out and buy something just to one-up someone else. Once we see all the great things people around us have, it becomes the new normal. In our minds it becomes “normal” to have, for example, a new 4X4 in the driveway, when, in fact, your neighbours probably bought it as something very special or out-of-the ordinary for them.

Thus the cycle of buying stuff that “everybody has” starts, when in fact “everybody” does not really have it.

In the world of behavioural finance, this principle is called “availability bias”. Someone who grows up in an  African Village with no contact with the outside world is bound to think that everyone has curly hair. This is similar to someone in a modern middle-class neighbourhood thinking that every family has at least one car.

How can we stop the cycle of “keeping up”? Donate a couple of hours a month to a charity. You will quickly realize that many things we take for granted are certainly not the standard for everyone. Let’s work at  releasing ourselves from the treadmill of keeping up with everyone else.

Kevin Mzansi

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How can we make your honeybun feel special without breaking the bank? Here are some ideas…

(My thanks to: Kylie Ofiu, galtime.com, Laura T. Coffey, wral.com, families.com for some great ideas)

A romantic dinner at a restaurant is the classic Valentines Day activity. Obtaining a reservation at a cozy Bistro could be a nightmare, as is the memory of seeing a line of peeved couples waiting for a table to open up.

Here are some food ideas:

* If you are far enough into a relationship, call a family member to get the recipe for your loved one’s favorite childhood food. You will see the smile when they walk in after work and smell their favorite childhood pumpkin fritters being glazed in the kitchen.

* Arrange to pick up a fancy entree at a favorite restaurant. You can then freestyle with starters, dessert, a picnic blanket and some candles. Sitting on a blanket on the floor in your tiny studio apartment will be a good memory for years to come.

* Go to lunch, instead of dinner. Restaurant’s lunch menus are generally much more reasonably-priced than the dinner menu. You may be able to go to a fancy-schmancy restaurant and not have to mortgage the house.

* Just do coffee and dessert. Most restaurants have early birds, who show up and then leave during the main sitting, leaving a table open. If you did something romantic before, you can end the evening sitting in a cozy restaurant looking into each others eyes and having dessert and coffee.

Really gushing about how ga-ga you are over them? Here are some literary ideas:

* Have you looked at the price of cards, lately? Try put pen to paper if you are at all poetically inclined. Always hand-write, no matter if it will make your doctor laugh when he compares your handwriting to his. Don’t go typed, even if you handwriting looks like the dog ate it. NEVER, EVER go the email route! It will be a special treat to snuggle on the couch together and try figure out what you scribbled. Also consider sending it by snailmail in a red envelope. Your darling will really like them sweet words when they arrive by snailmail at work, where everyone can see it.

* Get a stack of post-it notes, write sweet nothings on them and distribute them all over the place. Even if your loved one does not discover them all that day, he or she will be reminded of you whenever they are found.

Here are some DIY ideas, for those more artistically inclined:

* Start a “Memory box”: Find some sort of box and decorate it. Insert things into it that has special significance, for instance, a movie stub of your first date or a picture you took at the fair. If you don’t have anything, you can start with something on this Valentine’s day. This will always bring back good memories every time the Memory Box is opened.
[Note: This is a risky strategy on its own - it may make you look cheap.]

* A personal gift basket: Find a gift basket or one of those nice gift bags that you find in the paper section of the grocery store. Fill the bag with little things that reminds you of that special person. You can include the classic; chocolate and a flower, but make sure that you include some things that are personal.

* A twist on the traditional flower bouquet: Instead of buying a bunch of roses, consider buying a potted orchid or buying a flowerbox (and seeding it), to provide beautiful flowers year-round. You probably want to combine it with other ideas, since an empty flowerbox doesn’t normally spell L-O-V-E.

Valentines Day might be very commercial, but is a good opportunity to create some memories in your fledgling relationship.

What are your thoughts? Valentines Day too commercial for you? What was the coolest Valentines Day gift you ever received? What was the most memorable thing you did?

Kevin Mzansi

Image by Clara S.

Regulation 13 of the Medical Schemes Act prescribes a formula to calculate the late-joiner penalty. The formula depends on two things:
* the age at the time the late-joiner applies for membership or admission as a dependent
* the number of years of “creditable coverage” which can be demonstrated by the late-joiner

“Creditable coverage” means the period in which the late-joiner was a member or dependent of a medical scheme, but excludes any period of coverage as a dependent under the age of 21 years old. (there are other similar provisos that I will not cover here)

The amount is first calculated using this formula:

Answer = (Age at application) – [35 + (number of years creditable coverage that can be shown)]

This answer is then combined with a table:

0-4 years: 5% of contribution
5-14 years: 25% of contribution
15-24 years: 50% of contribution
25+ years: 75% of contribution

Here’s an example:
- John was a member of his parents’ medical scheme until he turned 25,
– a member of his own medical scheme for 5 years
– did not participate in a medical scheme for 5 years
– then went overseas for 14 years and was covered under a scheme where he worked
– he returned to South Africa at age 49 and applied to join a medical scheme

Creditable coverage:
* 25 – 21 = 4 years as a dependent of his parents (the coverage when he was under 21 does not count)
* 5 years under his own scheme
* the 14 years overseas is currently not considered “creditable coverage”, even though he may have proof of cover.

Therefore, his creditable coverage will be 4 + 5 = 9 years

Using the formula:
A = 49 – (35 + 9) = 5

When we look at the table, it reads “5 to 14 years = 25%”

This means that John will pay 25% more than a regular member in the medical aid.

The matter regarding membership of foreign medical schemes is currently under review. Proponents argue that the regulations unfairly penalizes individuals who have worked overseas. Others argue that workers who have been out of the country have not contributed to the reserves of local schemes and the tab is being picked up by other members. It is also very difficult to determine medical cover in another country or verify the member’s state of health with a foreign doctor.

It is also allowable under the Medical Schemes Act that a person can sign a sworn affidavit stating that they were members of a liquidated scheme. There may be no way of verifying this, though. In effect, someone can get around the late-joiner penalty by saying that they were in a medical scheme and sign a sworn affidavit. This is another issue under review.

It is important to realize that the penalties are at the discretion of the scheme and can be waived. Some schemes apply the penalties strictly, while others do not.

I hope that these two posts gave you a good overview of the what late-joiner penalties are and how they may affect your pocketbook in the future if you decide not to participate in a Medical Aid.

Kevin Mzansi

Disclaimer: This post is only an overview of how medical schemes and specifically, late-joiner penalties work. Please consult your own financial adviser or medical scheme to find out more about the details of these regulations and whether it may apply to your unique situation.

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Regulation 13 of the Medical Schemes Act (131 of 1998) prescribes a formula whereby people who join a Medical scheme after a break of coverage may pay between 5% and 75% more than anyone else in the scheme for the rest of their life. This happens when the member joins who is 35 years or older and did not have medical scheme coverage for a certain period of time.

At that time, I had a break in my medical scheme cover, so my knee-jerk reaction was: How on earth does the Medical Aid Industry get away with this type of discrimination?

Let me tell you a little story:

Imagine a gentleman, let’s call him Klaus. Klaus has just turned fifty and has been living in the bush for the last 20 years. He has gangrene in his little left toe and broke his right clavicle wrestling with a lion a while ago. It has healed, but it still bothers him on cold winter mornings. He is also coughing constantly because he tends to sample his tobacco and weed crop in the back of his tent too much.  He also has a sneaking suspision his home-made brew burnt a hole in his stomach.

He wakes up one morning, really concerned about all his ailments. He hobbles into town to find a that damn charlatan, the local doctor. The doctor takes one look at him and starts giving him a rundown of some costs. “Jiminy cricket”, he says, “I can’t afford this!”. He wonders: “This can’t be normal. What do other people do?”

“Other people have medical aid!”, says the doctor.

Klaus decides to check this out. He goes to the nearest Medical Aid and finds out that the lovely constitution of the land allows anyone to join a medical scheme, because refusing would be considered discrimination. He also finds out about a “waiting period”, before the scheme pays for a treatment. “This sounds promising”, he schemes, “let me pay my premiums for a year, have the Medical Aid pay for my procedures and then stop paying the premiums again”.

So, he goes back home and pays the premiums for a year. He returns and decides to have some teeth-whitening done too – he reckons that his two sparkling teeth would blind his next prey and give him a competitive advantage.

This ends up being quite a deal: he paid R5,000 and gets millions of rands worth of procedures done. He’s even more chuffed, because his sales of the good stuff has skyrocketed from all the bystanders who inquire about his produce. Maybe he should come into town more often…

If I were a young member of a medical scheme paying in for years without claiming, I would be more than mildly annoyed that I am paying this guy’s medical bills.

The way Medical Schemes work, is that the older members, who generally get ill more often are subsidized by the premiums of younger members, who claim less. As the younger members get older, their medical costs are increasingly paid by the new younger members and so forth. (cue: “the circle of life” by Elton John)

A medical scheme, just as in any good budget, stays healthy if their income (the premiums) exceed the outgo (medical expenses, administration and other fees). A person joining just before they get sick is similar to someone jumping the queue and not “paying their dues”, which could leave the Medical Aid in bad financial health. This will spoil the amount of benefit available to everyone else in the scheme.

Sounds pretty logical, right?

Why would there be such a debate over the late-joiner penalty?

As in most situations, the legislation is not perfect. In the next post I will show you how the late-joiner penalty is calculated and who should be worried about having to face the extra costs.

Kevin Mzansi

Disclaimer: This post is only an overview of how medical schemes and specifically, late-joiner penalties work. Please consult your own financial adviser or medical scheme to find out more about the details of these regulations and whether it may apply to your unique situation.

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Most of us will agree that some of the easiest stuff to avoid paying for could possibly be the most important. The items that come to mind most glaringly are the need for Insurance and our health.

Insurance is critically important because it protects us from infrequent events that can have a major effect on our finances. The tough part is that its importance only shows up in hindsight – it seems rather less obviously important when we are paying our premiums month-after-month. Let’s say, I drive my car only once a week and decide to skip the insurance. During my weekly Saturday afternoon grocery run, I am hit by a poor, unlicenced driver who decides to flee the scene before I could get his details. How does my “smart” money-saving plan sound now?

The next item is one’s health. For us who are young and healthy, we often assume that things will stay this way forever. More than anything else, I think, we take being healthy for granted. As we get older, we start to get a sense of what a privilege good health really is.

Thinking we are Superman causes us to skip on the Medical Aid (Health Insurance), skip the yearly check-up or postpone the dental visit for another year. We only realize the mistake, unfortunately, when we see the bill for a broken arm or a root canal.

Closely connected with our feeling of immortality is the food we consume. One can save a fortune by only buying certain foods, normally the processed kind, and stay away from the healthy stuff like fruits and vegetables. I know of some guys in university who lived on bread and beer for a more than a semester and ended up with scurvy! (Not nice for them, but I found this extremely funny when I heard, I must confess…)

Being frugal, when done right, can turn you into a saving machine and put you on a solid footing for financial stability in the future. One must be aware of the consequences of the risks we take when “saving” on certain items.

Are there any other traps someone should watch out for when being super frugal? Any recommendations to save a penny here and there? I look forward to hearing your thoughts.

Kevin Mzansi

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Over the last year, while I was a full-time student, I decided to go ultra frugal – spend only the cash that I have left in savings and not put anything on my credit card unless it was absolutely necessary. I did pretty well – only my tuition expenses and books ended up going on my credit card. My life was pretty dull, though. Every time an opportunity for being social or doing something different came along, I thought about it….

….and then did nothing….

The biggest downside to living within your means is not the most obvious things (I will discuss these in the next post). The biggest “a-ha” for me was how you can get very comfortable with the situation you are in. Having the budget perfectly balanced can stop you from stepping out of your comfort zone into other aspects of your life, which could prove more meaningful.  It pulls you into a “I can’t afford it” mindset, rather than the healthier “how can I afford it?” mindset. The end result is that you end up stuck in a rut.

You want to go do something fun to re-connect with friends and loved ones? “Sorry, I don’t have any money”.

This is similar to falling into a comfort zone when everything is going comfortably in a relationship. Ask any woman what she thinks about the time in a relationship when their man gets comfortable and prefers holding hands on the couch to a romantic walk at dusk.

Truth is, there is more to life than just money.

I know some get a real rush out of saving a couple of percent on their bill by shopping around. There is nothing wrong with this, although one must ask: “at what overall cost?” You will never find me making my own shampoo or home-made washing detergent. Why? I value my time too much. I’ll rather be doing something else that I enjoy. Maybe it comes down to preferences: I get a rush from depositing money in my savings account.

Yes, you can say that the best things in life are free. I remember fondly, during my time in the US, when a couple of us would grab some fishing rods, a six-pack of beer and go sit at the lake all day or the many mornings I would  walk onto the mountain, strap on my snowboard and spend all day on the slopes using my employer-supplied ski pass. These activities cost next-to-nothing and I can tell you, it was sheer *bliss*.

Sometimes it is necessary to spend some money, though, to do things that add some meaning to your life.

There is merit in the view of not paying too much for something than you have to. I want to argue, though, that frugality has it’s place in the overall picture and should not overshadow everything else. Frugality is good as a safety valve to ensure that you do not live the champagne lifestyle on a beer budget. It definitely should not be the be-all and end-all in life.

Let me close with a good example to illustrate my point. Let’s say you meet this gorgeous person that makes your heart skip a beat. You know for a fact that you cannot afford to date them, but go ahead and do it anyway (you know how it is….). I can promise you that everything in your life will be looking up, no matter how dire your situation. Your perspective is suddenly expanded from “I can’t afford it” to “How can I afford it?” – a transformation from a position of weakness to a position of strength. Isn’t this a much better mindset to face life’s difficulties with?

Where do you fall in the spectrum? Do you think that your decisions on life opportunities should be dependent on the state of your finances? I’m looking forward to hearing your thoughts.

Kevin Mzansi

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