Here's how to avoid being bankrupt, without knowing it…

by , 21 September 2017
Here's how to avoid being bankrupt, without knowing it…
South Africa's in a recession.

That means businesses are struggling.

Your salary is unlikely to grow as much this year as in years past, and that's if it grows at all.

That's why it's more important today than ever before to make sure you are in good shape financially.

In fact, if you've never done the exercise I'm about to share with you it is possible that you are bankrupt, without even knowing it…

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LIE #3: You CAN’T win against the big banks and hedge funds 
If one of these are affecting you, click here now to uncover the real truth
What does your personal balance sheet says about you
Are you growing a little richer every month, or do you sit with credit card debt, car instalments and a home loan that doesn’t seem to shrink?
If you are, you need to start creating your own personal balance sheet every month. It’s the only way you can identify what’s wrong with your finances, and get an easy solution to fix them.
It is really easy to do. All you need to do is draw a line through the middle of a page so you have two columns.
The one side is for everything you own – your assets.
The other side is for everything you owe – your liabilities.
Then you start filling it in. No fancy software needed. And if you don’t know how to use Excel, you don’t have to – writing it out is even faster…
So you own a house, you have a R100,000 share portfolio and you have a rental property that gives you an income every month.
You might think you are in a great position. And certainly, things could be worse.
But the fact is, you could still have negative net worth!
Remember – the moment you buy a car it is worth less when you drive it out of the dealership.
So whilst in this example your debt is R450,000 – selling the car would only bring you R400,000.
Then there’s your house… Chances are you bought it without a deposit. And perhaps you loaded all of the transaction costs (bond registration fee, transfer fees etc) onto the mortgage as well. That means on day one you sit with a mortgage that’s larger than the price you paid on your home.
On a R1.5 million home purchasing costs amount to R81,000. If you added that onto your mortgage and you paid 10% interest rate it would take you 3 years’ worth of R15,250 monthly instalments just to get to R1.5 million (which is the initial value of your home).
The other items on the personal balance sheet are self-explanatory. You might have some credit card debt, store accounts that need paying and a short term loan you took out for an overseas holiday.
You have fortunately paid off some of the bond on your investment property.
But, overall, in this case you would find your net worth sits at a negative number!
Now, let’s say a year has passed. You paid off your store accounts, some of your credit card debt and short term loans and you’ve paid towards your car and home loans.
At the same time, the value of your home and share portfolio has grown a bit, but the value of your car dropped.
Suddenly your net worth is positive.
It’s grown from negative R20,000 to R108,000.  So, your net worth is up R128,000 in a year.
If you can keep this up, you will be in a good position in years to come.
But how do you maximise your net worth?
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Three tips to ensure your net worth keeps growing faster and faster
Tip #1 – Your car is a massive expense
Remember, your car loses value the moment you drive out the dealership. That’s not even mentioning maintenance costs and fuel. Buy a sensible car with low fuel consumption. Rather drive it for a year or two longer.
A R350,000 car will cost you R7,096 per month (on a 60 month instalment plan with 8% interest).
A R650,000 apartment that you rent out at R6,500 per month will have a monthly instalment of R6,272 (at 10% interest). So why buy a new car that will cost you money, when you can purchase an asset that creates its own income stream?
Whatever you do – don’t buy cars with balloon payments (or a residual amount).
Remember, you still pay interest on the residual amount from day one, and you will most probably be forced to sell the car at the end of the period to cover the residual amount. That means buying yet another car and paying the bank for it again, for years.
Driving a paid off car for two years longer, can easily add R200,000 – R400,000 to your nett worth…
Tip #2 – Pay off your expensive debt first 
If you have store accounts, credit card debt and short term loans, pay these off first, rather than paying off more on your home loan.
Start with the highest interest debt, pay it off and then move on.
Once your short term debt is paid off, rather start saving money and use your savings instead of taking on further short term debt. That saves you lots on interest payments.
Also, you may have the temptation to use equity in your home loan to consolidate short term debt (you pay lower interest on the home loan than the short term debt).
Don’t do it. Remember the term of your home loan is 20-30 years. So if you use that to pay off short term debt you will pay off much longer. Even though the interest rate may be lower, the total interest paid could be higher because of the longer payment term..
Tip #3 – Rather rent longer and save for a deposit on your home
Typically it is slightly cheaper to rent than to buy (in the short term anyway). A R650,000 apartment will cost you R6,272 per month in instalments. Add in R1,000 levy, R450 property taxes and R200 long term insurance and you will see that your monthly expenses end up at R7,922.
If you rent, it will probably cost you R6,500 in per month in year one, and R6,800 in year two.
That means, over two years you could save R32,644 just by renting instead of buying. Now I’ve ignored capital growth on the property, but the current market we’re in most property values aren’t growing. I also ignored the fact that owners have maintenance costs (which tenants don’t).
In contrast, you will only pay off around R22,000 on a property in two years.
But here’s the thing, if you rather save that R32,644 upfront and then buy a home you will start off with monthly payments of R5,957 – already R315 smaller. If you now use that extra amount towards paying off the property faster you can do it in 17 years, a year faster than when putting NO DEPOSIT down and buying two years earlier.
We typically only look at our monthly income and expenses when doing budget. But now I hope you see the value of drawing up your own personal balance sheet.
It shows you your net worth, and by doing it monthly you can see how much your net worth changes as well.
A couple of simple tweaks to your assets and liabilities now, could have a profound impact on your net worth for years to come, so make sure you use financial discipline. A small sacrifice in luxuries today can add significant wealth to your household in the long run…
Here’s to unleashing real value
Francois Joubert
P.S: You can get your share of all the true-wealth assets such as property, shares, offshore investments and gold without having to make all those calls to your broker or having to spend hours of your time doing unnecessary investment research...

Here's how to avoid being bankrupt, without knowing it…
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