Friends that are bad with money :: Episode 1

So I am always interested in how people manage their money. Where they keep it and what they spend it on. I’ll go as far as to say, on this subject, I am pretty nosy. I am not really after amounts, percentages will do – amounts are just a bonus! BTW 1$ = around R12

I just find it fascinating how such an important function of life is often given little to no thought.

So recently had dinner with a friend and he said that he had been struggling to get to sleep at night as he was so worried about his financial state. He then (with no prodding I might add) – laid it all out.

He currently has R466 000 invested through some adviser (I do them and they are decent) – and from that he is pulling R5500 p/m. He also has an undisclosed investment vehicle paying R700 p/m. He has only started to worry now because he is starting to draw from the original capital – basically he had some good initial years of growth which, even with his heavy drawings, kept him from drawing on his initial investment.

So he is pulling a massive 14% of his investment per year – this is nuts even when our economy was ticking along, but now it’s just crazy. Our market has been pretty flat for 3 years or so, and looking at most metrics, will remain so for the foreseeable future.

If he carries on as he has been going, and his investments grow at 4% (which might be a tad optimistic in this climate) - he is going to run out of money in 8.3 years. If he dropped his withdrawing to R4000 – he will get just over 12 years. He is around 71/72 – overall, pretty healthy, recons he will get to 90. So both these scenarios dropping well short.

My idea would be that he invests in some of our smaller REITS, basically dividends from real estates companies – but not optional like dividends, the companies HAS to pay a percentage of rentals received – in SA 75% – makes for a smoother income stream. He could get a yield of around 10% with the added bonus of that yield increasing by around inflation every year as well as the capital increasing as property values increase. Sure, no guarantee's, but spread over a few companies, different sectors and countries - relatively safe.

The only down side is that most pay bi-annually so you need to keep a little back for the first 6 months, then you need to manage the payout to last the next 6 months. So jumping on the calculator, take out and initial R4 000 per month for 6 months – then the rest x 10%/ 12 months. Gives him around R3700 p/m – but that should keep up with inflation and be for life.

He has no debt, house paid (half owns it – if he sold it the income would not cover the rental on a flat) – no medical aid. So his expenses are pretty low (ball parking here) but under R1000 for rates/elec water. Then has phone and internet – about R400 and tiny DSTV (cable) of a R100. Insurance for household and car – he said R600. So “fixed” bills of around R2100.

I did do a post about my wife and I living on R100 each – so even doubling it – R200 per week + bills gets him too around R3000p/m. That leaves him around R1400 for unexpected bills/petrol/entertainment p/m (R3700 + R700 – R3000) granted not a huge amount – but doable.

https://steemit.com/budget/@life-of-al/could-you-cut-your-food-budget-by-75-we-tried-it-for-four-weeks

I also pointed out a few other options – like he has some nice furniture and some old toys that between them could raise R50K fairly easily – chuck that into REITs and you have an extra R400 p/m – pays his internet for life. He probably could also earn some pocket money teaching English privately (his profession) and, as he has free time and is mobile – house/pet sitting.

But one thing he cannot do it stick his head in the sand – which I feel is the route he is going to take, unfortunately. He needs to take action straight away – the biggest being to slash his expenses. Next, try get a more “fixed” income from what capital he has – I favor REITs. Lastly, start de-cluttering and turning things into income and also look for some new income streams – even if it’s just pocket money.

I did, of course, mention steemit.com – so who knows? He really is not in a good space, but still has a couple of options. In a year or so, he might have NO options. BTW – this guy has worked all his life - for many years as a teacher – and is certainly not extravagant in anyway I can see, but just general bad money management has led him here.

I would be interested to know, if you had/have a friend like this – how far would you go to set them on a better path? Or, like most, is talking about personal finances a no no?

Next – will chat about a family member and her finances and how she would rather listen to a bank teller than me, a person that retired at 40 and is actually interested in finances. Grrrrrr.....