Retirement Village unit selling for R495 000 and a rental of R6 000 per month. At 12% interest it will cost you (out of your pocket) R950 per month and after 4 years you will start making a profit.

  If you are interested in this excellent opportunity – pietm3@yahoo.com is the answer to all your info.

 The other person who responded to benchmarking your wealth, does not agree with my basic premise.

 Now what can I say?

 The advert above is real, if you act quickly you can buy this unit. And I will use this as an example to “proof” my case.

 Let’s assume you buy this property with a 100% bond. Then you owe R495 000 and you have an asset of R495 000. Your income is R6 000 per month. After paying expenses (levies and management) you need R1 000 to pay the bond.

 Now assume there is no capital growth in the property (not very realistic, but I want to simplify things). And assume the rent increases by inflation every year. Very realistic. Further, with the increasing rent, your contribution to the bond will decrease over time, right? Which means that in time you will start making a profit which, if you are wise, you will utilise to repay the bond.

 Let us further assume that your contribution will be R1 000 per month for 4 years (R48 000). Obviously this is wrong, but let’s keep it simple. After 4 years you start making a profit. And within 15 years you have settled the bond.

 What is the result of all this? For R48 000 you bought an asset of R495 000. That is not bad in anybody’s book.

 But the best part is this: for R48 000 you bought an income stream of R6 000 per month, increasing by inflation, for life! And that is what it is about!

 Now consider the alternative.

 I don’t know how much you have to save EVERY month for your whole working career to have an income of R6 000 per month growing by inflation. And keep in mind my rental R6 000 is present value!

 When you retire with the capital you have saved over your working life, you have one of two options:

1. You buy an annuity or pension – a monthly income – normally for life. Because the company paying the pension has to be sure that you don’t outlive your capital, the income is not very high and mostly is unchanged for your life. NO increasing by inflation. When you die, the capital goes to the company (this is simplified).

2. You buy a living annuity, which is a relatively new product. It means you invest your money, let’s say R1 000 000 and you take an income of 5% per year. What is supposed to happen, is that investment income and growth should be more than 5% so that your annual income can increase. But what happens when the stock market drops by 50%? Are you going to go without an income until the capital has increased again? If you DO take your 5%, then the capital reduces, so the growth is on less capital. What is more, there is a huge difference between 5% of R1 000 000 and 5% of R500 000!

This is very simplified, but look at the above and decide for yourself which option is better.

 And consider that investment opportunity!

But, while we are on the topic of salary, I think your biggest wealth is your health and your ability to generate an income.  That is ultimately what enables you to become financially wealthy.  That means you must protect your health and insure your ability!

From an accounting perspective, you might want to calculate your wealth in terms of net asset value.  You do that by adding the value of all your assets and deducting all your debt.  If your assets are worth more than your debt, then you are wealthy by that amount.  It is not a bad indicator, but in a scenario like this, you will also add your home, car and golf clubs.  How realistic is that?

I prefer another method, because I think it relates to real life.  If you would lose your salary today, how many months can you maintain yourself financially before you will have nothing left?  That is real life, because people are retrenched and we must live.

To calculate this, look at your expenses and write down what you have to spend every month.  Let’s say R10 000.  Now look at all your financial resources – do you earn interest and dividends and rent?  That is income that you deduct from the R10 000.  Let’s say you still need R8 000 per month.  How many months can you survive with the cash resources you have (without borrowing) before you start selling golf clubs, cars and the home? 

The number of months you can survive, is an indication of your wealth!  And you are only really wealthy when you have sufficient resources to survive the rest of your life.

So calculate your wealth right now!

Tomorrow I will discuss how this way of measuring wealth is an argument in favour of property investments.