My (26M) cousin (22M) was awarded a settlement of just over R1m in cash (post-tax). I thought it prudent to check our ignorance here before he commits to anything, although I have advised him to consult a CFP® (please recommend one) and tax adviser/practitioner.
BACKGROUND
He is currently a 2nd year student at a private college (BCom Marketing). He lives at home with his parents covering all his typical living expenses and tuition. He does battle with mental illness (e.g. clinical depression; ADHD and the like) and has been seeing a psychiatrist (although, not quite as often as needed due to financial constraints). He’s yet to have regular sessions with a psychologist (again due to finances). He spends most of his days in his bed and struggles to go about his daily tasks. He doesn’t drink or smoke.
He doesn't have a monthly allowance or income. I have pushed back against his mother and aunt suggesting he purchase a vehicle because he would need to use even more of the principle from the windfall to fuel, maintain, service and insure the vehicle. He also only has a learner's licence so insurance is likely to be high for newly a licensed driver.
While I realise the time value of money and inflation is a key aspect; I've elected to ignore that maths for now. This is to say, I suggested he invest for income over the next 3-5 years until he completes his honours and begins working full-time (I hope it allows him to learn the basics of finance (like saving), with a smaller amount). I would also like him to have money to refill his prescriptions, consult his psychiatrist as and when needed and begin therapy. He could also get his driver’s licence. These would hopefully make a meaningful difference to his daily life and assist him in his studies.
BRAINSTORMING
The finance minister did not adjust the tax brackets so the primary rebate places his tax threshold at R95 750. Additionally, he has the s10(1)(i) interest exemption of R23 800. This means his effective tax threshold is R119 550. So, here's a napkin plan:
I realise inflation eats away at his principle over time as he’s not re-investing the interest (aside from TFSA contributions). I figure ≈R900k in 3-5 years’ time is still a great sum of money for a person in their 20s, just starting out in their working career. Hopefully, he’s more comfortable with finance when those years roll in. He’ll make the max contributions to his TFSA every-year until then and move away from this income focused strategy when he has a salary.
Does he need a will; if so is it typically a one-off cost or monthly cost?
BACKGROUND
He is currently a 2nd year student at a private college (BCom Marketing). He lives at home with his parents covering all his typical living expenses and tuition. He does battle with mental illness (e.g. clinical depression; ADHD and the like) and has been seeing a psychiatrist (although, not quite as often as needed due to financial constraints). He’s yet to have regular sessions with a psychologist (again due to finances). He spends most of his days in his bed and struggles to go about his daily tasks. He doesn’t drink or smoke.
He doesn't have a monthly allowance or income. I have pushed back against his mother and aunt suggesting he purchase a vehicle because he would need to use even more of the principle from the windfall to fuel, maintain, service and insure the vehicle. He also only has a learner's licence so insurance is likely to be high for newly a licensed driver.
While I realise the time value of money and inflation is a key aspect; I've elected to ignore that maths for now. This is to say, I suggested he invest for income over the next 3-5 years until he completes his honours and begins working full-time (I hope it allows him to learn the basics of finance (like saving), with a smaller amount). I would also like him to have money to refill his prescriptions, consult his psychiatrist as and when needed and begin therapy. He could also get his driver’s licence. These would hopefully make a meaningful difference to his daily life and assist him in his studies.
BRAINSTORMING
The finance minister did not adjust the tax brackets so the primary rebate places his tax threshold at R95 750. Additionally, he has the s10(1)(i) interest exemption of R23 800. This means his effective tax threshold is R119 550. So, here's a napkin plan:
- He opens a TFSA now and makes his R36 000 contribution as a lump-sum. He’ll purchase an ETF and wait for subsequent periods to do the same. We’ve considered 10X Total World Stock Tracker Feeder ETF; Sygnia MSCI World Stock ETF and Sygnia S&P 500 ETF. We are still reading more about these to figure out what makes sense; and
- He keeps R60 000 in the savings account linked to his FNB account to serve as a small emergency fund. He will allow whatever interest earned on these funds to compound; and
- He allocates R220 000 to a 5-year RSA Retail Savings Bond at 10,75% for R23 650 pa (or R1 970,83 pm). The annual interest is below the annual exemption so even if he starts working within the next 5 years these proceeds should always be tax-free. Access restrictions also mean I shouldn’t be seeing my boii on “I Blew It” for at least 5 years lol; and
- He allocates R300 000 in a Money Market Account at Standard Bank (he already banks there). The quoted rate is currently 8,70% for an annual return of R26 100 (or R2 175 pm). He use R36 000 from this account next year to allocate to the TFSA; and
- He allocates another R300 000 to a Standard Bank Flexi Advantage Account (12 months fixed deposit). The quoted rate is currently 8,51% for an annual return of R 25 530 (or R 2 127,50 pm). He can access upto 40% without penalty during the investment term. I figure 12 months so he can make new choices a year from now as he learns more and context of his life may change; or
- Recognising that the MoneyMarket in point 4 is quite liquid already: instead of no. 5 he rather allocates R150 000 into a 2-year RSA Retails Savings Bond at 9,25% and another R150 000 into a 3-year RSA Retail Savings Bond at 9,75%. This translates to R14 625 pa (or R1 218,75pm) and R13 875pa (or R1 156.25pm) respectively. He can fund his TFSA with a portion of the capital when these mature.
I realise inflation eats away at his principle over time as he’s not re-investing the interest (aside from TFSA contributions). I figure ≈R900k in 3-5 years’ time is still a great sum of money for a person in their 20s, just starting out in their working career. Hopefully, he’s more comfortable with finance when those years roll in. He’ll make the max contributions to his TFSA every-year until then and move away from this income focused strategy when he has a salary.
Does he need a will; if so is it typically a one-off cost or monthly cost?