T h e F i n m a r F i n a n c i a l Winter Issue 3rd Quarter 2010 Richie Riches What are you teaching your kids about money? Often the advice parents give their children goes something like this: "Money doesn't grow on trees", or "Do you think I am made of money"? Although that parental wisdom has stood the test of time, it takes a bit more effort to teach a child sound financial management. Children are the most potent FAMILY FINANCE put, you give your child a mone- receivers in the world - they are tary gift just for being your child. also notorious mimics. A child can unfortunately, omitting this subject The advantages of this system are read the unconscious signals in can have an effect on the financial that it is regular and unchanging. how we react to certain events lessons they pick up and the atti- You will not be raising or lowering and at once surmise and integrate tudes they adopt. In general, par- the amount of the allowance be- our attitude into their personali- ents tend to avoid speaking to their cause of your child's behaviour. ties. If we show a negative attitude children about finances because it is However, the disadvantages are Francois Marais toward things of a financial nature, an "adult" subject. Finance is seen numerous. Your child will not get Hons BComm, MBA chances are our children will too. as something that a child can worry a sense of achievement from the So how do we know when we are about when childhood gives way to allowance, nor will he or she truly sending the wrong financial mes- adulthood and, as a result, parents appreciate it. Additionally, it is sages to our kids and what should neglect to address these topics harder to instill a sense of fiscal P O Box 401 we do about it? responsibility when your child with their children at an early post Paarl, 7620 age. Implicit in this silence, how- receives the money without show- What You Don't Know … ever, are a number of negative ing any initiative or desire. For many people, it may take signals - if you do not discuss fi- The Reward System email@example.com discipline not to let out a groan nance with your child, it may sug- email when the bills come, a sigh when gest to him or her that money is The reward system is the most it is time to balance the books and either unimportant or something common system parents choose. a curse when a financial analyst to fear. In this system, parents set chores phone 021 871 1666 appears on the television screen. for their children to perform on a However, if your reaction to For many children, this silence weekly or monthly basis and then financial topics is typically negative continues at their schools, with pay a set amount for the successful and your strategy one of avoid- only the most cursory glances at completion of the chores. Chores mobile 083 654 1987 ance, these will send a message to accounting and vital life skills like typically include tasks like washing your child that finances are an budgeting. The undeniable truth is the dishes and making the beds. annoyance best to be avoided. that your children are going to The advantages of this system are fax 021 872 4528 learn about finances from you. But that there are consequences for Social scientists have discovered to do this effectively, you need to not doing the assigned chores and that the vast majority of children develop a plan and some tech- ☺ Yolanda Huijsamer are destined for a financial future a reward for doing them. In other assist niques that will help make the words, this system provides a mix firstname.lastname@example.org that differs little from that of their lessons count. A good first step is of positive reinforcement and parents. In many cases, the middle granting your children an allow- punishment. The disadvantages are class raise the next generation of ance. www.finmar.co.za somewhat difficult to see when web middle class people, the poor Starting an Allowance your child is young, but the reward raise the poor and the wealthy system is also guilty of reducing raise the wealthy. Very few chil- It is hard to know when your child your expectations for your child to dren move up the ladder from is ready for an allowance. If you a monetary figure. Your child their parents, while sliding down start before they walk, your chil- should clean his or her room and is as simple as swiping a credit dren won't understand the signifi- help with the dishes regardless of card. cance of the money they receive. any allowance. If you use the re- If there is going to be a change Although it is not a hard and fast ward system, you will encourage between your level of wealth and rule, an appropriate starting point your children's desire for money at that of your children, the odds are is when your child's verbal compre- the cost of their sense of responsi- that they will do worse financially, hension is high enough for you to bility. rather than better. They may earn explain how the allowance will work. When your child reaches The Income System more than you do, but they will also spend more and save less. In this level, there are three types of The third system, the income recent years, the practices of allowance to choose from: the gift system, works much like real life. saving to buy and general frugality system, the reward system and the When there is a job to do that is Inside this issue: have been sabotaged by quick income system. not expected of your child - for credit, payment plans and a "why The Gift System example, washing the car or weed- Richie Riches 1 wait?" shopping attitude. ing the garden - you can pay him The gift system is a regular pay- or her to do it. Basically, you want Deadly Silence ment to your child that is not de- Banking on the future 2 to establish an allowance that is Many parents avoid discussing pendent on any chores that your paid to your child for work out- Making sure 3 money with their children but, child does or does not do. Simply side of regular responsibilities. This Published by newsprintz media 084 471 0782 email@example.com Page 2 The Finmar Financial Informer (Continued from page 1) it. One factor that limits how much If you share your experiences with allowance will be variable and irregu- your child can learn is the amount of your child, he or she will be able to lar, but it will do far more for your knowledge you are able to give them. learn from your mistakes. Further- child's financial future than the other An allowance is a great way to get more, all of your research might even two. the ball rolling, but as a parent, pay off for you in the way of a better you should also share your own real- financial plan for yourself, In practice, you will have to agree on life lessons in budgeting, frugality and which could provide a great lesson how much a particular job is worth. the importance of emergency funds. for your children in itself. Write down all the jobs and the agreed upon payment for each one To give your child the best advan- The buck stops here on a large sheet of paper. Allow your tage, you will need a working knowl- For parents who are serious about child to tick them off as they are edge about investing. Developing instilling their children with some completed. Then, you can use this this can be as simple as going to the financial knowledge, there is more to work schedule to add up your child's public library or searching the inter- an allowance than just the transfer of allowance together. If your child does net. There are books on portfolios a trivial amount of cash. The system not keep up with regular responsibili- and shares, and the internet is great you choose has an impact on both Rich Dad, Rich Mom, Rich Kids ties, he or she will have less time to for links and information. Many are your child's financial outlook and his do paying jobs. You can also withhold written in plain language and include The press often refers to well or her character. Pairing this system known billionaires like Howard the work schedule if your child has easy-to-follow examples. up with discussions about money and Hughes and Bill Gates as “self not completed his or her regu- You do not need to master concepts finance and your own financial ex- made”. The truth is that like many lar duties. like futures trading, but you will need periences is also invaluable. If you other so-called “self made” people both of them came from extremely Teach Yourself First to explain endowments, unit trusts want to pave the way for success in wealthy families! and compound interest. The best your children's financial future, you The deciding factor in whether or way to educate your child is to edu- can't just hope for the best. Instead, not a child will succeed financially is cate yourself first. If you are lost in provide them with the skills that will how much financial education they the financial quagmire, you owe it to make this success possible. receive and when they receive your child to chart a course out. Banking on the future Robert Kiyosaki’s book, “Rich Dad, Poor Dad” was a huge success but it had its critics. They said that the book was too “airy fairy” and that it lacked practical instruction. His theory was that rich dads have a good attitude toward money and that they teach their kids good financial habits. Teaching them to invest and save is a great place to start! Sometimes we forget that we need but children will do better if they FAMILY FINANCE to teach our children about planning learn it early. and budgeting. Creating a saving / investing and spending plan for your Explaining the Importance of Saving children will help steer them toward Children are masters of interrogative financial wisdom. sentences so don't be surprised Why is it a Piggy? Splitting the Pot when your child asks you why he or Dogs bury bones. Squirrels gather Banking is a great place to start she should save money. The ideal nuts to last through the winter. As your children start to receive reply has two parts. One, you have with the basic lessons your kids Camels store food and water so money - for example from an allow- to save money for the future. Two, they can travel many days across need for a successful financial ance - it is time to sit down and you save money so you can meet deserts. But do pigs save anything? future. show them how to make a saving and your spending goals. When your No! Pigs save nothing. They bury spending plan. It is essential that you However, as they get a bit older, child decides how much to save, you nothing. They store nothing. give your children the power to their lessons should include simple will then have to ask them how much So why do we save our coins in a decide how much to save and how investment knowledge. piggy bank? Because someone made of that will be for the future and how much to spend. In doing so, you will One of the best ways of teaching a mistake. During The Middle Ages, much for goals. also confer the responsibility and them the invaluable lessons of risk in about the fifteenth century, metal was expensive and seldom used for excitement that comes with making and return is with their own If your child is very young, you household wares. Instead, dishes and adult decisions. You can make sug- personalised endowment or unit should encourage him or her to pots were made of an economical gestions and prepare some example trust portfolio. choose one spending goal rather than clay called pygg. Whenever house- plans, but the final choice should be many. A piece of sports equipment, a wives could save an extra coin, they left to your children. toy or some relatively inexpensive dropped it into one of their clay jars. item will suffice. Your child will be They called this their pygg bank or If the allowance payment will vary, Spending able to see how x% of his or her their piggy bank. you should use percentages instead You should not interfere in how your money will go into savings and x% of Over the next two hundred to three of set amounts (save 25% of the child uses his or her spending money. that will slowly accumulate to buy a hundred years, people forgot that allowance versus save R4). By giving To a child, a few Rands often seems chosen item in the near future. This "pygg" referred to the earthenware your child a choice of how much to like a fortune. Don't interfere with may encourage your child to increase material. In the nineteenth century save, you bypass the question of when English potters received your child's spending habits other his or her saving rate. whether or not to save. This is, after than to point out that once it's gone As your child matures, he or she may requests for piggy banks, they all, a saving and spending plan, rather it's gone - you won't provide more want to save for a number of differ- produced banks shaped like pigs. Of course, the pigs appealed to the than the other way around. The goal money if your child spends his or her ent spending goals - a computer or a customers and delighted the of this exercise is to teach your child own too quickly. It's a difficult lesson, car. That's fine - as long as it all children. a saving habit. Page 3 3rd Quarter 2010 comes from the spending goal frac- est. When you go together to the through them together and explain tion of the savings account. The bank, let the bank consultant sell the interest and any other numbers amount going to the future should your child on the account you have that may appear upon it. You can remain constant. You can call it his decided on. Your child will feel much even check the figures together to or her car or varsity fund if you like, more involved in the process. The practice doing sums. On the same but nurturing habitual saving in your account should be in your child's day as you regularly pay out your child is more important than his or name and all the mail should be ad- child's allowance, go together to her monetary progress. Once the dressed to your child. Receiving bank make the deposit at the bank. This plan is complete, the next step is to statements like mom and dad is a will help to reinforce the habit of go to the bank. source of excitement for most chil- saving before spending. Saving should dren. feel good so make sure that it’s a fun Opening a Bank Account morning out with mom or dad! You should visit your bank in advance Get Organized Having a plan and tangible goals is as to check what type of accounts they On the same day as you open the important to adults as it is to chil- offer for children. You may be sur- account, go shopping with your child dren. In helping your children chart Dumb and Dumber prised by the incentives they offer for and select a binder, a congratulatory out their saving and spending plans, Very few parents want their kids to juvenile accounts. After settling on a present. You will use this to organize you may find ways to improve or grow up dumb, greedy and rich! particular account, set up an appoint- your child's bank statements. Starting clarify your own. Additionally, being However, giving your children a well organised, especially in respect sound financial understanding and ment to attend with your child. Ex- out with an organised record-keeping of financial information, will remove encouraging a strong sense of plain that a bank is a place you put system will be invaluable when your character will guarantee a successful your money until you need it. Your child gets older and has to grapple many of the fears that keep people and balanced future. child should be old enough to have with taxes and accounting. from investing later in life - particu- an understanding of compound inter- When the statements arrive, go larly the misconception that it is too complicated. Making sure Promises are like babies: easy to make but hard to deliver. And so it is the harsh reality of commerce, that creditors cannot always be persuaded to give credit to a debtor merely on the faith of the debtor’s promise. Even with the best intentions, a debtor may be unable to fulfil his debts - and if the debtor has no assets, then the debtor’s broken promises will be poor consolation for the creditor for the loss of his money. For this reason, it is very common tract of suretyship is that it creates a LEGAL WISE for a creditor, such as a financial separate but ancillary obligation: the institution, retailer or landlord to when applying for credit facilities surety’s obligation, while independent require that another person other from suppliers or when leasing prem- from that of the debtor, only exists if than their debtor guarantee payment ises, equipment or a vehicle for the there is a valid underlying principal of the debtor’s obligations in the business. debt. If the principal debt is extin- event of the latter’s default. guished (such as by payment in full by A common form of security provided in these circumstances is the con- Similarly, a married couple seeking to protect their interests may have the risk-taking (and thus intentionally less the principal debtor) then the surety’s obligation is likewise extin- “Credit is a system guished. tract of suretyship. A contract of asset-rich) spouse incur the couple’s suretyship is entered into when a person (called the “surety”) agrees debt in his or her name only. In these circumstances, the creditor’s claim The surety can stand surety for the full principal debt (an “unlimited whereby a person with the creditor of another person rests against the debtor-spouse; surety”), or he may place a limit on (called the “principal debtor”) to be there is usually no claim against the his exposure. The surety could even who cannot pay gets liable for any part of the obligation other spouse’s assets (this applies commit to a “continuing suretyship” (called the “principal debt”) that the whereby he agrees to stand good for principal debtor does not fulfil. only if the couple are married OUT of community of property). Thus the the outstanding amount owing by the another person who smart creditor will request the debtor to a particular creditor from What a bank wants In business, the limited liability rules debtor’s spouse to stand surety for time to time. cannot pay to the debt, ensuring that he can lay The suretyship contract: a wolf in applicable to corporate entities usu- claim to both spouse’s assets. ally protect the business owner from Also, in a situation where a debtor Latin clothing guarantee that he personal liability for his or her com- The consequences of standing as a cannot provide adequate security to can pay.” pany’s debts. If a company or close surety can be far-reaching and poten- corporation cannot pay its debts, the the creditor for their debt, or where tially devastating for the surety. For individuals owning the entity are not a debtor lacks a regular income, such this reason our law provides some normally liable. For this reason, be- as the granting of a study loan to a protection for the surety. fore granting credit to a business, a student, the creditor is likely to demand that the debtor persuade a The contract of suretyship is one of creditor often requires business the few in our law that is required to Charles Dickens owners to sign as surety for their more (financially) established person to stand surety for the debt. be concluded in writing in order to British Novelist company’s liabilities. For example, be valid. In order to avoid unneces- the business owner is likely to be Law of suretyship 101 sary legal disputes, the suretyship required to sign surety for a business contract must be signed by or on overdraft or loan from a bank, or A distinguishing feature of the con- Page 4 The Finmar Financial Informer (Continued from page 3) for his company. Failing to read the affairs of the principal debtor at the behalf of the surety and must dis- “small print” is a dangerous habit as time the debts are incurred. As long close the identities of the creditor, the law generally holds a person as the principal debt exists, the the principal debtor, the surety and liable for the commitments they surety is potentially liable. the nature and amount of the princi- make in contracts. However, in sign- The best advice to give a person pal debt. But the commercial reality ing what appears to be a credit appli- asked to sign a surety is…. don’t! is that sometimes a suretyship con- cation, there have been cases where The reality though is that often the tract is prepared “in blank”. Here the the company director or officer fails would-be creditor and debtor’s surety signs a pre-printed surety to notice a small but not insignificant bargaining positions are unequal; the document leaving blank spaces, in- clause buried somewhere in the creditor’s demand for a surety could tending for the creditor to fill in the “small print” whereby he unwittingly be a prerequisite to obtain credit. If crucial details at a later stage. There agrees to stand personal surety for you must sign as a surety, the follow- are a number of court judgments in the company’s liabilities. ing guidelines might help: which sureties have been exonerated In situations such as these, the courts from liability where this happens, as • understand the terms of the sure- have on occasion exonerated the signing “in blank” does not meet the tyship contract, especially the fortunate surety from liability where legal requirements. creepy Latin stuff – get advice from the creditor fails to draw the specific According to our common law, vari- attention of the surety to the fact a lawyer if necessary Check it Out! ous other defences are available to a that there is such an obligation in the • accurately describe (and restrict) Make sure when signing a contract surety. An example is the require- main contract. the nature of the debt for which that you do not unwittingly agree to ment that the creditor must first you intend standing surety – eg. all Till death us do part stand surety in the “small print”! proceed (or “excuss”) against the indebtedness or just a home loan, principal debtor, and only if unsuc- Not even the surety’s death releases overdraft, rental etc cessful may they turn to the surety. him (or more accurately, his estate) Also, where more than one person from the clutches of a suretyship • put a maximum limit on your liabil- has stood surety for a debt, the law contract. When a surety dies, the ity if possible allows the surety who is called on to creditor must be persuaded to re- pay up to insist that the creditor lease the surety’s estate from its • don’t leave blank spaces in the claim pro rata contributions from any obligations before the deceased’s contract – it might be impossible co-sureties. The effect of this will be estate can be properly wound-up and (and expensive) to prove later that that each co-surety is liable only for all the deceased surety’s assets the final document was not what Where a company director or you signed his or her proportionate amount of passed to his heirs. The creditor may business owner stands surety for the debt. demand that the principal debtor • understand that so long as the a company’s debts, the and/or the deceased estate settle the principal debt exists, the creditor However, as interesting as these obligation normally remains principal debt, or that an appropriate may call on you to pay – even common law protections may be to a sum in the estate be set aside as binding the executor of the law student, in commercial practice years after you signed the contract cover for the payment of the debt in surety’s deceased estate. they are worthless. Even the mod- due course. Either possibility could • ensure you get written proof from estly knowledgeable creditor simply The surety’s death (or disabil- have serious repercussions for the the creditor if they agree to re- provides in the suretyship contract ity) may result in the surety’s winding-up of the estate, involving lease you from the suretyship – for (often using Latin expressions which lengthy delays and a possible cash example, if you sell your business estate being forced to settle the are unintelligible to the surety) that shortage in the estate. Business own- and the new owner agrees to company’s liability to the credi- the surety waives these various de- ers in particular need to address this “procure your release” from sure- fences. Often the surety also sign as problem as they often sign a host of tor. This would lead to the re- ties you have undertaken for the “co-principal debtor” – in this situa- duction or insolvency of the sureties for suppliers, banks and business, get written unambiguous tion the surety has the same obliga- landlords. proof from the creditor of this surety’s estate, which could be tions as the principal debtor and Let the surety beware having been done disastrous for the surety’s heirs. cannot raise the common law de- fences. Generally, provided the legal require- • seek legal advice before paying up The company should take out a as surety – you should ascertain Signing on the dotted line ments for a valid suretyship are met, life policy on the surety and the surety is bound to make good your rights against the creditor, bind itself to the surety that the Legal contracts are seldom short and principal debtor and co-sureties any failure by the debtor to pay his to-the-point. Lacking the time, incli- proceeds will be used to settle debt. Depending on the terms of the nation or access to a magnifying glass • heed the words of the wise King the liability thus enabling the suretyship, the surety could be held to read the “small print”, a company Solomon in the bible - “He who liable for debts of the debtor years surety’s estate to be released. officer or business owner might puts up security for another will after signing as surety, and whether simply sign a credit application in- surely suffer” (Proverbs 11:15 New or not the surety is involved in the tending only to obtain credit facilities International Version Bible) LESSONS FROM LAW Lesson 1: “Read the small print” (Sorry, this really is the small print!) In 1991, a Johannesburg company director, Mr F, signed the standard application form of a famous international credit card company for credit cards to be issued to his company. He failed to notice a clause in the “small print” in which he agreed to stand surety for the card debts of the company. When the com- pany was unable to pay, the credit card company sued Mr F in his personal capacity. The court found that it was clear he had not reasonably intended to sign as surety and it had not been made sufficiently clear to him that there was a suretyship clause in the contract. The court refused to grant judgment against Mr F. Lesson 2: “Get it in writing” In 1987, a Cape Town businessman, Mr H, started a computer business and signed an unlimited surety for its current and future banking facilities. The business was sold to another company that was listed on the stock exchange. The listed company agreed to negotiate his release as surety. Mr H remained with the listed company until 1999 when he had a fallout with the board of directors and left the company. He believed that he had been released from his surety obliga- tions. Some years later, the listed company was liquidated and the bank sued Mr H for payment in terms of the surety contract. The contract required the bank’s release of Mr H in writing before the suretyship could be considered legally cancelled. As Mr H had never received a clear written release signed on behalf of the bank, he was held personally liable for the company’s banking debts of R11 million. Disclaimer Neither the publisher hereof nor your financial advisor can guarantee the accuracy of the content of this communication, which is provided for general information purposes only - no part of it constitutes financial advice for purposes of the Financial Advisory and Intermediary Services Act. You should discuss matters with your financial adviser before making any decision. Neither the publisher nor your financial advisor accepts responsibility for any direct or indirect loss or damage you may suffer as a result of using or relying on any information in this newsletter.