Investing for your future

Baruch Labinsky- Financial Planner, Israel Resource Network
This is the third in a 3-part series on Financial Planning in Israel.

The basic concepts are really important or you can’t do anything – you need to understand what you’re doing when you invest. An important “rule” to keep in mind is the Rule of 72 – divide a number into 72, and the result is how many years it would take for your money to double. So if you get 10% each year you’ll double your investment after roughly 7.2 years.

Two things you always have to take into account with investing are 1) taxes and 2) inflation – inflation always eats away at the real value of our investment. Inflation went up 4% over the past year in Israel, so if you made less than 5% on your investment you lost money – 4% plus what you paid on taxes. You need to make 5% just to break even, but your money isn’t really growing.

Compounding means your money can do tremendous things just by natural growth. It means you make money not just on what you initially invested but what you earn over the years. Getting 15% vs 5% isn’t just a difference of 10%, it’s 10% compounded. So the more time you have to invest the better you can do with larger gains even if the market goes up and down over the years. You may lose in the short term but you need to focus on your long term goals.

It’s important to put together an investment plan that matches our goals, our risk level, and time available (ie how many years till retirement will affect how aggressive you invest your retirement plan). Money needs time in order to grow, so start as early as you can. You can also help the next generation and start putting money away for them now.

There is a spectrum on investments – ultra conservative would be a savings account, or government bonds. Middle road would include stocks, real estate, corporate bonds. Stocks are an investment in a company – you own a part of the company. More speculative investments are options trading, hedge funds (which have the possibility to make money even when the market isn’t doing well). There are many options with investing, but you have to know what the money is for – do you need to take out the money soon, or can you let it sit for 30 years? You have to plan and know what level of risk you are comfortable with.

Stock prices don’t always go up or down based on exactly how the company does, stock prices are really based on expectations and psychology. If there is more demand in the market for the supply of stocks, that drives up the price. Prices really reflect what people are willing to pay, not always what a company is really worth. Much of investment is based on 1) fear and 2) greed.

When the market is really good, and everyone is talking about how great investing is, that’s already the end of the cycle – the average person invests out of greed because they hear so many people are making money. Then things drop, and they panic and sell – fear. They are the ones who lose out – they’ve bought high, and sell low. If they had an investing plan, and they held on for the long term, they would have been able to ride out the short term downslide.

You need to have a long term plan, not make decisions based on emotion. You can’t be right all the time, there are plenty of professional investors losing money all the time. Therefore it’s important to diversify and invest in different places - you’ll have more of a chance of succeeding. You need to have a plan and the discipline to follow it.

You can invest in mutual funds, which are a basket of stocks – so if one goes down hopefully another one is going up. Studies have found that people who invest in no-load funds, which means no fee to go in and out of the fund, have a lower return than people who join load funds. It should be the opposite, because they are saving all that money in fees, but since they don’t stay in for the long haul they tend to lose.

Israeli investing

The investment market is divided into 3 types of investments:

1)      Real Estate - which in this country is a real insiders market, a small number of people control the majority of real estate in the country and you need to be an insider to get good prices

2)      Bonds

3)      Stocks – this can be divided into mutual funds, ETFs, etc

There are two main places you can hold your money in Israel – through the banks, or through private brokerage houses. Banks by law are not allowed to manage people’s money. They can give you investment advice, but can’t manage the money for you so you’re really investing on your own. Most people invest in mutual funds when they invest this way. All the fees are built in so the investor generally doesn’t know how much they are really paying.

You can invest through a brokerage house, which is private. They invest for you and can actually manage your money for you in addition to selling you funds and giving advice. You can give your money over to them and they determine (together with you) the level of risk you want and then they can invest for you. Fees are much more transparent because they are obligated by law to be clear about everything.

The other way to invest is through the Bituach Menahalim and Keren Pensiot – long term savings plans that are basically run by the insurance companies. They invest your money, generally in all the other securities that everyone else is investing in (stocks, corporate bonds, etc). These funds have 3 components: 1) Life insurance 2) Disability insurance 3) the investment. Plus the fees the companies are charging for all this.

There is also Keren Hishtalmut, which is a 6 year savings plan that becomes liquid after 6 years.

Most of the time all people know when they are investing in these funds is that they are investing in something – it’s money for retirement, but I don’t read or understand the reports. It’s important to understand who’s managing your money and what they are doing. The Ministry of Finance has a website where you can investigate how various funds are doing.

There is a major problem with retirement funds in this country. You start contributing let’s say when you’re 25. You continue to invest for 40 years. At 63 you’re investing in the exact same fund you invested in at 25 – but should you be investing in the same fund 2 years from retirement? Probably not – you may want to invest more aggressively, or less, if you know you need the money sooner. You should evaluate where you stand and make sure you’re going to hit your original investment goals (which were set along time ago, so you need to track it).

You shouldn’t be jumping every year, but you should be aware of where you stand with your investments because you may want to switch at some point to maximize your investments.

Long Term Financial Planning

Baruch Labinsky- Financial Planner, Israel Resource Network
This is the first in a 3-part series on Financial Planning in Israel.

-          retirement

-          insurance

how it fits into financial plan

Financial planning: a lifetime of planning.

1) When you start off: just trying to make ends meet

2) Start accumulating assets- put them to work for you. Start long term retirement plan

3) retirement- you have income flow. Now determine how to spend it or how much I can spend to make ends meet

4) Passing assets to next generation- trusts, wills, estate planning

It's a process- not just one time discussion and that's it. The more you plan- less you'll think about it on day to day basis

"But it stresses me out!" – Exactly the opposite. If you have no plan and it's all ad hoc, financial issues will come up constantly. A plan in place, a budget in place reduces the stress and thinking about it. Do the homework- and you'll be better off

RETIREMENT PLANNING

Putting together a plan

1)       Define goal- what do you want to accomplish. Have an idea of what you want in retirement- even before you put a number on it.

-          know the environment- will you be in BS, Yerushalayim etc

-          what are you doing- working, learning, resting, travel, support children, non-profit work

-          what will your standard of living be

2)       Now you can put numbers to it

-          sources of income: pension plans (government based, bituach minahalim, keren pensia, kupat gemel), social security (if you can work 40 quarters or work from here and file in US), bituach leumi, other savings (financial assets, real estate)

How much do we need for retirement? If you're spending 15,000 shekels now, people generally assume you'll spend less in retirement. Statistically, retired people spend similar to pre-retirement. They have more free time- recreational money spent to keep busy (travel, shopping, activities). They support the children, grandchildren. Medical costs- takes up major bucks and replaces all the stuff you were paying for before retirement.

Therefore you need to have at least 75% of your average adult income for retirement

Now start estimating what each thing will bring in, in what currency it's coming- because of exchange rates, you want the money to be shekels based. Inflation also affects amounts you'll have available- you pay taxes on what you earn. Therefore to keep buying power of money you have to make- after taxes- enough that it reaches the rate of inflation and higher.

The rule of 72's: divide into 72 any number and that determines the outcome- so if you're getting 10% return, then in 7.2 years the money will double.

Flip side: if rate of inflation is 3%, then every 24 years your money becomes worth half of what it is in today's money.

You must evaluate your retirement plan as you go along

What else to consider- different types of insurance

-          life, especially critical when you have young kids. As you get older you should be saving more money, and because the premium is rising you should be reducing the life insurance policy. If you have more assets, in theory you don't need as much insurance. Once kids grow up, same applies. How much life insurance should you have? That's a very personal decision.

3 different attitudes to insurance

a) I want my spouse to be covered for life, kids to be supported till they're out of house etc. Insurance should cover all eventualities

b) I want a minimum amount so my spouse can get thru transition period. Eventually they'll land on feet- so enough for maybe a few years

c) in between- enough to support kids are out of house, till spouse is X age etc. 

-          disability- disability is very critical element. It's much more common that person will become disabled and be unable to work for many years than catastrophic event and person dies

-          health- in Israel everyone by law is covered for the basics. It's the extras that cost- you have to evaluate what type of policy you want. Some policies are available thru kuppot which give extra level but it doesn't give 100% flexibility as to what doctor or hospital you can choose. The rest can be covered thru private insurance broker

-          bituach siudi- long-term care. Generally thru kuppot ranges 3-5 years, will cover 5-8000 shekels for home care or in a home. Not 100% clear that these policies pay: If you have the extra money, you can put it in savings and you will have enough towards retirement ("self-insuring"). Because you probably won't need it for many years to come, no reason to buy this policy at a young age- save money and you'll have it when you need it

In Israel, life insurance policy ends at retirement age. So once you hit that age, that's it- policy is over. There's nothing to pass on to inheritors. Therefore, in Israel, there is less use of insurance in estate planning.

Disaster Plan

Other people might call it a Will. But odds are greater you'll be disabled rather than suddenly die. So…you have to plan for the kids, spouse etc.

Recommended to have a will- however it only comes into effect when you die.

So disaster plan deals with other eventualities- both parents killed. Who takes care of young kids? Who deals with leftover finances?

So in your lifetime you can put in place plan- how you would want others to take care of you, who takes care of kids etc.

If you write will here in Israel, you have to decide which court will adjudicate: secular or Rabbinic

Using your existing skill set to land a job in another field

Listen to Ephraim talk about using your existing skill set to land a job in another field, on Rusty Mike Radio.

http://rmr.sharp-stream.com/nettie_jobmarkets7-01-10_dl%29.mp3

Here is a compilation of invoicing services for people interested in freelancing who do not want to open a tik.

1. Pamela Richman--5%, up to a maximum of 450 NIS (min NS 200)
pamela@richmancpa.co.il, 09 766 4537 ext 7, 0544 505 839

2. Yeul Sahir--7%, www.yeuls.co.

il, 02-651 0666

3. www.Freelancer.co.il: 5%

4. www.Bizpay.co.il: 5%

5. Yitzhak Treister: 575 NIS a month. cpayitz@gmail.com, 02-9995625

6. Shimon Galitzer: $85/100 a month

7. Nachum Feiglin / ANAP
nachum@sagiyogev.co.il, 03 9228501

8. Yitz Corn of Infodyce. 054 495 4435

9. www.heshbonit-mas.co.il ( 5% service fee)
  Web site wasn't working

10. www.etgarimc.co.il (10% service fee)
http://www.etgarimc.co.il/services/salaried.aspx

Controlling your finances – Cutting expenses

Baruch Labinsky- Financial Planner, Israel Resource Network
This is the first in a 3-part series on Financial Planning in Israel. 

Many people think that there is no point in making an effort to budget because money will go anyway. "I’ve tried to budget in the past, and it just doesn’t work."

 

The little things can make a tremendous difference in the long run. If you can save 50 NIS/wk from total expenses, you can save a lot over the years.

 

You have to align your spending with what you want to be spending – ie, knowing what you want to spend your money on.

 

Break it down – if you can afford 3,000 NIS/month on food, that means (since there are really 4.2 weeks/month, not 4) you can spend 650-700 per week. Most of that is groceries, but have to budget for fill in shoppings, Shabbat, lunch money for kids, etc.

 

Can put specific amount of cash you’ve budgeted into envelope, and take that with you when you shop – if you don’t have more, you won’t spend more.

 

Important Klalim:

1) In Israel, you can negotiate everything.

 

2) Research is important – where are the best prices, go online, ask people – especially for big ticket items.

 

3) Buy used – can save a lot. Online auctions, email lists. Auctionisrael.com.

 

4) Review your bills – there are often errors. Call up and remove those extra charges. Supermarket items get rung up incorrectly all the time – check receipts, and know the cost of what you are putting in your cart.

 

5) Plan ahead. If you wait until the last second you may end up buying the most expensive thing just because you need it. Stock up on end of season sales by planning ahead what you will need.

 

How does the Tax system work in Israel?

Bituach Leumi, Bituach Menahalim, Keren Hishtalmut, Keren Pensiya. You can contribute to these packages and it will reduce your overall tax rate.

 

Individuals are taxed, not family. Each person gets a certain amount of nikudot zikui. Women get an extra point for each child under 18 they have.

 

If you give tzedaka to a recognized charity, that has “seif arbaim vshesh” you can get back 35% of your donation from Mas Hachnasah. You can go into Mas Hachnasah anytime during the year with your receipts and they will print out a page for your employer to take out a certain amount less each month. If you want to get back for a previous year, you have to file a tax return. (You must have taxable income to take advantage of this, if you already aren’t paying taxes you don’t get anything back).

You must be aware of what is happening financially in the country to take advantage of it – Ma’am just went down ½%, which means prices go down.

 

You may be eligible for certain benefits from bituach leumi, go to their website for a list of situations. You can then go in to an office and ask them about it.

 

How to save $$:

Shop at discount stores, shuk, shopping online can be cheaper. Don’t shop with your kids, that increases bills. Plan weekly menus so you know what you need when you go in. Limiting the amount of times you go to the store can lower the amount of money you spend. Prepare food from scratch, rather than buying prepared. Don’t go shopping when you’re hungry. Freeze leftovers for later use, stretch leftovers by adding something new.

 

Keep a notebook of which items are cheaper where – if you shop in several places you’ll know what to buy where.

 

The average person spends between 2,000-3,000 NIS/month on their car. Gas, insurance, repairs and maintenance.

 

Mortgages are very complicated in this country. There are many different types of mortgages involved and it’s hard to understand the complexities involved. You can either work through it with a mortgage broker, or invest the time to understand it so you know what you’re getting into.

 

Financial system:

Banks are the biggest shuk in this country – everything you do at the bank is negotiable. Get to know someone at the bank, your banker who is there to help you, that can help cut expenses.

 

Insurance:

People don’t understand their insurance – what they have, what types of policies they have, amounts they are paying, etc. It can be a good idea to take insurance out of your bituach menahalim so you actually get a bill each year and have to evaluate if it’s what you need.  What you took out as a 23-yr old may not be what you need as a 40-yr old. Reducing your deductible can lower your payments.

 

Debt Reduction:

Can rollover debts and combine things to lower overall payments. Know what your obligations are as far as tzedaka, you may be able to pay less (make sure to ask a Rav).

 

Utilities:

Electricity:

Heating and cooling is the single largest component to electricity. Can check bills in March/April when we tend not to use it to get your baseline, and then see how high it goes in summer and winter. If you can make changes there, you can save a lot. Change to energy efficient systems. Can change to a different electrical system, called Taoz, where instead of paying flat rate no matter when you use it you can get lower rates on off-peak hours. Have to do the calculations to see if those times work out, but can look into it.

 

Water:

Have to register the number of people in your house so you get the right allotment.

 

Arnona:

Certain people qualify for discounts – Olim, low earners, etc.

 

Gas:

Gas companies have a habit of charging as high as they can. So buildings have different rates depending on when they were hooked up, and whether they ever complained to the company and renegotiated rates.

 

Phone:

Cell phones can take a huge chunk of your monthly expenses. Make sure you’re using them as efficiently as possible.

 

Gmachim are a great way to cut expenses. Get hand me downs from friends, or switch clothes if you have things your child didn’t wear. You can talk to school about getting discounts if you have multiple children in the school, or a child with disabilities.

 

Be creative – If you want your kid in a chug, then offer to host a chug and organize it for someone and they may let your kid go for free. Can you barter babysitting or other services?

 

 

Commuting for work: Discussion

Listen to Ephraim talk about the pros and cons of commuting for work when you live here in Israel, on Rusty Mike Radio.

http://rmr.sharp-stream.com/nettie_jobMarket_24-12-09%28dl%29.mp3