South Africans are finding it more difficult to save money and build their wealth in an economy stretched to its limit, and amid rising fuel prices and other living costs.
According to Tlotliso Phakisi, investment analyst at Cannon Asset Managers, the key to keeping your financial goals on track in tough economic times is to work smarter, not harder.
Below he outlined three ways that South Africans can optimise their savings right now.
Trim the fat
It’s often more difficult to increase your income than it is to cut down on spending, said Phakisi.
“Trim the fat from your budget by consciously cutting out wasteful or unnecessary expenditure. Shop around and compare monthly premiums on your insurance or mobile package, cancel any subscriptions that you may not be using, cut down on takeaways or nights out at restaurants, or look for ways to maximise your savings through any retail loyalty programmes,” he said.
“Once you have freed up some room in your budget, channel these funds into savings instead.
“If you haven’t already done so, set up a monthly debit order for your savings and investments. Find a realistic and comfortable amount that does not place you under unnecessary financial pressure and, with time, gradually aim to increase this amount.”
Phakisi said that a monthly investment of just R250 a month (which may have been spent on junk food) achieves an average annual return of 7.5% net of fees would grow to as much as R18,131.78 within five years, and R44,482.59 within 10 years.
Put ‘lazy’ funds to work
You should consider putting your short-term savings to work inside a money market or capital preservation fund, or even an interest-bearing bank account such as a call deposit, said Phakisi.
“Through the power of compound interest, whereby both your initial capital and the interest earned on your capital earn additional interest, your savings will then grow and generate more wealth as opposed to lying stagnant in a no-interest or current account.
“For example, if you invest R1,000 in a money market fund that earns average annual interest of 7% compounded monthly after fees, in 12 months your savings would grow to R1,072.29 – even without making any additional contributions.”
Growth within tax-efficient investment vehicles such as a Tax-Free Savings Account (TFSA) or a retirement fund such as a pension fund, provident fund or retirement annuity (RA) is free of Capital Gains Tax, Dividends Withholding Tax and tax on interest, said Phakisi.
“You are allowed tax deductions of up to 27.5% of your salary to a maximum of R350,000 each year for contributions to a retirement fund, reducing your annual tax burden. However, the income you draw from these funds after you retire will be taxed.
“In terms of TFSAs, every person can invest up to a maximum of R33,000 each year (or R2,750 a month), and up to R500,000 over their lifetime. Although contributions are not tax deductible, you will also not be taxed when you withdraw from the fund,” he said.
Phakisi provided the example of an investor who contributes R2,750 each month to a TFSA until they reach the lifetime limit of R500,000 (or for 15 years and two months).
Assuming that this investor achieves an average annual return of 10% net of fees, their tax savings over the life of their investment would have amounted to nearly R135,000, boosting their final investment outcome to more than R1.17 million, he said.