We live in a time of ever-increasing living costs and financial pressure. Fuel price hikes. Food price increases due to the drought. High interest rates. Rising taxes. It is becoming more and more difficult to save, and for some people it often feels like an accomplishment just surviving from payday to payday. This struggle from month to month makes it easy to forget the importance of saving for our future.
Healthier lifestyles and medical breakthroughs are contributing to people outliving their retirement funds forcing them to be dependent on others. We do not realise how large our future financial liabilities will be, and go on the assumption that we will be okay when retirement comes. The scary truth is that we probably won’t be.
According to National Treasury, 94% of South Africans are not saving enough for their retirement. Surveys show that South Africans allocate only about 15% of their income towards savings; this has been consistent since 2015. This low savings rate, coupled with lower expected investment returns thanks to the slow growing economy, is not enough for people to settle down with at retirement.
Personal financial management should involve preparation for the future. Our spending and savings patterns should reflect our perceptions of our entire lives. We may not be able to control investment returns or how long we can save for, but we can control how much we can save.
Behaviourally, as humans, we tend to distort information and struggle (or make excuses) in our decision-making, particularly when it comes to our savings decisions. We tend to select the default or easy option, telling ourselves that by at least saving something we should be okay. This is however not enough. Our own financial wellbeing should be priority, and we should not allow our emotions or lack of self-control to interfere with it. Debt – the danger of living beyond your means
It is an unavoidable fact that we live in a consumerist society which values a pleasure-seeking way of life funded by debt. The reality is that a growing number of people from all ages are living beyond their means. It is a trap that is so easy to fall into, especially when we allow our emotions to trump rational decision-making.
South Africa’s household debt as a percentage of disposable income is currently a shocking 72.5%, which means that for every rand earned, nearly three quarters is spent on debt.
It is crucial to have a grasp on your debt, and to make its repayment a priority. As the cost of debt will always exceed returns earned on savings, it makes sense to repay your debt before you start working on your savings plan. Don’t incur unnecessary and additional debt and prioritise its repayment, starting with the most expensive. Tips to improve your financial health:
On savings and taxes
- Have a good look at your budget, and differentiate between your wants and needs. This will assist you in cutting out unnecessary spending.
- Focus on your spending and saving goals. Set deadlines to achieve these goals and pursue them rigorously. Keep track of where your money is going and make sure to stay aligned with your goals.
- Pay yourself first – make the goals you have set for yourself a priority.
- Seek out professional financial advice – a financial planner can help you get the most out of your money, and assist you in making sure that your hard-earned savings are growing and working for you.
When Benjamin Franklin said that nothing in life is certain besides death and taxes, he had a point. Taxes can however be dealt with by reviewing one’s savings and investment vehicles, and ensuring the way you are saving is tax efficient.
There are various tax-efficient savings vehicles available for us as South Africans to make use of, including retirement annuities, unit trusts and tax-free savings accounts. These vehicles offer great tax breaks that can really help you to get the most out of your savings.
Retirement Annuities (RAs) are particularly tax efficient to encourage longer-term saving. Contributions are tax deductible up to a set limit and the growth in your RA is not subject to tax on interest, capital gains tax or dividends tax.
TFSA (Tax-Free Savings Accounts) are the next most tax-efficient savings vehicle. Introduced by government in 2015, it was aimed at encouraging consumers to get into the habit of setting aside fixed amounts to save each month, instead of exhausting their income on spending. Through TSFA’s you are able to save up to R33,000 a year, completely tax-free, up to a lifetime limit of R500,000. This means you pay no tax on the growth of your savings, including dividends, capital gains or interest. As with most savings funds, they should ideally be allowed to mature over time to get the most benefit out of compounding growth.
TFSAs are an ideal vehicle for topping up your retirement savings or saving toward specific goals, depending on your needs and savings objectives.
Financial freedom is something that I’m sure we all want. Even though we live in hard times, the truth is that it is available to everyone. By making use of the tools available to us, and dedication to our goals month after month, we can take control of our financial health and make our money work for us.