BOITUMELO NTSOKO: Welcome to the Money Savvy podcast, I’m Boitumelo Ntsoko. July is National Savings Month and, as we shut it off, I believed we’d take a look at the completely different financial savings autos out there to South Africans for his or her numerous objectives. Joining us on this episode is Chrisley Botha, who’s a licensed monetary planner at PSG Wealth. Welcome, Chrisley.
CHRISLEY BOTHA: Thank you for reaching out to me. I do know it may be complicated to work out which financial savings car is greatest for all of the completely different objectives, and I actually hope to present some perception to the listeners.
BOITUMELO NTSOKO: We look ahead to listening to your insights. So, Chrisley, let’s say I’ve a six-month saving interval where, for instance, I need to save for a vacation or back-to-school bills in January, which car could be greatest suited to my purpose?
CHRISLEY BOTHA: Tumi, the excellent news is that there are a couple of completely different choices out there to you. The very first thing I like to recommend doing is looking at how a lot money you want to save and the way lengthy you’ve till your purpose is due.
Then take into consideration what sort of car could be greatest for what kind of saving interval – for instance, long run versus quick time period and the completely different objectives. Once you’ve decided that, take into consideration what sort of options are essential to you and select the funding car that has these options.
So on this case, I might say you’re looking at a short-term funding, and I might suggest a voluntary funding or financial savings account – that are each low-risk methods to stash your money whereas it grows.
I might additionally suggest trying out a couple of completely different suppliers and seeing which one has the most effective charges for financial savings accounts proper now. If one among them gives the next rate of interest than the opposite, then by all means select that. You’ll have the option to save extra money whereas nonetheless incomes curiosity on these funds.
Just additionally keep in mind to choose an possibility where the funds are simply out there and never locked in. This is particularly essential if you’d like to use your financial savings account as an emergency fund. You need to have the option to withdraw the money at any time with out having to pay penalties or charges.
BOITUMELO NTSOKO: Would the identical autos be acceptable if you happen to want the money in two or three years’ time for a deposit on a home or a automotive?
CHRISLEY BOTHA: If you need to save money for a longer-term purpose, reminiscent of shopping for a home or a automotive, I might contemplate investing in bonds or different fixed-income securities slightly than a money-market account that simply earns curiosity. These forms of investments sometimes have a low-risk profile and supply regular returns over time. Each funding horizon comes with its personal danger profile, and it’s essential to perceive what which means. For instance, if you happen to put money into a bond fund, you’ll be able to anticipate to earn larger returns than with a money-market account or financial savings account, however you might expertise barely extra volatility.
BOITUMELO NTSOKO: And if I’m planning on having an emergency fund, you talked about earlier that it wants to be simply accessible. So which financial savings software could be acceptable for this?
CHRISLEY BOTHA: Okay. So whereas the scale of your funding fund will clearly rely on your way of life, month-to-month bills, revenue, dependants, all that kind of stuff, the rule of thumb is to put away at the least three to six months’ price of bills. So this can even be seen as a short-term funding.
Usually, a financial savings account that’s linked to your private checking account is an effective place for an emergency fund as a result of the funds may be simply transferred between accounts and may be accessed anytime.
If you’re wanting to nonetheless earn some progress on these funds, then you may as well contemplate investing them in a money-market fund or perhaps a higher-interest financial savings account.
BOITUMELO NTSOKO: I do know some folks want placing their further funds into their entry bond. Would you suggest this?
CHRISLEY BOTHA: Tumi, I might assess what charge you might be at present paying on your entry bond. So it’s positively one thing to contemplate. But I might slightly take a look at what you will get in a financial savings car versus what your curiosity is that you’re paying in your entry bond – and try this calculation earlier than making a call.
BOITUMELO NTSOKO: And are there any income-generating financial savings autos out there to South Africans?
CHRISLEY BOTHA: Well, Tumi, continued will increase within the worth of meals and gas have pushed South Africa’s inflation to hit its peak since 2009, and it accelerated to 7.4% final month. The Reserve Bank has additionally elevated the repo charge to 5.5%. So the price of dwelling is actually simply getting costlier and maintaining with inflation has turn into a tougher problem for South Africans.
To sustain with inflation you want to put money into property that can develop quicker than the speed of inflation.
There are few completely different income-generating financial savings autos out there to us as South Africans, and it relies on your desire and state of affairs. But I’d identical to to break down the 2 fundamental classes of those choices.
You get a assured revenue and a voluntary revenue.
Firstly, the assured revenue possibility contains issues like conventional annuities, which give a stream of funds from an insurance coverage firm for the remainder of your life. These sorts of merchandise are particularly useful for individuals who need to make it possible for their money is protected in opposition to inflation and market volatility.
Secondly, you get voluntary investments – they usually work a bit in a different way. They don’t assure any return on your money, however as an alternative, they pay out based mostly on efficiency. So you’ll be able to select to take a excessive degree of danger with these investments after which earn a excessive degree of return or capital beneficial properties [rather] than in case you are utilizing a assured funding possibility. But there’s additionally an opportunity that you just’ll lose money due to market volatility or poor efficiency from your funding’s underlying property. So it actually relies on your wants and goal and danger profile.
But the principle focus I might say will nonetheless be to attempt to at the least sustain with inflation.
BOITUMELO NTSOKO: Coming again to the schooling theme, which is the most effective car to use to make investments for your little one’s college charges?
CHRISLEY BOTHA: Tumi, I might say {that a} tax-free funding financial savings account might be the best choice for most individuals in South Africa, and this may be opened at any financial institution or most monetary establishments. This is a superb fund as a result of it permits you to save money that may be invested with out paying taxes on curiosity, dividends, or capital beneficial properties. It additionally permits you to withdraw money from your account at any time with out having to pay penalties or fees.
However, the present contribution restrict is simply R36 000 per yr. So I might suggest beginning as quickly as doable as a result of at present, on common, the primary yr of a level in South Africa at South African universities, prices roughly R62 000. Add lodging and meals to that and you’ll be in for method over R150 000 per yr. So it’s essential to begin saving as quickly as doable.
There is another choice to take a look at they usually name that an ‘education savings vehicle’, though one of these account can have some downsides in contrast to a tax-free funding financial savings account. For instance, whereas they permit you to save money tax-free, they don’t enable you to withdraw your money with out penalties or fees if you happen to want it sooner than anticipated. So this additionally makes them much less versatile. And if your little one doesn’t go on to research at college after faculty, then all of that money would’ve been wasted because it gained’t be used for the rest.
And then it’s additionally important to have a backup plan in place to be certain that even when the sudden occurs, your family members can nonetheless get the schooling they want. Some life insurance coverage corporations provide an schooling profit, and that covers the associated fee related to the nominated little one’s tuition charges ought to a father or mother die or turn into disabled.
These tuition charges usually embrace faculty charges from a pre-primary degree all by means of to college and undergraduate {qualifications}.
BOITUMELO NTSOKO: Just going again to the entire tax-free financial savings account possibility, there’s quite a lot of debate about whether or not it is best to put the account in your title or your little one’s title. Where do you stand on that?
CHRISLEY BOTHA: It relies on the rationale for this. If you utilize this particularly for schooling functions, like we simply mentioned, I might positively suggest placing it in your little one’s title. I might additionally positively suggest opening a tax-free financial savings account for your self, as every particular person can get the good thing about this tax-free financial savings account. So the sooner you begin, the higher [the amount] you’ve. You can contribute up [to] R500 000 all through your life into this tax-free financial savings account. So my recommendation could be open it in your little one’s title, and once they attain the age of going to college or beginning with their research, that money can really be withdrawn after which paid over to the establishment.
BOITUMELO NTSOKO: And then how would you deal with this with your taxes in case you have, let’s say, a tax-fee funding in your little one’s title and yours as nicely?
CHRISLEY BOTHA: Okay. The tax-fee funding account that’s in your little one’s title would simply type a part of their taxes. So they may get the profit in their title. It gained’t type a part of your tax declaration. So you’ll have your personal tax-free financial savings account and also you’ll get the profit on your personal, and you’ll withdraw the money everytime you need to. But if it’s in your little one’s title, it will probably solely be withdrawn and paid right into a checking account in that particular little one’s title. So they’d want to have a checking account, and the funds will clearly apply to them and it’s nonetheless a part of their tax declaration.
BOITUMELO NTSOKO: Now we all know saving is tough for lots of people proper now, particularly with rising rates of interest and the excessive value of dwelling. What suggestions are you able to give us to squeeze extra out of our budgets in order that we are able to direct these further cents to our financial savings?
CHRISLEY BOTHA: Yes, Tumi, it’s fairly a troublesome time in South Africa in the meanwhile. And with every little thing rising, it’s actually troublesome to attempt to save something further. But I feel one good factor that the pandemic has taught us is the significance of getting ample financial savings. However, the money being saved in the meanwhile is just not substantial due to the excessive value of dwelling that we face.
I all the time strive to train my shoppers the easy 50-20-30 price range rule to assist them handle their funds and save sufficient. So the fundamental rule is to divide up your after-tax revenue and allocate it to spend 50% on wants, 30% on desires, and 20% on financial savings.
So financial savings is troublesome and life clearly usually throws sudden bills at us on a regular basis.
By following this 50-20-30 rule, people could have a plan on how they need to handle their after-tax revenue, and in the event that they discover that the expenditures on their desires are greater than 30%, that is the realm where they’ll discover methods to cut back these bills that can assist them direct funds to extra essential areas, reminiscent of emergency financial savings and retirement.
Life must be loved, so it’s not really useful to reside like a Spartan. But having a plan and sticking to it can enable you to cowl your bills, save for retirement – all whereas additionally doing the actions that make you content.
BOITUMELO NTSOKO: Do you discover that individuals who automate their financial savings have a greater financial savings charge than those that don’t?
CHRISLEY BOTHA: Yes, in fact, they do positively have a greater financial savings charge. I feel the sooner you begin getting right into a mindset and behavior of saving, the simpler it will get for you.
I feel everyone seems to be conscious of this quote – a Warren Buffett quote – that claims: ‘Do not save what is left after spending, but spend what is left after saving’.
So as quickly as you automate your financial savings, it’s funds that you just don’t even know you had, and it’s saved even earlier than you’ll be able to take into consideration spending it. So positively, the extra you [save], the higher you get into the behavior. And clearly, you’ll reap the advantages over the long run.
BOITUMELO NTSOKO: Thank you a lot, Chrisley. That was Chrisley Botha, who’s a licensed monetary planner at PSG Wealth.
