Plan for your financial goals
“If you fail to plan, you are planning to fail” – the wise words of Benjamin Franklin ring true even centuries on for the reason that it is an undeniable fact of life. Sitting down and planning what financial goals you want to achieve and what the time horizons for each of them are is the very first step for any financial roadmap. A goal could be an overseas holiday 5 years from now, or funding your child’s tertiary education 15 years from now. Knowing the value of the goal, how important it is to reach such a goal and the time for you to save and invest towards reaching the goal will give you the framework in which to decide in what asset classes, and ultimately in which products, to invest. The rule of thumb is that longer term goals need to be met by investing in higher risk-taking asset classes, while shorter term goals are funded by savings in low risk-taking asset classes.
Having clear goals will also help you to be more disciplined with your money, as you are focused on your financial goals, rather than satisfying short term desires through impulsive buying.
Pay off short-term debt
A discussion about financial freedom truly cannot begin if someone is still chained down by short term debt obligations. According to the National Credit Act, interest rates on credit cards can be as low as the prime lending rate, which is currently 7%, and as high as the repo rate plus 14%, meaning given the current repo rate, the upper limit for credit card interest rates is 17.5%. Any investment return that might be able to provide a return rate in excess of 17.5% will have to come with extremely high risk, meaning such a return is highly unlikely. Therefore, when you have extra savings, or have just earned a bonus, prioritise settling your short-term debt first, since the amount you are saving on not paying interest over time is guaranteed – investment returns wouldn’t be.
Take advantage of annual tax relief incentives
The wise Benjamin Franklin also famously said ‘the only certainties in life are death and taxes’, but luckily there are some incentives that can be utilised to lessen the burden of taxes.
A Tax-Free Savings Account (TFSA) is an investment vehicle introduced by the government in 2015 to encourage South Africans to increase their savings. Capital gains tax (CGT) is the tax payable on the growth of an investment, but in a TFSA, no growth will be subject to CGT, meaning that it can offer enhanced returns. The catch, however, is that every South African is only allowed to invest a maximum of R36,000 per annum and R500,000 in total in this product in their lifetime, and therefore it is important to not miss out on this opportunity. Make your annual contribution before the tax year-end in February.
Another savings incentive introduced by government in 2016 is the tax deductions from contributions made to retirement funds. These deductions allow South Africans to deduct the contributions made to a retirement product, by both them and their employer, from their taxable income resulting in a lower annul income tax liability. These tax deductions are limited to 27.5% of your taxable income, capped at R350,000 per year. Retirement funds are your pension or provident fund (to which you contribute when working for a company) or a Retirement Annuity (RA), which is a retirement product independent from your employer. By starting to utilise this deduction benefit as soon as financially possible, you can save a significant amount of taxes over your lifetime.
Review your emergency fund
If the last two years of Covid-19 restrictions have taught us anything, it is that life is uncertain and that emergencies are a fact of life. An emergency fund is a sum of money, in liquid form, that is saved to help cover unwelcome financial surprises such as unexpected home repairs, unplanned travel expenses, car problems, medical or dental emergencies or even losing your job. The rule of thumb is that an emergency fund should cover at least two months’ worth of your monthly net salary. An emergency fund is important for your overall financial strategy since it allows you to navigate through these inevitable events without having to disrupt your long-term investments by having to liquidate them. Prioritise keeping this pot filled since you will be required to dip into it regularly and keep it in line with your changing life circumstances.
We all have the power to choose whether we will react to what life throws our way, or if we are going to be proactive and avoid situations that may lead to crises. Not being intentional with finances can spill over into all other aspects of life and it is therefore important to plan and maintain your financial health by following these guidelines, as well as those that will be outlined in part two of this series.