Savings month: Here’s where to put your money to work

BOITUMELO NTSOKO: Welcome to the Money Savvy podcast, I’m Boitumelo Ntsoko. July is National Savings Month and, as we close it off, I thought we’d look at the different savings vehicles available to South Africans for their various goals. Joining us on this episode is Chrisley Botha, who is a certified financial planner at PSG Wealth. Welcome, Chrisley.

CHRISLEY BOTHA: Thank you for reaching out to me. I know it can be confusing to figure out which savings vehicle is best for all the different goals, and I really hope to provide some insight to the listeners.

BOITUMELO NTSOKO: We look forward to hearing your insights. So, Chrisley, let’s say I have a six-month saving period where, for example, I want to save for a holiday or back-to-school expenses in January, which vehicle would be best suited for my goal?

CHRISLEY BOTHA: Tumi, the good news is that there are a few different options available to you. The first thing I recommend doing is taking a look at how much money you need to save and how long you have until your goal is due.

Then think about what kind of vehicle would be best for what type of saving period – for example, long term versus short term and the different goals. Once you’ve determined that, think about what kind of features are important to you and choose the investment vehicle that has those features.

So in this case, I would say you are looking at a short-term investment, and I would recommend a voluntary investment or savings account – which are both low-risk ways to stash your cash while it grows.

I would also recommend checking out a few different providers and seeing which one has the best rates for savings accounts right now. If one of them offers a higher interest rate than the other, then by all means choose that. You’ll be able to save more money while still earning interest on those funds.

Just also remember to select an option where the funds are easily available and not locked in. This is especially important if you want to use your savings account as an emergency fund. You want to be able to withdraw the money at any time without having to pay penalties or fees.

BOITUMELO NTSOKO: Would the same vehicles be appropriate if you need the money in two or three years’ time for a deposit on a house or a car?

CHRISLEY BOTHA: If you want to save money for a longer-term goal, such as buying a house or a car, I would consider investing in bonds or other fixed-income securities rather than a money-market account that just earns interest. These types of investments typically have a low-risk profile and provide steady returns over time. Each investment horizon comes with its own risk profile, and it’s important to understand what that means. For example, if you invest in a bond fund, you can expect to earn higher returns than with a money-market account or savings account, but you may experience slightly more volatility.

BOITUMELO NTSOKO: And if I’m planning on having an emergency fund, you mentioned earlier that it needs to be easily accessible. So which savings tool would be appropriate for this?

CHRISLEY BOTHA: Okay. So while the size of your investment fund will obviously depend on your lifestyle, monthly expenses, income, dependants, all that type of stuff, the rule of thumb is to put away at least three to six months’ worth of expenses. So this will also be seen as a short-term investment.

Usually, a savings account that is linked to your personal bank account is a good place for an emergency fund because the funds can be easily transferred between accounts and can be accessed anytime.

If you’re looking to still earn some growth on these funds, then you can also consider investing them in a money-market fund or even a higher-interest savings account.

BOITUMELO NTSOKO: I know some people prefer putting their extra funds into their access bond. Would you recommend this?

CHRISLEY BOTHA: Tumi, I would assess what rate you are currently paying on your access bond. So it’s definitely something to consider. But I would rather look at what you can get in a savings vehicle versus what your interest is that you are paying in your access bond – and do that calculation before making a decision.

BOITUMELO NTSOKO: And are there any income-generating savings vehicles available to South Africans?

CHRISLEY BOTHA: Well, Tumi, continued increases in the price of food and fuel have pushed South Africa’s inflation to hit its peak since 2009, and it accelerated to 7.4% last month. The Reserve Bank has also increased the repo rate to 5.5%. So the cost of living is really just getting more expensive and keeping up with inflation has become a more difficult challenge for South Africans.

To keep up with inflation you need to invest in assets that will grow faster than the rate of inflation.

There are few different income-generating savings vehicles available to us as South Africans, and it depends on your preference and situation. But I’d just like to break down the two main categories of these options.

You get a guaranteed income and a voluntary income.

Firstly, the guaranteed income option includes things like traditional annuities, which provide a stream of payments from an insurance company for the rest of your life. These kinds of products are especially beneficial for people who want to make sure that their money is protected against inflation and market volatility.

Secondly, you get voluntary investments – and they work a bit differently. They don’t guarantee any return on your money, but instead, they pay out based on performance. So you can choose to take a high level of risk with these investments and then earn a high level of return or capital gains [rather] than if you are using a guaranteed investment option. But there’s also a chance that you’ll lose money because of market volatility or poor performance from your investment’s underlying assets. So it really depends on your needs and objective and risk profile.

But the main focus I would say will still be to try and at least keep up with inflation.

BOITUMELO NTSOKO: Coming back to the education theme, which is the best vehicle to use to invest for your child’s university fees?

CHRISLEY BOTHA: Tumi, I would say that a tax-free investment savings account is probably the best option for most people in South Africa, and this can be opened at any bank or most financial institutions. This is a wonderful fund because it allows you to save money that can be invested without paying taxes on interest, dividends, or capital gains. It also allows you to withdraw money from your account at any time without having to pay penalties or charges.

However, the current contribution limit is only R36 000 per year. So I would recommend starting as soon as possible because currently, on average, the first year of a degree in South Africa at South African universities, costs approximately R62 000. Add accommodation and food to that and you can be in for way over R150 000 per year. So it is crucial to start saving as soon as possible.

There is another option to look at and they call that an ‘education savings vehicle’, although this type of account can have some downsides compared to a tax-free investment savings account. For example, while they allow you to save money tax-free, they do not allow you to withdraw your money without penalties or charges if you need it earlier than expected. So this also makes them less flexible. And if your child does not go on to study at university after school, then all of that money would’ve been wasted since it won’t be used for anything else.

And then it’s also essential to have a backup plan in place to ensure that even when the unexpected happens, your loved ones can still get the education they need. Some life insurance companies offer an education benefit, and that covers the cost associated with the nominated child’s tuition fees should a parent die or become disabled.

These tuition fees normally include school fees from a pre-primary level all through to university and undergraduate qualifications.

BOITUMELO NTSOKO: Just going back to the whole tax-free savings account option, there’s a lot of debate about whether you should put the account in your name or your child’s name. Where do you stand on that?

CHRISLEY BOTHA: It depends on the reason for this. If you use this specifically for education purposes, like we just discussed, I would definitely recommend putting it in your child’s name. I would also definitely recommend opening a tax-free savings account for yourself, as each individual can get the benefit of this tax-free savings account. So the earlier you start, the better [the amount] you have. You can contribute up [to] R500 000 throughout your life into this tax-free savings account. So my advice would be open it in your child’s name, and when they reach the age of going to university or starting with their studies, that money can actually be withdrawn and then paid over to the institution.

BOITUMELO NTSOKO: And then how would you handle this with your taxes if you have, let’s say, a tax-fee investment in your child’s name and yours as well?

CHRISLEY BOTHA: Okay. The tax-fee investment account that’s in your child’s name would just form part of their taxes. So they will get the benefit in their name. It won’t form part of your tax declaration. So you’ll have your own tax-free savings account and you’ll get the benefit on your own, and you can withdraw the money whenever you want to. But if it’s in your child’s name, it can only be withdrawn and paid into a bank account in that specific child’s name. So they’d need to have a bank account, and the funds will obviously apply to them and it’s still part of their tax declaration.

BOITUMELO NTSOKO: Now we know saving is hard for a lot of people right now, especially with rising interest rates and the high cost of living. What tips can you give us to squeeze more out of our budgets so that we can direct those extra cents to our savings?

CHRISLEY BOTHA: Yes, Tumi, it’s quite a tough time in South Africa at the moment. And with everything rising, it’s really difficult to try and save anything extra. But I think one good thing that the pandemic has taught us is the importance of having adequate savings. However, the money being saved at the moment is not substantial due to the high cost of living that we are facing.

I always try to teach my clients the simple 50-20-30 budget rule to help them manage their finances and save enough. So the basic rule is to divide up your after-tax income and allocate it to spend 50% on needs, 30% on wants, and 20% on savings.

So savings is difficult and life obviously often throws unexpected expenses at us all the time.

By following this 50-20-30 rule, individuals will have a plan on how they should manage their after-tax income, and if they find that the expenditures on their wants are more than 30%, this is the area where they can find ways to reduce those expenses that will help them direct funds to more important areas, such as emergency savings and retirement.

Life should be enjoyed, so it’s not recommended to live like a Spartan. But having a plan and sticking to it will allow you to cover your expenses, save for retirement – all while also doing the activities that make you happy.

BOITUMELO NTSOKO: Do you find that people who automate their savings have a better savings rate than those who don’t?

CHRISLEY BOTHA: Yes, of course, they do definitely have a better savings rate. I think the earlier you start getting into a mindset and habit of saving, the easier it gets for you.

I think everyone is aware of this quote – a Warren Buffett quote – that says: ‘Do not save what is left after spending, but spend what is left after saving’.

So as soon as you automate your savings, it’s funds that you don’t even know you had, and it’s saved even before you can think about spending it. So definitely, the more you [save], the better you get into the habit. And obviously, you’ll reap the benefits over the longer term.

BOITUMELO NTSOKO: Thank you so much, Chrisley. That was Chrisley Botha, who is a certified financial planner at PSG Wealth.

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