Following the highly anticipated National Budget Speech, it is important that those entering the job market for the first time pay close attention to changes that affect how one starts to save. According to Sue McLennan, Financial Planner at BDO South Africa, “First time earners need to remember to ‘pay themselves first’ before committing to any other expenses right from the first salary received. Start good habits by determining your investment objectives, deciding on the level of risk you are willing to take, and choosing the type of asset you wish to buy and the strategy to achieve your objectives. Save regular amounts and stick to your investment strategy.”
McLennan outlines her four step process for those starting to save:
1. Open a money market account
The first step is to save three months’ overheads into a money market account, which is separate from the account you use on a day-to-day basis. “This investment will earn interest that is tax free up to R23 800 (for a natural person under 65) in the 2017 tax year,” says McLennan. “At least you will earn a better rate than in your current or savings account and will be less tempted to use the money for non-essentials or luxuries such as alcohol and cigarettes or other products heavily taxed with ‘sin taxes’.” This investment would be for unforeseen expenses such as motor vehicle repairs or medical expenses, and is viewed as a short-term investment (up to one year).One needs to keep in mind that interest rates vary between banks and amounts invested, and that they also fluctuate on a daily basis dependant on the type of account.
2. Contribute towards a retirement annuity investment
The second step would be to consider contributing towards a retirement annuity investment, which will give tax-free growth in the portfolio. “You can now contribute up to 27.5% of your taxable income per annum (up from 15%). This is a long-term investment as you can only access a portion of the capital at age 55. However, capital can be paid out beforehand for disability, formal emigration or death.” She continues, “Upon ones death, the capital is not lost. It will either be left to a beneficiary or to your estate, and a choice will be taken either to have the full amount paid out (less tax liability) or to purchase an income (Living Annuity) with the proceeds.”
3. Short-term investment
According to McLennan, one should consider investing in the shorter term for a specific goal, such as the deposit for a flat into unit trusts (3-5 year investment) or an endowment investment (5 year investment). “Unit trusts are used for investors who would like access to the stock market but don’t have the required capital (approximately R1m) for a diversified share portfolio.” She advises people to “select a unit trust fund that will give exposure to different asset classes such as equities, bonds, cash, property and offshore investments. This will help you to spread your risk.”
4. Tax-free savings accounts
Currently, you are allowed to invest a maximum of R30 000 per annum into a tax-free savings investment, with a maximum of R500 000 over a lifetime. The underlying investment can be placed into unit trusts and is accessible, but subject to various restrictions. The main benefit is no tax within the investment. The additional growth from tax-free portfolios (Retirement Annuity and tax-free savings investments) will also enhance a portfolio when it is needed most – I.e. at retirement. “Investors saving between 15 and 20% of their income early in their careers will benefit from compound growth over many years, which late savers loose. Investors who save even a small amount each month from the first salary will at least start the discipline of building up capital,” states McLennan. “However, if you haven’t already started, today is better than tomorrow!” she concludes.
By Sue McLennan, Financial Planner at BDO South Africa