The idea of saving for retirement, or even just saving in the current environment where every cent counts, can be daunting, but the first step is simply tracking your money to see how much is coming in and how much is going out.
Speaking at a recent Money Cents webinar on Smart Savings, Kirsten Smit, an advisory partner at Citadel, recommended that you make a Sunday habit of reviewing your finances.
https://youtu.be/voibSbS1REs?si=hOCRTAWobtnxUBX_
“Sit down with a glass of wine or tea, track your spending, and then tally it with where you want to be. Over time, as this becomes a habit you will start becoming more confident about your finances and that’s when the magic starts to happen,” she said.
Although there are several retirement-savings calculators available on various financial company websites, the numbers they spit out can be quite intimidating.
John Manyike, the head of financial education at Old Mutual, said we often underestimate the psychological barriers to saving. “Very often, people are willing to save but they may have their own historical trauma around money or their mindset needs to shift,” he pointed out.
Farzana Botha, a senior communications manager at Sanlam Risk and Savings, said like anything else in life worth achieving, saving required discipline.
“Discipline is not just a feeling, it is the alignment of all your energies towards something you really want. Just like you need to be conscious of your calories and maintain an exercise routine to achieve a certain fitness level, you need to track your spending and maintain a budget in order to achieve your savings goals,” she said.
When you decide to save, you need to commit to a goal and that automatically will give you a savings timeline. For example, saving for a fridge could be a short-term three-month goal, while saving for a holiday could be a one-year goal, saving for the deposit on a home loan could be a five-year goal and saving for your child’s education or retirement could be a 20- or 40-year goal.
Smit says when it comes to short-term goals, you want a low-risk savings vehicle like a bank savings deposit account or a money market account.
“When your savings timeline goes beyond six months, then you start looking at things like bonds, equities and property. These investments have a higher volatility, but being invested for longer means you can ride out the volatility,” she said.
Emergency savings
The first start to your savings journey should be building up emergency savings equivalent to three to six months’ of your monthly salary.
“One of the quickest ways to increase the risk of your investment strategy is not having an emergency fund because if you do have an emergency, you might be forced to sell off your investments for next to nothing because you’re looking for quick cash,” warned Manyike.
All three financial experts recommended tax-free savings accounts (TFSAs) as a great mechanism to save money. Introduced in 2015, a TFSA can refer to fixed deposits, unit trusts, retail savings bonds, linked investment products, exchange-traded funds and even endowment policies issued by long-term insurers. The main benefit of these products is that you are not taxed on any growth.
However, there are contribution limits. The maximum you can put into a TFSA is R36,000 a year, capped at R500,000 over your lifetime. The capped amounts only refer to your capital contributions and do not include the growth on your investments.
If you do exceed the limits by, for example, contributing R40,000 to a TFSA in one year, you will pay 40% tax on the excess amount — which means you need to keep track. This is simple if you only have one TFSA product or you have more than one but with a single financial services company. If you have more than one TFSA with more than one financial services company, the onus is on you to ensure you do not exceed the limits.
“A retirement annuity is also designed to be tax-efficient, particularly for those in a higher tax bracket. So, there are different products that are tax-efficient in different ways. If you have a financial adviser helping you, you could potentially have multiple products solving the tax problem in your financial plan,” Botha recommended.
You can now claim a tax deduction on your retirement savings, regardless of whether you are contributing to a provident fund, pension fund or retirement annuity. However, the deduction is limited to 27.5% of your taxable income, up to a maximum of R350,000 a year.
In short, saving is a journey that starts with a single step and is reinforced by repetition and the formation of a habit that becomes a lifelong practice. DM