GROW WEALTH WITH R500 A MONTH
Through the Show Your Money Who’s Boss campaign, we have demonstrated how to find money hidden in your monthly expenses by budgeting, but how do you start using that money to create real wealth?
Fortunately, in March last year, tax-free savings and investment accounts were introduced. No tax is paid on your investment – not on interest, dividends or capital gains. Depending on your tax rate, over a 20-year period you save about 36% in tax.
For example, if you saved R2 500 per month (the maximum allowed in a tax-free savings account) for 20 years with a growth rate of 10% a year, it would be worth around R1.9 million. However, because of taxes, if you fall into the top tax bracket, you would only receive a final payment of R1.4 million. By investing in a taxfree investment account, you would in effect have saved R500 000 in tax.
A relatively small debit order deduction can, over time, become a significant amount of money. For example, a monthly debit order of just R500 (less than the cost of a meal out with the family) paid over 10 years will be worth more than R100 000 if the investment grows at just 10% a year, thanks to the power of compound growth.
Investing via debit order is also a powerful risk management tool. With a lump sum investment in units or shares, the timing of entering the market has a significant effect on the investment return. Our emotions increase the chance that we will invest at the wrong time. We tend to buy high and sell low as we get caught up in the emotions of investing. By investing via a monthly debit order, we are protected from the risk of bad timing because we buy both when the market is up and when it is down. This kind of “phased-in” investing is known as rand-cost averaging, because it helps to average out the return on your investment. You buy more units or shares when prices are low, and fewer units when prices are high, which reduces the overall price you pay for the total number of units in your account.
This week, 22seven added to its range of low-cost, tax-free savings accounts, allowing investors to invest offshore for as little as R350 a month. 22seven currently offers two low-cost investment options that can be used for tax-free savings, namely the Old Mutual Core Diversified Fund and the Old Mutual Top 40 Fund. There is no upfront fee and an annual cost of only 0.68% a year.
A new offering, the Old Mutual Global FTSE RAFI All World Index Feeder Fund, allows you to invest 100% of your funds into a pure offshore fund with exposure to 3 000 international companies for the same annual cost of 0.68% a year. The fund is available as a regular investment and as a tax-free savings account.
Show your money who’s boss and open that tax-free account today – just make sure the debit order goes off before you start spending the money.
Do you think a Tax-Free Savings account will help you save more? Why?
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