How to deal with VAT increase

The effect of the 1% extra may vary between households and chip away at your savings.

Even if you are one of the lucky ones who can just brush off last week’s VAT increase as inconsequential, a lack of care might result in a little pain growing into a much bigger one over the long term.

It is better to feel a slight pinch as you readjust your budget than merely kicking the can down the road and effectively magnifying the effect significantly.

What I’m referring to is the power of compounding, which can be a great force for good … or bad. Which way it goes depends on whether you progressively add a little more to your savings and leave it to grow over the years and decades, or if you allow small cost of living increases, such as the extra percent of VAT, to lower your savings rate, thereby chipping away at your nest egg.

Estimates of the effect of the VAT increase on household budgets vary from a couple of hundred rand a month to many thousands, depending on lifestyles, but it seems certain that all South African households will have at least a couple of hundred rand less to spend from this month.

People who reduce their savings by even R100 or R200 per month are robbing themselves of the huge benefit of compounded growth. For example, investing R200 a month over 30 years in the 10X high equity portfolio, ie making a total contribution of R72 000, would result in savings of about R205 000. There are many reasons even people with the best financial intentions come up short. One example is letting the amount you save fall behind inflation or your earnings growth.

Not adjusting your savings in line with inflation has much the same effect as reducing the amount you save. To maintain a certain standard of living in retirement you need to keep your savings in line with your earnings.

You are storing up trouble for yourself in later years if you let your retirement savings become a smaller and smaller percentage of your earnings. As your salary grows with inflation, or hopefully even ahead of it, so should your savings. It might be easy to justify not keeping your savings in line with your earnings when the cost of living goes up, particularly in a sudden spurt such as a VAT increase. But it is only you who will suffer and possibly your children, who will have to take care of you once you can no longer work.

Fees are an important part of the equation. It amazes me that people will worry about the effect of the VAT increase on their household budget yet happily throw away a lot more in fees.

There are certainly better ways to absorb the VAT increase than by reducing your savings. Start car-pooling, eat meat less often (vegetables are all zero-rated), or find other little luxuries …

Emma Heap is the head of sales at 10X Investments