Money

As we head into bonus time, these tips will en­sure you use any wind­falls you re­ceive re­spon­si­bly

Destiny - - Contents - BY Na­z­ley Omar

Acash wind­fall, whether it’s ex­pected or not, can have a huge im­pact on your fi­nan­cial se­cu­rity. It’s wise to plan how you’re go­ing to spend the lump sum and con­sider your short- and long-term fi­nan­cial goals. Think about what you’re hop­ing to achieve fi­nan­cially in the next six months or year. How can this ex­tra money help you ac­com­plish those goals?

SET­TLE YOUR DEBTS

Be­fore spend­ing any of your wind­fall, it’s es­sen­tial to make a lump sum pay­ment to re­duce your in­ter­est. First set­tle the debts with the high­est in­ter­est rates, as they’re more ex­pen­sive to ser­vice over the re­pay­ment pe­riod. These in­clude credit card debts, mi­cro-loans and over­drafts. Then tackle lower in­ter­est-bear­ing debts, which are usu­ally linked to high-value as­sets such as cars and houses. Pay­ing off your debts will also free up more dis­pos­able in­come in the long term, mak­ing monthly money man­age­ment eas­ier. – Thando Sit­hole, fi­nan­cial plan­ner

IN­VEST

Hav­ing paid off your debts, you’re in a great po­si­tion to save what’s left of your wind­fall. Con­sult a fi­nan­cial ad­vi­sor to help you to de­velop an in­vest­ment plan that could in­clude var­i­ous short- or long-term in­vest­ment ve­hi­cles.

One good op­tion is an en­dow­ment plan, which pro­vides a low-cost op­por­tu­nity to save for medi­umterm goals. You can ac­cess your cap­i­tal af­ter five years of con­tribut­ing to your fund. Funds saved within an en­dow­ment are taxed at 30%. So, if your per­sonal tax rate is above 30%, you ben­e­fit from the dif­fer­ence in your per­sonal tax rate and that of the en­dow­ment, which is 30%. Be aware that if your per­sonal in­come tax rate is lower than 30%, you’ll pay higher tax than you need to on your en­dow­ment pol­icy, so this may not be the best sav­ings ve­hi­cle for you.

Flex­i­ble in­vest­ment plans are also a good choice be­cause they of­fer im­me­di­ate ac­cess to funds, which can be in­vested in a va­ri­ety of port­fo­lios. In­vestors also en­joy the ad­van­tage of an­nual, lo­cal in­ter­est tax ex­emp­tion of up to R23 800. Bear in mind that this in­vest­ment ve­hi­cle gen­er­ally has higher in­vest­ment fees. – Claire van Wyk, Fi­nan­cial Ad­vi­sor: Dis­cov­ery

SAVE FOR RE­TIRE­MENT

Ac­cord­ing to a study by the World Bank, only 6% of South Africans can af­ford to re­tire com­fort­ably. This is be­cause many be­gin sav­ing for re­tire­ment too late or aren’t sav­ing an ad­e­quate per­cent­age of their in­come. The rule of thumb is that you’ll need about 75% of your in­come to re­tire com­fort­ably, which means you need to save around 15% of your life­time work­ing salary. Fac­tors such as med­i­cal ex­penses and in­fla­tion will af­fect your cost of liv­ing dur­ing your re­tire­ment years, so it’s im­por­tant to start plan­ning and sav­ing as soon as pos­si­ble.

One of the ben­e­fits of a re­tire­ment an­nu­ity (RA) is its tax ben­e­fit. Leg­is­la­tion al­lows for 27,5% of your in­come to be in­vested into a RA, which is capped at R350 000 per an­num. This al­lows for tax-free growth, as there’s no in­come or cap­i­tal gains tax payable while your funds are in­vested. Upon re­tire­ment, you’re also given tax re­lief up to R500 000 on the lump sum with­drawal. – Gabrielle Pa­tel, pri­vate wealth banker

SAVE FOR YOUR CHIL­DREN’S ED­U­CA­TION

Ed­u­ca­tion in SA car­ries a big price tag and a study by Old Mu­tual shows that it’s in­creas­ing. This, cou­pled with the ris­ing cost of liv­ing, means it’s cru­cial for par­ents to use cash wind­falls to save for their chil­dren’s ed­u­ca­tion fees.

One way of do­ing so is by pay­ing for a full year’s tu­ition at the start of the aca­demic year, since most schools of­fer a 10-15% dis­count to those able to do this. You could also save the money in a tax-free sav­ings ac­count, which al­lows par­ents to save a max­i­mum of R2 750 per month, not ex­ceed­ing R33 000 per an­num.

For short-term sav­ings, a good in­ter­est-bear­ing ac­count will do. Shop around for the bank which of­fers the best in­ter­est rate. For a long-term ed­u­ca­tion fund, par­ents can also in­vest in unit trusts and ex­change-traded funds, con­tribut­ing any­thing from R500 per month up­wards, as well as any lump sum amount. – Ma­palo Makhu, founder of Per­sonal Fi­nance Coach and Woman&Fi­nance

TREAT YOUR­SELF

Day-to-day money man­age­ment can be stress­ful, what with liv­ing ex­penses, bonds, car re­pay­ments and school fees to pay. To per­form at your best, it’s im­por­tant to treat your­self from time to time. So once you’ve taken fi­nan­cial care of the im­por­tant things, put some money aside for en­joy­ment.

Have you been mean­ing to ser­vice your car, make ren­o­va­tions to your home or buy fur­ni­ture? Use some of your bonus to pay for these things. Al­ter­na­tively, make a list of items or ex­pe­ri­ences you’re long­ing for and save to­wards them. You de­serve a bit of fun! – Ler­ato Msomi, fi­nan­cial ad­vi­sor

First set­tle the debts with the high­est in­ter­est rates, as they’re more ex­pen­sive to ser­vice over the re­pay­ment pe­riod.

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