Wealth creation focus
PAY YOURSELF FIRST: BEST WAY IS TO TREAT INVESTMENTS AS EXPENSES
Don’t delay saving until debt is paid off. Moneyweb
In a world of easy debt and instant gratification, most South Africans can barely make it through the month. Over their heads in debt, the last thing on their minds is putting away savings for the future.
The good news is that saving, once started, quickly develops a life of its own.
People start to see the benefits of compound growth and then look for ways to grow their savings. This develops in them an interest in different products that will help them achieve their savings goals.
One of the best vehicles for wealth creation is tax-free savings accounts, which allow individuals to put away R33 000 a year, and get growth on their savings taxfree.
Many people in debt falsely believe they shouldn’t save until the debt is paid off. In fact, they should be doing both, says Geraldine Macpherson, legal marketing specialist at Liberty.
“If all you are doing is paying down debt, you are delaying the start of saving by several years, and that is costly in the long run in terms of growth foregone.”
How to grow wealth
This is one of the key lessons from those who have achieved wealth: “If you are going to start investing you have to pay yourself first, and the best way to do this is to treat your investment as an expense.
“In other words, you pay say 10% or 15% of your monthly income into your savings account before you pay your bond or vehicle instalment.
“One thing I find people are not doing nearly enough is budgeting – figuring out how to allocate what income there is,” says Macpherson. “… I find that when people start doing this, they also start developing an investment plan and sticking to it.”
Only later are they likely to become interested in investment products and their various tax benefits. Most people tend to default to retirement annuities (RAs), but the fine print needs a closer look.
The advantage of RAs is their tax-free growth in the fund, but ensure you choose a product that won’t penalise you if you don’t pay your instalments for a year. It helps to spread your investment over a variety of products, from tax-free savings accounts to RAs, endowments and unit trusts.
Macpherson notes an alarming increase in the number of people being retrenched – all the more reason to get serious about investing, and to set a goal of having sufficient funds to survive a year without income, and then build this up to two and three years.
“The real challenge for the savings and investment industry in South Africa is to get people to start thinking about investing or saving,“she says. “For most people, there’s always something more urgent – until retrenchment or some financial emergency arrives. But by then it is too late.
“I think people need to recognise that job security is not what it was a generation ago.”
Note that this article does not constitute tax, legal, financial, regulatory, accounting, technical or other advice.