Saving is an essential concept that spans the centuries. The Agrarian revolution of the 18th and early 19th centuries come to mind, where farmers used to save surplus produce for future use. In modern times there are industrialised saving methods via several investment products.
The ideology of savings has been engraved upon us from the days when we use to deposit every coin given to us into a little piggy bank, eventually progressing to having a savings account at Postbank.
Saving money can be loosely defined as delaying current consumption for future use, by purchasing savings products whose benefits one will enjoy tomorrow. The growth experienced in your savings is derived from the interest earned over time.
Reasons for savings are varied and largely driven by individualistic needs and preferences. The most generic reasons for savings are as follows:
- Unforeseen life events;
- Short-term goals;
- Buying an asset such as a house or a car;
- University fees;
- Financial freedom; and
It goes without saying that savings and investments are inseparable twins that go hand in hand.
Depending on one’s underlying reasons, below is a list of the most common investment products (though not exhaustive) one can use to save:
Share investment is owning a proportionate portion in a company, where the shareholder earns a return through share price appreciation and dividend payment. The investor, however, is subjected to capital gains tax (CGT). Shares are commonly traded on stock exchanges such as the Johannesburg Stock Exchange, Dow Jones, New York Stock Exchange etc.
Fixed income (bonds)
These are debt instruments that pay interest or coupon payments at defined intervals while the principal amount remains invested until maturity. Maturity of these debt instruments varies from 90 days to 30 years. They can be traded over the counter via established investment banks and exchanges.
This is a form of investment where your savings can earn considerable interest. However, this asset class has a very long investment horizon relative to other investment asset classes. One can invest in this asset class either directly or indirectly through real estate investments trusts (Reits).
A unit trust is a flexible investment product that gives one access to financial markets at an affordable rate, relative to buying shares directly at the stock exchange. Each unit is divided into equal portions called units. However, just like shares, they attract CGT upon withdrawal. Generally, the minimum investment could be a lump sum of R20 000 or a monthly debit order of R500, depending on the investment platform used.
Derivatives are financial contracts that largely derive their value from an underlying asset. Derivatives are mostly used in commodities such as oil, gold etc. They are sold over the counter or through exchanges.
These are fixed-term investment products with a minimum investment term of five years or more. Endowments invest largely in unit trusts. What makes this investment avenue unique is that the income tax and capital gains are taxed within the endowment structure and not in the hands of the owner. This is at the insurer’s effective tax rate of 30%.
Offshore investment is another form of saving where you can keep your savings in a jurisdiction other than South Africa. In the current economic environment, offshore investment has proven to be popular with investors.
Narrowing down to retirement products, one can invest in the following retirement savings options:
As enshrined in the Pension Funds Act of 1956, a retirement annuity is a tax-effective investment vehicle modelled for the following investors:
- Self-employed individuals who are either in the formal or informal sectors of our economy;
- Individuals who have no access to a workplace pension or provident fund;
- Individuals who want to supplement their pension or provident funds; and
- Individuals who earn sizeable amounts of non-pension income, such as rental income and interest.
One can only access one-third of his/her investment at the age of 55. The remainder needs to be transferred to an income-generating annuity, such as fixed or living annuity. A retirement annuity can be transferred to another retirement fund.
A living annuity is a unit trust-based investment platform where an individual’s ‘pension’ money is invested into a diversified unit trust portfolio and a taxable income is drawn from the portfolio. According to the Pension Fund Act, the income level allowed is set at between 2.5% and 17.5% of the capital balance per annum. The income is paid annually, quarterly or monthly, depending on one’s requirements.
With a fixed annuity one gives money to an insurance company, which in turn guarantees to pay a monthly taxable income until death. There is minimal risk in following this route.
The downside, however, is that income payments cease upon death and the capital is retained by the insurance company. The income is a fixed amount and can be structured to keep up with inflation.
These are just some of the few mechanisms which one could use to start saving for tomorrow. Whatever your reasons are, whatever your investment horizon is, whether short term or long term, every rand earned is worth saving today for the rainy days ahead.
No matter how young you are, where you come from, or how small your savings could be, let the principle of saving be an embedded lifestyle.
As the proverb by John Heywood goes: “Make hay while the sun shines”.