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.
This is particularly true of the 20 to 40 age group, for whom retirement is a vague and distant reality, says Geraldine Macpherson, legal marketing specialist at Liberty.
“People in this age bracket have different goals to those in their 50s and 60s. They are more interested in advancing their careers, building a family or taking an overseas holiday.”
The days of retiring from the workplace are likely coming to an end for many. Whether by choice or of necessity, most people will continue working past the age of 65.
How then, does one convince those aged between 20 and 40 to start investing for the future?
“Fortunately, people in this age bracket are better informed about financial choices than the generation before them,” says Macpherson. “The younger generation seems more open to budgeting and financial education than their parents. That’s due in part to a newer generation of financial advisors who see themselves more as educators and advisers than sellers of products.
“I am less interested in promoting savings products than in cultivating a culture of saving.”
The good news is that saving, once commenced, 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, and 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 completely tax-free.
Many people in debt falsely believe they should not save until the debt is paid off. In fact, they should be doing both – paying down debt and saving, says Macpherson.
“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.”
A sad reality of the 20 to 40 age group is that many are emigrating, and it’s not just whites who see better opportunities abroad. Many young black professionals are leaving the country for reasons of career advancement and overseas experience.
After 2020 all South African residents will be taxed on their foreign employment income in excess of R1 million a year. A way of avoiding this tax consequence is to ‘financially emigrate’. A word of warning though – financial emigration is treated as a disposal for capital gains tax purposes.
Those leaving the country are then left with a choice of whether to emigrate or simply work abroad. Both decisions have tax consequences, and seeking tax advice is advisable. There are double taxation agreements between SA and other countries that determine which country has taxing rights over the income earned. It is important for people to take into consideration whether the country they are working in has a double taxation agreement with SA in order to ensure that the income they earn is not taxed twice.
How to grow your wealth: see savings and investing as an expense
One of the surest ways to grow wealthy is to treat your savings and investments as an expense, says Macpherson.
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.”
Macpherson acknowledges that this can make some people feel uncomfortable, since it involves foregoing spending now for some future benefit.
“One thing I find people are not doing nearly enough is budgeting – figuring out how to allocate what income there is,” she says. “This is often very painful for people because it exposes where money is being wasted. But 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 you need to take a closer look at the fine print on these products. The advantage of RAs is their tax-free growth in the fund, but you want to make sure you choose a product that will not 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 due to a weakening economy. This is all the more reason to get serious about investing, and to set a goal of having sufficient funds to survive 12 months without any income, and then build this up to 24 and then 36 months.
“The real challenge for the savings and investment industry in SA is to get people to start thinking about investing or saving,” says Macpherson. “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, and they should plan accordingly.”
She adds that companies are increasingly moving to remunerating employees based on total cost to company, which creates incentives to dissave (‘negative saving’, or spending more than they earn). Employees are paid larger monthly take-home salaries, and are expected to cover their own pension, medical aid and tax obligations.
“The problem is you get used to more take-home pay and that makes it harder to start investing,” she says.
There are a thousand reasons to give to delay investing. Which makes it all the more virtuous and rewarding when someone actually starts setting aside money for the future.
Brought to you by Liberty.
This article does not constitute tax, legal, financial, regulatory, accounting, technical or other advice. The material has been created for information purpose only and does not contain any personal recommendations. While every care has been taken in preparing this material, no member of Liberty gives any representation, warranty or undertaking and accepts no responsibility or liability as to the accuracy, or completeness, of the information presented. The writer although an appointed representative of Liberty Group Limited, is not allowed to sell financial products. Please consult your financial adviser should you require advice of a financial nature and/or intermediary services. Liberty Group Limited is a Registered Long-Term Insurer and an Authorised Financial Services Provider (FAIS no 2409).