While accepting that averages are fraught with shortcomings, the finding that the average salary in the formal sector in South Africa has increased by R727 per month – from R22 395 in March 2020 to R23 122 in 2021 – is nevertheless interesting.
The figure comes from the latest Quarterly Employment Statistics survey recently published by Statistics SA.
Thousands of people would be very happy with a salary of R23 000 per month, while many are probably just as happy that they don’t earn only R23 000 per month – illustrating the bane of averaging income from diverse professions in different industries.
In addition, the increase in the average salary is probably more the result of the decline of 552 000 jobs in the formal economy over the past year than a real salary increase.
However, the R23 000 is the statistical average of 6.64 million people employed in the formal non-agricultural sector, raising question about the average lifestyle in SA.
Paying tax is the first responsibility of whoever is lucky enough to still have a job.
Sidney Fletcher, senior tax consultant at Tax Consulting SA, says an individual under the age of 60 will have to pay R3 258 tax on R23 122 per month in the current tax year, leaving a net salary of just less that R20 000 per month.
“If a person’s total salary for a year is less than R500 000 from a single source without any allowance, it is subject to PAYE [pay-as-you-earn tax] and they do not have to submit a tax return.
“However, I would always advise taxpayers who were employed for a part of the year and/or made contributions to a retirement fund and medical aid that did not form part of employer’s payroll to submit a tax return,” says Fletcher.
He says employees can reduce their tax liabilities.
“The most common and risk-free method of reducing tax is to contribute to a retirement fund. Retirement fund contributions reduce your taxable income and your tax liability. Individuals who are employed and whose income is subject to PAYE will get the benefit monthly, while also having the benefit of saving for their retirement,” says Fletcher.
Contributing R1 500 to a retirement fund will reduce the tax liability by R385 per month – from R3 258 to R2 873 – but reduces the available monthly income to R18 746.
Value of income
Just below R19 000 per month after tax and a long term savings plan is still a good income for an individual, as well as for a family of two parents and two children. (Stats SA research shows that the average family has 2.6 children.)
Sebastien Alexanderson, CEO of National Debt Advisors, points out that Stats SA also found that about half of SA families are considered poor, while about 30% are considered working to middle class. He says a lot of people earn less than R8 000 per month.
“The value of your income is dependent on your expenses. The person earning R12 000 per month with no debt and limited, manageable expenses might be in the position to afford some luxury items, as well as have some money left to save each month.
“However, the person earning R25 000 per month may have huge expenses and numerous debts to service, leaving them open to not having enough money for everyday living expenses and much fewer savings.
“In our experience, it isn’t about how much you earn – but rather how your earnings relate to your everyday living expenses and your debt repayments,” says Alexanderson.
He says National Debt Advisors found that affluent households were harshly affected by Covid-19 in the past year. “If you were earning R60 000 per month with monthly living expenses and debt repayments of R55 000 per month, and your income dropped to R40 000 per month, then you got into trouble.
“It isn’t [simply] a matter of income. How much you earn is only important in terms of how much you spend,” he says, adding that if a person’s expenditure is consistently more than their income for months at a time, then they should consider professional advice.
Alexanderson says that too often people deny the reality of their situation and leave it until it’s too late to find any viable solutions.
Pierre Muller, advisory partner at Citadel, agrees that too much debt and a lack of proper financial planning is at the core of people’s money worries. He notes that people often spend too much money and make too much debt.
A typical example is an expensive new car. “If one goes into debt to make a purchase, let’s assume R500 000 at 18% interest, payable over five years, your instalment is R13 200 per month.
“After five years, you’ve paid R300 000 in interest alone. Hence you paid a total of R800 000 for something that might only be worth R200 000 after five years.
“As a depreciating asset, a new car loses approximately 20% value in the first year and 15% per year thereafter.
“This is the epitome of short-term pleasure versus long-term pain,” says Muller.
“If one spends too much now and too little on the important financial elements, when calamity strikes in life there will not be enough reserves to fall back on. This often leads one into debt and starts or continues a vicious financial cycle.”
He says it is better to save up until you can at least put down a significant deposit to decrease the loan term. Suddenly, you earn interest on your savings instead of paying interest on a loan.
Muller stresses the importance of proper financial planning to secure a better financial future.
The first step is to acknowledge and take stock of your current financial status. “If you do not know where you are, you cannot navigate your way forward.
“Whether you are in debt or want to build your financial future, the best time to face the reality of your situation is today and any situation can be improved upon with a clear path and time,” says Muller.
He gives a few pointers:
- Determine your financial goals, and be realistic.
- Compile a list of your assets and liabilities, including any current investments and policies. Include details of the income for both you and your spouse.
- Include your dreams or aspirations, such as owning a holiday home or buying a vintage car.
- Consider the tax implications, if any. The advice of a financial planner cannot be stressed enough when it comes to the complex world of tax.
- Be aware of the effects of inflation on investment values, particularly when planning for retirement.
- Beware of the ‘Yolo’ (You Only Live Once) mindset. It also encourages younger investors to take highly concentrated risks.
- Use a professional financial advisor to prepare a detailed analysis for you and always establish what the costs will be upfront. This advisor should be your financial coach to help you stay motivated, to persevere and reach your financial goals.
- Beware of financial scams.
- Get your partner or spouse involved.
“Creating a personal financial plan starts with identifying your goals. Remember that each goal needs to be achievable within the context of your lifestyle,” says Muller.
“This serves as a reality check, taking into consideration your resources. If your resources are insufficient, certain goals must be adjusted to be more realistic. Goals are usually dependent on your monthly budget.”
Advice for the average earner
The first goal for a person earning the average after-tax salary of around R20 000 per month should be to save for an emergency fund of approximately three months’ living expenses, which would cover them if they lose their jobs or another unforeseen circumstance arises, says Muller.
“It’s important to bear in mind that retirement savings are often not accessible in case of emergencies,” he adds.
“A person earning R20 000 should look at what expenses they will still have even if they have no income.
“The person might save on travel expenses to work or pension fund deductions from their employer. If they still need R16 000 per month to survive, the goal for an emergency fund should be around R48 000,” according to Muller.
Thereafter, the focus moves to investing for retirement. “It’s important not to delay this because retirement might feel far in the future, but the earlier you start, the more you will benefit from compound interest,” say Muller.
If you will be comfortable in retirement living off 75% of your pre-retirement salary, you need to save the following:
- 17% of your salary every month if you start investing at 25 years;
- 22% if you start investing at 30; and
- Nearly 60% if you only start saving for your retirement start at the age of 45 years.
How best to save?
Muller says good investment options for an average single person who wants to save for an emergency fund, a new car or a holiday include tax-free investment plans.
While the maximum annual contribution is limited to R36 000 with a total limit of R500 000, the funds are accessible when required.
“When the R36 000 annual limit is reached, one can opt for a unit trust investment with similar investment options and flexibility,” says Muller, noting that fixed deposits and other cash investments are currently earning very low returns.
A couple with children
Having a spouse and kids significantly adds to the monthly living expenses, such as more life cover to look after the family if the main breadwinner dies, more dependants on the medical aid, and saving for tertiary education.
“It’s probably best for a couple to work backwards in their budget,” says Muller, “deducting all the important expenses and investments from their salary and seeing what is left for spending.”
This exercise is often a wake-up call that one needs to be careful about spending on ‘wants’ and being left with too little to save and invest, says Muller.
Covid-19 was a wake-up call
The experts Moneyweb spoke to noted that the Covid-19 pandemic forced people to look at their income, expenditure and financial future – or should have motivated them to do so.
Muller says a good financial plan creates financial security and ensures that people reach their goals.
“It gives direction and meaning to one’s financial decisions.”
Listen to Nompu Siziba’s interview with TransUnion’s Carmen Williams (or read the transcript here):