Q: I am 26 years old, and would like to know if I am heading in the right direction. I have a tax-free savings account with FNB and a few other investments with them. I also have a property which I rent out and some money invested with ETFSA and Satrix.
Zah Mthethwa - Masthead Financial Planning
Saving is a very important habit we need to adopt and I am very happy you are doing it already.
Tax-free savings is a brilliant vehicle for saving, because you don’t pay tax on your investment return. However, you must be careful that your savings are not performing below inflation, as your money will be losing value in that investment.
Cash investments are low risk, and with low risk comes low return. Whenever you take an investment out it must be able to assist you achieve your goal or objective. With your other investment with FNB it will be advisable to review the situation. It might be even be worse with a bank as they might attract tax and the performance might [then] be below inflation.
The flexibility part of the tax-free savings makes it more appealing.
You also mentioned that you have property that you rent out. Mostly property is a sound investment and people even say you can’t go wrong with it. But a lot can go wrong with property investment if the decision was taken without proper research and calculated risk.
There are a few things to bear in mind with property.
You get two sets of returns, namely rental income and capital appreciation. Appreciation depends on the area your property is in: if the property is in a good area such as the cities, chances are high that the value will go up.
Where rental income is concerned, if you have a bond to pay every month and rates and taxes, you might not be getting any income from the property and might even be operating at a loss. This makes it very important to calculate the net yield, where you will be looking at the total income from the property with all the costs incurred by it, against the value of the property. That is what will give you a true indication of where you are and the performance of the property.
Regarding ETFSA and Satrix I think those are goods as they are both liquid and good for medium- to long-term investments.
I have about R30 000 which I have saved up: where could I invest it for best returns?
Before a proper recommendation can be made about your money, it is crucial that a proper financial needs analysis is done, to make a sound decision. A lot needs to be taken into account, such as your risk appetite, how long you want to invest, the goal or objective of the investment, and how flexible you want your investment to be.
Given that you already have investments that are liquid and you still have time to ride the market agewise, an endowment can be a good option. An endowment is five-year investment. You have an opportunity to borrow or disinvest limited to one loan and one disinvestment, however after the restriction period withdrawals can be made at any time
If you have a higher tax rate than 30%, then you will save on your tax as an endowment is taxed at 30%. You avoid executor’s fees as you have an option to nominate beneficiaries.
With all the recommendations above it is advisable to conduct a full financial needs analysis to be able to get accurate and proper advice. Good luck!