Our investment journey has to start somewhere, and sometimes, when life happens, it has to restart somewhere, so let’s just revisit those building blocks – even if it is just to tick them off and move on to the sexier stuff in future episodes of this series. If the pandemic taught us anything (and no, not to use horse de-wormers), it was the wisdom and necessity of an emergency fund. I know that it might comfort you to say that you can just use your credit facility or card for that, and that’s great if you’re highly disciplined and run your credit card at a zero balance at the end of every month. In other words, YOU use the credit card (the 55 days ‘free’ credit), not vice versa. For everyone else, an emergency fund is a grudge necessity, probably at least 3 months of expenses, if not six. Get the best interest rate with the easiest accessibility (available from some of the newer banks – shop around). Make sure that both spouses have a fund, even if it takes longer to get to the goal.
How are you protecting your ability to earn an income, in the short and long term, especially when it comes to ill-health? An emergency fund in this instance will not give you the liquidity you need. Most larger companies will have a ‘group benefit’ scheme that will give you some protection, but if they don’t, or you’re flying solo, covering this risk is probably more important than life cover. Look at it this way, if you’re in a car accident and die prematurely (let’s face it, however old you are, it’s always ‘premature’), then perhaps you’ll have life cover for your ‘responsibilities’, and everyone will be very sad. If you survive the accident but can no longer work, though, where are the funds going to come from to keep things going, keep you fed, a roof over your head, etc?
If you look at investment as a lifetime journey, it probably looks like this : Emergency fund – Life & disability cover – Retirement savings – Flexible investments locally – Flexible investments offshore – Legacy. Let’s just look at one popular early investment saving strategy – that you tackle one project at a time. Great in theory, in practice, though, life happens, and if you wait until one investment – even the emergency fund – is ‘perfect’, you may take years to even get to the next rung. Again, the strategy best suited to you will boil down to your self-discipline. ‘Thinking about your thinking’ is probably one of the biggest gifts you can give yourself and is usually the hallmark of successful people. Instead of reacting to something instinctively, or because it is how you were taught/brought up, take a step back and ask if it serves your long-term objective for yourself. If you understand your behaviour, in this instance your ‘spending’ behaviour, then you can strategise a workaround.
Let’s take retirement saving, for example, especially if you work for yourself or the company does not have a ‘pension scheme’. We all know that the earlier you start, the easier it is going to be – but knowing and doing are not always easy. In the next chapter of this series, I am going to tackle the thorny issue of how to keep on investing when you’re battling to keep your head above water (kids, family, bonds, poor salary increases – we’ve all been there at some time in our lives). With the ‘pension reform’ that has been going on, it is going to be increasingly difficult to ‘cash in’ your pension when you leave a job. Everyone has been focused on emptying out their ‘savings pot’ and forgetting that this is a sleight of hand by the government to stop people from cashing out their full pension. In time, you can only cash out your ‘savings’ portion. Don’t forget that this will now be taxed, not at the old, more favourable ‘lump sum’ rates, but at your marginal tax rate (and decrease your tax-free lump sum at retirement in the process (double whammy).
Tax-Free Savings accounts are a popular ‘starter’ investment – but frankly, they shouldn’t be. These are long-term investments and shouldn’t double up as emergency savings – the amount you can put there has a lifetime cap. Once you have maxed out on your annual tax interest allowance and are investing in a retirement fund of sorts (even if you’re not maxing out) then you can think TFSA – but keep it ultra low cost and simple. Because these are long-term investments, it makes more sense to invest in growth assets – shares. You’ll save on Capital Gains tax. These TFSAs are a good investment for grandparents to give grandchildren (using their R100k annual donations allowance) and way better than the old education endowments. (There is one school of thought that this ‘robs’ the child of their own TFSA later, but laws, products and allowances change all the time – use them while you can. Anyway, I don’t know of a child who is going to berate a grandparent for a (potentially) several hundred thousand rand gift, free of estate duty and any other tax obligation going forward.)
I can’t believe I am saying this – because I detest doing my own tax return, I literally must pour myself a stiff one first – but the sooner you understand how and where you’re taxed, and how you can optimise this, the better. I know that it’s tempting to abdicate that stress to a tax practitioner, but understand that for a few hundred bucks a year, they are not going to chase you for all the inputs and deductions you could be making. It is up to you to know what you can and can’t deduct, how that changes with time and keep the relevant paperwork. Your tax practitioner is unlikely to sort through shoeboxes filled with receipts (which they certainly did in the past) but will expect you to upload them digitally and probably summarise them too. If you’re doing that, you might as well learn to take the next step. Remember, too, that come tax season, you’re probably one of dozens of clients the practitioner has. Frankly, all that collecting and tabulating is the hardest part of the job. Step one is to get this year’s tax tables. The Treasury has a great little booklet which you can get from their website (or ask me, I’ll send you one). Add a tax tab to your RedFile (still available from me free by request) and print out your latest ITR12 (a few previous years won’t hurt either). You can upskill yourself with SARS YouTube videos.
This is a good place to start.
Articles and Blogs:
Legacy Series Part 4NEW
Legacy Series part 3
Legacy Series Part 2
Legacy Series Part 1
Holiday checklist
Next year – Action Plan
Next year – Vision, Mission etc
Medical Risk Mitigation
Next Year – Consolidation
Abdication or diversification?
Carbo-loading your retirement
Spoiled for choice
Who needs a plan anyway
8 questions you need to ask about retirement
What to do when interest rates drop
How to survive volatility in your investments
What to do when interest rates drop
Difficult Financial Conversations
Financial Implications of Longevity
Kick Start Your Own Retirement Plan
You matter more than your kids in retirement
To catch a falling knife
Income at retirement
2025 Budget
Apportioning blame for your financial state
Tempering fear and greed
New Year’s resolutions over? Try a Wealth Bingo Card instead.
Wills and Estate Planning (comprehensive 3 in one post)
Pre-retirement – The make-or-break moments
Some unconventional thoughts on wealth and risk management
Wealth creation is a balancing act over time
Wealth traps waiting for unsuspecting entrepreneurs
Two Pot pension system demystified
Cobie Legrange and Dawn Ridler,
Rexsolom Invest, Licensed FSP 45521.
Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za
Website: rexsolom.co.za, wealthecology.co.za