Expert advice on saving and repaying loans
1. When is the right time to start planning for retirement?
There is no “right time” to start saving for retirement because people’s situations are different. The idea is to start as early as possible. Some people can only afford to save as little as a few hundred rand per month, so saving as soon as you start working is a good idea. The aim is to have the same living standard when you retire, and to have the savings last until your death. It’s important to have projections done by a financial expert to determine when to start and how much needs to be saved for retirement and for other investments.
It’s even better to have your retirement plan complemented by compulsory retirement savings like a pension or a provident fund. With these kinds of savings, you can either buy a living annuity or a life annuity when you retire. A life annuity is best because income is guaranteed for life and the principal amount can be preserved for the beneficiaries to inherit if the annuity holder so chooses. Unlike a life annuity, a living annuity can get depleted if the client outlives the funds.
2. What other investment options should I be thinking about?
Investments that have tax incentives, like a tax-free investment, are highly sought after. This is because, in a perfect scenario, you get better real returns due to your not having paid tax. The only disadvantage is that there is a limit of R33 000 in contributions per annum and R500 000 over a lifetime. The returns will not incur tax (no capital gains tax or dividends withholding tax). It is a skill to choose good funds, so it is always encouraged to get advice from a financial expert. Endowments are good if you’re looking to invest long term (five years and more).
3. How much do I need to be earning to start thinking about buying property or a house?
It’s important to request expert advice to help undersand how the amortisation of loans works before you commit to taking one. In some cases, you may end up having paid twice the price of the property over 10 to 20 years. Generally, it would be best to buy property if your monthly rent is equivalent or more than what you would pay monthly on your bond. But this must be analysed by an expert first.
4. Do I need to rush to pay off my educational loan?
A loan needs to be settled early if it accrues more compounding interest against the debtor than what the compounding interest would be in favour of the same person if they invested instead. Generally the longer you take to settle a loan, the more money you end up paying because of interest. A financial planner will look into your income, draw up a budget and advise on affordability. They will also show you a projection of how long it would take to settle the loan, depending on how much you can pay monthly.
5. I earn R23 000, but spend R6 000 on car instalments, R950 on car insurance, R5 000 on rent, R 2 500 on petrol, and R6 400 on three different loans every month. How much can I save for myself and for my baby on the way?
According to Foundation Family Wealth, the key to effective budgeting is understanding your needs, wants and wishes, and breaking down your expenses in those three categories. Looking at your expenses, the balance you’re left with is R2 150, which is not much. Ask the car financier if you can have a bigger portion of R6 000 paid towards the capital and not interest. See if, among the three loans, you can find one that charges low interest. Instead of paying off that loan quickly, you could invest in a good portfolio. See a financial planner for more detailed help.
This article first appeared in print in the Sowetan S Mag June 2019 edition.