WHY I QUIT MY JOB

A former colleague asked me if I missed my former workplace. I get similar questions from my former colleagues often. My response has been consistent. “No, I do not miss the workplace”. I miss the people but not the place. I prefer the current version of my life.

I loved the work content and had great colleagues. My job exposed me to a whole lot of stuff. I am grateful for the experience. That does not make me wish to go back to it.

My family has always seen employment as a temporary arrangement. We needed the jobs to build what would make them optional. The initial plan was to quit at 35. I was fortunate to  get an opportunity to take a break at 35 but went back a few years later. That was an opportunity for us to prepare for my resignation. As my partner put it, “we will know for sure if our strategy works when one of us quits and works on building something for the family”. So, I did. Our main goal was to create opportunities for ourselves and our children. Which we did and continue doing.

Before I quit my job.
We have always been a couple that is focused on working towards a comfortable and sustainable lifestyle. This was a decision that we made when we got married. As a result, we tried a lot of options to build a family real estate business that we can both retire to. We also intensified on other investments. Most importantly, even when I had a job, my studies were aigned with our family goals. I enrolled for a Masters in Real Estate, just to get a deeper understanding of the business. This changed the way we did things going forward and helped us identify our niche.

Climbing the corporate ladder was never a priority. We both sought opportunities that would empower us to take better business decisions. Creating opportunities for our children was at the centre of our building. A life partner that is a visionary and support is invaluable.

Preparing to quit.
Our siblings have always known how much planning we put into our family's lifestyle goals. We always put our dreams down and work towards achieving them. Our main goal was building wealth to fully own our time. Having time for family and time to do whatever gave us joy. This is what shaped our financial goals. We wanted to own our TIME.

We have always detailed our dreams, ambitions, needs, wants, our priorities and our strategy. Financial education became a priority. We have learnt about finances and discussed so much that we got completely aligned. In preparing for one of us to quit we did the following:

• We saved and invested more and more. In the process we kept learning about the higher return assets.
• Our spending was well thought. We prioritised family health, good education and great food. We love our food.
• We stayed out of debt. This was strangely never difficult for us. When we started on our journey, a lot of sacrifices were made.
• We taught ourselves about different kinds of investments. Books helped a lot. We bought a couple of business books every single month.
• We worked on our mindset and attitude towards money. We both do not come from money. We believed that it was possible for us to change this and do better for our children and the next generation.
• We prepared ourselves to take risks. This is probably the most difficult step. But that is what education is for. We had read about successful people and their strategies. If only information was as freely available as it is today.
• We specialized and diversified at the same time. I'll repeat, nothing beats education in this journey.
• We set timelines for achieving our family goals. This is the most important step in my opinion. To this day, we track our progress, set more goals and timelines.
• We are completely transparent and accountable to each one another as a family. Our lifestyle is aligned with our goals.

After quitting.
We are probably among the most predictable people. We pretty much stick to our decisions. We took steps to ensure that we survive on one salary and our then small rental income. Our other sources of income were even lower at the time. My primary assignment was to increase the business income. I had the time and space to implement whatever I thought would yield results. I presented the strategies to the family and we worked together to see them through.

One of the areas in which we grew our income was in making improvements on the assets that we already owned. We changed the use of land, refurbished, invested in stocks, sold stuff here and there, etc.

Our monthly activities have always included reviewing our finances and deciding on a way forward. Quarterly, I give a financial report to the family. The report is on all our assets and net worth. The value goes up and down. But what matters is really, the income that assets generate. 

I can easily say that I quit my job to serve my family. 

What are you doing to prepare for your retirement? Have you started yet? Ask us any questions. Please share the article.

Thank you for visiting Safe Investing SA. For daily motivation please like us on Facebook, Twitter and Instagram.

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Tax Free Savings Account and Investment

What is a Tax Free Savings Account and Investment (TFSA)?

Since 2015, SA government decided to gift us with an amazing tax-free product. Contributions to a TFSA are not deductible for income tax purposes. Contributions and income (income tax, dividends tax or capital gains tax) earned in the TFSA are tax-free.

Here's the catch: this is a long-term savings benefit limited to R500,000 contribution in one's lifetime and R36,000 in one year. Withdrawing from this account should be avoided. 

Annual Limit

The Annual limits have been steadily increased from R30,000 in 2016, R33,000 in 2018 and R36,000 in 2021. Maxing the contribution to the Tax Free Savings Account and Investment is ideal. That and not withdrawing, I emphasise. Unused annual limits are forfeited. Important to note is that there is a tax penalty for amounts that are above the annual limit. The tax penalty is 40% on the excess contributions above the annual limit. 

Tax Free Savings Account and Investment

Who is Eligible for a TFSA?

South Africa allows all South Africans to invest in a Tax-Free Savings Account or investment. This includes children. Parents can invest on behalf of minor children.

Maxing out the TFSA should be a priority. The examples in the image above are an indication of how a TFSA can be maxed out every year.

1. Once-Off Investment. One can invest the full annual limit in one payment. March is the first month of the financial period. However, one can invest at any time during the financial year.
2. 12 Months Instalments. One can also spread their deposits in 12 equal instalments. This can be automated from your main bank account to the investment tool used for this purpose.
3. Quarterly Deposits. The quarterly deposits work the same way as any instalment deposits. Any form of instalment works. The amounts deposited do not need to be equal.

The reason March is used as ideal in the example is that, the investment gets a growth benefit for the entire financial period. In a 11.5% return per annum for instance, R36,000 would have grown to above R40,000 at the end of the financial period.

The following accounts qualify to be used as Tax Free Savings Account and Investment:

• Fixed deposits
• Unit trusts
• Retail savings bonds
• Some endowment policies issued by long-term insurers
• Linked investment products
• Exchange traded funds (ETFs).

One can transfer between tax free savings accounts or investments as they change the investment vehicles or service providers. Service providers are responsible to provide SARS with all the information required for tax filing.

Are you investing in a TFSA? Please share the article.

Thank you for visiting Safe Investing SA. For daily motivation like us on Facebook, Twitter and/ or Instagram.

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Author Mbini Kutta, a businesswoman, personal finance author and investor.

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2022 FINANCIAL GOALS

Have you set your own 2022 financial goals? For me the main goal is the standing 'project 2021 July to 2023 June' to double our net worth and monthly income without acquiring new physical assets. It is very ambitious but after such a challenging two years I reckon we deserve a bit of excitement. The previous post detailed the 2021 financial goals review. Let's dip into our 2022 financial goals:

1. Net Worth Tracking. Goals that are shared are more likely to be achieved. Like most bloggers, I come from that background where money talks are a taboo. But writing about my financial freedom journey helped me achieve my goals. So, my first goal is to keep myself accountable by tracking my progress here every quarter. The reason I choose quarterly is that, I update my net worth spreadsheets and report to my family about our progress quarterly. I used to do this monthly but realised that there is too much volatility in a short period. 3 months is also a short period but hey, there has to be a cut off time somewhere.

2. Keeping Focus. In my 2 years of rest I spent a whole lot of time on social media. I realise that I need to schedule my social media times. I can do with limited distraction in my life. Having strict work and family times without social media has become top priority this year. I am catching up on my reading. One huge book done and halfway the second one. I have also set a full day aside weekly to do work for others/freelance work.  

3. Earn More. Right now I am working on increasing our real estate income, as per the main goal above. There are three ways in which we are doing this:

• Most of 2021 was spend renovating existing property. We had renovations on a small 2-bedroom duplex, our own home, and current renovations in the biggest unit in our multifamily property. The latter should increase the rental income of the unit by at least 60%.
• I am working on a short-term rentals strategy using the Airbnb model. I will furnish the units that will be let in this way. The first property will be the unit that is in an upmarket residential estate. 
• We are also working with our town planner to rezone a property which is in an erf earmarked for densification by council. This will be our first 'build to rent' property.
• Lastly, I will work on increasing the income of this blog. I want to add a channel/ podcast to it by June. 

4. Debt. We will continue to lower the rental property debt. This is a new strategy because of early retirement. We may as well get rid of this debt. This is our only debt. 

5. TFSA. Of course, we are maxing our tax free savings accounts. Mr V spreads his contributions throughout the year. I do a once off payment towards the end of the financial year. I am more likely to forget to do this, so Mr keeps telling me to try and make my lumpsum investment in March. That way I get maximum growth benefit. I need to start listening. We both use ETFs as an investment vehicle for this. It makes sense to use stocks, since a TFSA is more suited to long-term kinds of investment. The Geek (our son) will be having his second year of maxing a TFSA in 2022-23 too.  

6. Education. The plan is to invest in tax education for personal growth this year. A short course to help grow my understanding and learn about new tax provisions and laws will suffice. 

7. Stocks. This is where we plan to invest more to maintain a well-diversified portfolio. We love property and are over exposed in that investment category. We are currently trying to focus on investing in equities. We have both local and international individual stocks and ETFs. 

8. Retirement. We continue contributing to our retirement accounts. We only have this increased by 10% annually. Mr V and I both have 2 retirement accounts each. We have a retirement annuity each, Mr V's employer linked pension and my pension preservation fund. I have been tempted to cash my preservation fund a few times in the past. But I also think I need this kind of a safe option.

9. Family Finance Alignment. Every quarter I track progress on our goals and discuss with family. This way, our plans are aligned. We all pay attention to global economic conditions, to reshuffle our investments as a need arises. I am the one tasked with a responsibility to take some sort of a lead on this this year. So, I start my days with some light markets reads.

10. Will vs trust. Right now I am investing in weighing the pros and cons of a trust. We still do not have a family trust. We have been dragging our feet because of the expenses that will go with the transfer of assets. I'm onto it this year.

11. Getting rid of assets. The other important item on my to-do list is getting rid of all small property units. I no longer want to keep the apartments in our portfolio. We currently prefer the multifamily rental property. We have 3 units to sell in the year. This will depend on the property market conditions. If prices drop, we will just hold a bit longer.

12. Giving. I keep forgetting to mention this. We give over 10% of our income as a principle. As a family we assist our parents financially and have a scholarship. We have foster kids that attend a small private school on this family scholarship. We believe in this kind of giving.

Please share your own goals with us.

Thank you for visiting Safe Investing SA. For daily motivation like us on Facebook, Twitter and/ or Instagram.

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Author Mbini Kutta, a businesswoman, personal finance author and investor.

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OUR NET WORTH AND 2021 MONEY HIGHLIGHTS

 When Mr V (husband) and myself planned our lives together in our 20s we took a decision to focus more energies on our family and family businesses and less on top careers. We had decided on shorter career lives. This was before the ‘fire movement’ came to be. For those who do not know, ‘FIRE’ is an acronym for ‘Financial Independence Retire Early. We never imagined that this decision would be the one thing that gives us purpose and a strong joint passion. Financial independence and early retirement were the goal. I have been outside formal employment for almost 5 years now. I also took my semi-retirement break at 35.

The past few years were super challenging. We lost my mother in December 2020. The pain that I went and am still going through cannot be articulated. My mother was a close friend. The year 2020 was the most difficult year globally. I have not blogged in both 2020 and 2021. However, in 2021 I went back to tracking my finances. This was a needed distraction. 

Back in January 2020, our family’s financial plan was to double our net worth and income in two years without acquiring new physical assets. Then 2020 turned to be the weirdest period of our lives. I rested more that year. The plan to double our net worth was only implemented in mid-2021. My excel spreadsheets and graphs are beautiful to watch every quarter.

Whilst excel is great, I miss keeping myself accountable through blogging. I will use this platform to keep track of the progress in our ‘project July 2021- June 2023’. It will take a lot of doing to achieve this goal but it is doable. The detailed plan for 2022 will follow in the next blog post.

2021 Highlights:

1.Stocks. What we have done from July 2021 is increase our investments in stocks. We did get lucky with the SASOL dip and the great performance of the US dollar stocks in the past year. The year or semester rather, was great. We did not forget our tax free benefit accounts which are also in Exchange Traded Funds (ETFs).

2. Rental Income. We also had major renovation projects to increase the rental income. One renovation project was in our multifamily let. We renovated the biggest unit. This property has 6 lease contracts in it. We are finalising this remodel project soon. The renovation should increase the income of the unit by 60%. The plan was to further develop this property. The city’s 2018 Regional Spatial Development Framework (RSDF) removed the erf from the area that they earmarked for densification. So, we could not.

3.Retirement and savings. We also contribute to our retirement accounts monthly. We each have two accounts with one being a retirement annuity. The performance is not stunning, but they are a great addition. We also keep some small figure in savings to serve as an emergency fund. We no longer have a big sum in the emergency funds accounts. Interest rates are too low for that. My zero-fee credit card is my emergency account. I never pay interest on a credit card.

4. Gigs. I achieved more in 2021 than I did in the past few years. My freelance income has been channelled to fast-track Mr V’s retirement. This deserves a separate post.

5. Content creation. My content creation income was very small. Like I mentioned, I went AWOL. See next blog post for the plans for 2022 on this.

6. Speaking. I was a visiting lecturer and had a few speaking appearances last year. Noteworthy is my appearance as an expert at an ‘Africa Trade Conference 2021’ and the full week radio show talks.

7. Wealth transfer. The Geek (our son)  turned 18 in 2021 and started on the investment journey of his own. The boy has done very well and invests in the US stocks and ETFs exclusively. He has impressed us by his focus on managing his finances. We have discussed building a good credit rating record and getting his first credit card. We are also helping him max his tax-free savings account. 

8. Budgeting. I still work with a budget that is in my head. Budgeting never works for me. I make my targets, save, invest and then spend. Paying myself first helps with my impulsive habits. 

9. Debt. On debt, we still only have investment property debt. We also have reduced this remarkably in 2021. We are generally not bothered by rental property mortgages. Our priority is having no debt in our primary home and no debt anywhere else. This has always been the case.

10. Travel. I had plans to travel in 2021. Ireland and Egypt were on the list. Due to the pandemic I only managed to travel between Angola and South Africa. I am looking forward to open borders. The family’s feet itch.

11. Comfort. Our primary home was the most costly project for the year. We are a family that believes in comfortable living, and always prioritise comfort and healthy food. OH, we sure love our food. We did get approached by interested prospective corporate tenants to lease this property. I was welcoming the idea of great income, but Mr V and the Geek refused to let go.

12. Finally, 2021 had its challenges. We had a few months of vacancies and unpaid rentals due to the pandemic. This is not common as we invest mainly in the heart of national government and diplomat presence. Our 2022 goals will highlight how this discomfort pushed us to grow. Our investment city is also growing and is now with a population of over 2.5 Million.

Thank you for visiting Safe Investing SA. For daily motivation like us on Facebook, Twitter and/ or Instagram.

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Author Mbini Kutta, a businesswoman, personal finance author and investor.

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WHY WOMEN NEED TO START BUILDING WEALTH EARLIER IN LIFE

Personal finance is one of the areas that have always been considered gender neutral. But, is it? The gender gap in economic opportunity is not closing quick enough. This means that women must work more than twice as hard as men to acquire similar amounts of wealth. According to the United Nations, 90 percent of women income is invested back into their families, compared with 35 percent for men.

We are working with 10% of our income to improve on our lives and secure better future for ourselves and the next generation. This is despite the fact that money issues impact more on women than they do on men. For starters, women on average live longer than men. The average life expectancy at birth stands at 67 years for males and 71.1 years for females. It makes sense for women to take financial planning and management much more seriously than men do.

Secondly, women have a shorter work life and are likely to take breaks throughout their work life. Maternity leave for one easily costs up to six months’ worth of income per child. Raising a child could mean extending the work break by another three years or permanently. What this means is that, women need to start building wealth very early in their lives by saving a higher portion of their income to provide for the time off work. Negotiation skills are also needed to get more flexibility at the current workplace to earn income during these breaks. It is important for women to constantly contribute to their retirement plans.

Married women tend to rely on their spouses for financial support. In cases of a separation or divorce, they are forced to start taking full control of their lives and in most cases their children too. It is a hard way to learn. Financial planning is a practical skill that needs to be sharpened throughout one's life.

Most single parents are mothers. Primary caregivers of children in single parent households are most likely to be women. Often, single mothers must manage with no financial support from the fathers of their children. When the law forces men to provide for their children, it is often inadequate financial support for the needs of the children. Women’s personal finance empowerment is never overrated.

Women earn lower income compared to men. Earning low income means lower contributions to pension and retirement funds. This is extremely limiting, especially when it comes to wealth building. One needs to make money in order to save money. As women, we need to start saving way early in our lives and save a larger portion of our income.

Not only are we earning less and spending more on our households, but we're also investing less than men do. The gender investment gap is a reality.

Finally, women need to up their game when it comes to claiming what they deserve. Negotiation skills are key to bridge the existing gap in salaries. They also need to pay themselves first through savings and investments. There is a need for intentionality in building wealth.

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Author Mbini Kutta, a businesswoman and real estate investor. The article first appeared in an offline publication The Apple of His Eye.

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SAVING AND INVESTING STRATEGY

I had an interesting question and answer session with one of my readers. Her questions were on developing a saving and investing strategy to raise funds in a short period of time.

Hi Mbini
I'm always inspired by your posts. I have learnt that it is possible to pay property within the record time. I currently have two properties that are paid up. I paid up my last property in just 12 months. The price was not so bad.
I am now strained from that transaction and paying up the property. As a result I am currently a tenant, renting with an intention to buy. After twelve months of saving I am hoping to have raised enough capital as part payment. I am in a position to save between R200,000 and R300,000 monthly for the next twelve months. Do you have advice on saving options?
I hope this makes sense and thanks for your time.
Ms S

saving and investing strategy

Before we look at the saving and investing strategy for Ms S, I have to state how impressed I am with her discipline. She has done very well.

Twelve months is a short time for long term type investments like stocks or shares. Stocks are high return over a long term. One might even lose some of the money in the short term. I would personally work on preserving my capital by saving the in fixed deposit accounts monthly. Every month I would just start a new fixed deposit account. I would also look at the highest interest money market accounts including the notice accounts. The interest is not going to be as good as the returns in other investment vehicles, but given the time factor, this seems to be the best that one can do.

Where do I start with the search. I can even split this between savings and long term investments.

If you are keeping some by investing in a long term product, I would consider the Exchange Traded Funds (ETFs). I am assuming that you are not very familiar with the stock investments. You might need to have a managed kind of investment process. I think you will find a nice ETF product with high returns.

For the short term like 12 months, check your bank's highest return on investment products. That will be on the bank's website. I wish you the very best. Please let me know how it goes.

Please feel free to email your questions through our contact page. I trust that you have started with the savings challenge. We have four steps and groups. 1. Debt pay-up, 2. Emergency Fund, 3. Other Savings Accounts, and 4. Investments. Please do keep moving. Start slow but do not stop. For daily motivation like us on Facebook, Twitter and/ or Instagram.

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WEEKLY AND MONTHLY SAVING CHALLENGE

The four groups of our daily, weekly and monthly saving challenge that readers have joined as part of our Saving Community SA drive. I will quickly go through each of the four groups for readers to choose the suitable account for their savings and investment needs.

weekly and monthly saving challenge

Group One: Paying up Debt
If you are in this group, please go check our previous posts on paying debt up.  Dealing with debt is nice and short whilst the more practical one with examples is at If I had debt. These posts will help you structure your own journey out of debt. They are worth your time, OK I'm blowing my own horn. Our next challenge will be on paying mortgage/ homeloan in 10 years or less. It is not that hard. I have done it and so have some of my friends.

Group Two: Building an Emergency Fund
A lot of people dislike the term Emergency Fund. Please call it whatever you fancy. Just build the fund. For the emergency fund accounts again please check out the recent post on choosing the emergency fund account. If not sure of the best option, please enquire with your bank. As stated previously, I use a 24 hour notice account for this purpose. There is always an account suitable for this. Just avoid saving in an account that earns no interest. I have shown the interest that I earn in that particular post. Please check it out. A number of people keep R10,000 in that particular account. Some people keep more and some keep less. I need at least this amount because of my various financial commitments.
Remember that you may start building on this whilst you are paying your debt up. You might need to take part of the amount you are committing to fast tracking your debt payment and save it as your emergency fund.

Group Three: Other Savings
A job is such an enabling tool. I am reminded by this post that, when I had a job, I had a "car savings" account. This is where I saved to buy my next car. I also used my homeloan access bond to save for various projects. I would typically save for a down payment/ deposit on a property, a new car, children's school fees, vacations, renovations, etc. Now that we are all getting debt-free, we need this category of savings for us to get in the habit of saving before we spend.

This is a more medium term type of savings. It makes sense to use a higher interest earning account compared to the emergency fund account. For this particular group, you might need to consider the longer term notice accounts like 32 days notice or the highest interest money market account that your bank offers. I use the 32 days notice account. I keep about twice (or more) the emergency fund amount in this account. I prefer to keep most of my savings in the homeloan access bonds. The reason for this is that, my homeloans typically have a higher interest than the interest I earn from the savings accounts. It helps reduce the interest that I pay on my mortgage, but is also accessible if I happen to need funds. It is also not an easy decision for me to withdraw from an access bond. I have touched on this a little in the post: Best Savings Accounts.
Please choose wisely and ask questions where you need assistance. Use Facebook or the contact us page.

Group Four: Stocks, Shares or Exchange Traded Funds
I get a whole lot of emails on Exchange Traded Funds (ETFs). I am very passionate which attracts your amazing questions. I have a post that can assist readers understand this better. Please check out this post: Exchange Traded Funds. Take my word for it, they are the best money growing tool for new investors. My teenage son uses them and so does my husband. You might never use any other tool to invest in stocks or shares. I will write a post on how you register and where you can register.

All the best with the challenge. Please do not give up. Start slow and keep moving. For motivation please like us on Facebook, Twitter and/ or Instagram.

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TAX FREE SAVINGS ACCOUNTS INCREASED TO R33000

The joy I had when I learnt that the allowance for tax free savings accounts increased to R33000 from R30000 per annum. Most followers know that I am a fan of this government initiative. You may go check my previous posts on tax free savings account in South Africa, then choosing ETFs for my tax free savings account and low cost tax free investment to judge the excitement for yourself. R33,000 may be low, but it is a move in the right direction. The whole 10% increase, WHOOP!!!

tax free savings accounts increased to R33000

In his 2017 budget speech, Minister Pravin Gordhan had a lot of negative tax proposals. What's with the new 45 percent tax for above R1.5 million income earners, an increase in the dividend withholding tax to 20 percent, and an increase of 30c per litre in fuel levy and 9c per litre in the road accident fund levy. We are not surprised with the increases in the excise duties for alcohol and tobacco.


The part on the allowance for tax free savings accounts increased to R33 000 came as a pleasant surprise. Some feel it is a rather small increase. I am a happy chappy with any increase for sure. There are a number of ways in which one can increase their tax free benefits using these accounts. I, for instance intend to open a tax free account for my son this year. Some of his ETFs savings are better off there, as long as he is not going to use the cash anytime in the near future. He is one guy who does not like property investing. A story for another day. 

For the monthly savers and investors who want to maximise the benefit, R2750 will be their monthly contribution from March to February. One can save less than that if that is what they afford to put away. The lump-sum is another option for those with cash reserves.

As I mentioned in the past, I am using Exchange Traded Funds (ETFs) for this account. Reasons being that this is a long term savings benefit limited to R500,000 in one's lifetime which should earn the highest returns possible. Withdrawing from this account should be avoided. I wanted to add "at all cost" in the previous statement. This can serve as one of those cushy retirement provisions.

Another important piece of information is that, we will not be able to transfer our savings within the different service providers until 1 March 2018. When the National Treasury finally implements this provision, we will be able to move our investments from one service provider to the other without losing our benefits.  Investors will have to give an instruction to their service providers to transfer the funds on their behalf. It is important to note that, this will not be a self service function.

If you have not started with your tax free savings, 2017 may be the time you do. The sooner the better.

More posts on ETFs can be accessed here.

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BEST SAVINGS ACCOUNT

I am obviously not coming with only one best savings account option available for South Africans. We have quite a few options to choose from. One may have to look at their personal savings goals and the time they need to save for.
Before I even begin with the main issue, I thought it would be important to note the difference between saving and investing. Savings have lower earnings with the capital being safe from any risk. Investing on the other hand usually earns higher returns, with no guarantee of preserving even the capital invested. Lets go back to the best savings account options, shall we.

Best savings account South Africa

I was reminded of the need for this post last week when my bank called to find out if I didn’t make an error by putting money in a lower interest option instead of a notice account. I must also add that, even though the banker was correct, I am not a fan of bank savings. I use the bank for my emergency fund and extremely short term savings. Bank savings usually earn one extremely low interest. The following are just a few options that one can explore:

1. Saving by Paying Debt off
I have said it before, and am saying it again, paying debt off is probably the best saving option at one’s disposal. Most debt has unreasonable interest rates which eat into whatever interest a saver earns elsewhere. Debt like credit cards and other consumer debt often cost above 20% per annum in interest. It does not make much financial sense to pay above 20% in interest whilst earning way below 10% in savings. Something for one to think about.

2. Bank Savings Accounts
South African banks have various options for cash saving. These are given various fancy names, depending on the bank’s creativity. Do not get hung up on fancy titles.

• Basic Savings Account

This usually earns the least interest rates of the lot. I am using a one day notice account instead of this kind of account as a result. See the next bank option below for what I am personally using. A typical savings account may earn around prime interest rate minus 6.5%.  This is extremely low. It is definitely lower than inflation, which means that your money is in real terms losing value.
The main advantage of this kind of savings is that your money is readily available at all times.

• Notice Accounts

The notice accounts also differ from bank to bank. The most popular seems to be a 32 days’ notice account. This usually earns anything in the vicinity of prime interest rates minus 5.9% from R250 to prime minus 2.9% for any savings above R50,000. You will notice that, the higher the amount saved, the higher the interest earned. You are better off with an account balance of above R50,000.
I am using a one day notice account for my emergency fund which earns from prime interest rate minus 4.75% for R5,000 to R9,999 to prime interest rate minus3.5%  for any balance above R500,000.
There are various interest rate percentages earned in between R9,999 and R50,000. There are a number of bank savings options with a similar structure. I will repeat that, these and other bank accounts are typical low interest accounts which are ideal to keep savings for short periods of time or emergencies. An example will be a contingency/ emergency fund

• Money Market Accounts

The money market account also offers the benefit of the cash being available at any moment one needs it. The difference between the money market account and the basic account is the minimum amount one needs to keep in their account and of course the interest to be earned. This is usually from R20,000 with low earnings of about prime interest rate minus 5.75% and slightly above that for higher available savings.
Some banks offer a higher interest for their professional bankers. Wealth does pay.

• Fixed Term Deposit Accounts

The fixed term deposit accounts have their interest varying according to the term  the money is kept in the bank. This varies from 3 months to above a year. The implications are that you will not have any access to your cash until the term chosen lapses. The interest may go up to 1.25% below prime interest rate. This is not a bad rate for savings but the inconvenience of not having the access to the cash is the main disadvantage.

• Easy Access Deposit Accounts

Easy access deposit accounts are similar to the fixed term deposit accounts.

• Age and other Special Benefits

Most banks give a favourable treatment to citizens above 55 years of age. If you are in this category,  investigate the extra benefits on offer for pensioners.

3. Using the Homeloan and other Tools for Savings
Given the fact that homeloans are generally costing higher interest, using them as a savings tool is beneficial. The only way to ensure that one gets their cash when they need it is to ensure that they have an access bond in place. Some people use unconventional tools like credit cards for extremely short term savings.

The key is embarking on thorough research before one decides on the best savings account that meets their needs. We have dealt with investing throughout the blog. That is the obvious way to build wealth quicker. You will always need both for building and preserving wealth.

Similar Posts
Posts on Savings
Investing in Stocks/ Shares South Africa
Investing in Savings Bonds
Exchange Traded Funds (ETFs) 

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LOW COST TAX-FREE INVESTMENT

My previous post on the Tax-Free savings account looked at the investor who has the R30,000 R33,000 per year. This excludes a whole lot of people who are still busy fighting debt or afford less. Its only fair to go through a different low cost tax-free investment exercise. Reading this post together with the previous one may be beneficial as some of the information given in that post helps clarify this tax benefit better. You may also look at the other post on tax free savings and the one on Exchange Traded Funds (ETFs).

The most effortless way to invest in shares is through ETFs in my opinion. This should be a great option for those who lack the time and resources to invest in individual company and industry research. Losing money in the stocks, especially when you do not have a well-informed strategy is quite easy. The stress that goes with speculation can be outsourced to ''experts'' who are well trained to read the markets. A hands-on approach is also not a bad idea for inquisitive minds like mine. It is important to remember that, only a few of us can manage to be jacks of all trades with success. Definitely not me. That is the reason I strive for a diversified portfolio, with some loyalty to property investing. Real estate is my passion and what I have chosen to pursue. I am well pleased with the fact that it remains my main source of income. But that is not the point of this post.

Our low cost tax-free investment exercise will be on a R500 per month amount. To spice the exercise a bit, I am throwing in R3000 extra from the investor's annual bonus. I have such an overactive imagination, I know. Our investment qualifies to be referred to as low cost because ETFs are generally relatively cheap investments.

Remember that you can invest your monthly R500 in one ETF, a combination of two ETFs or even a combination that includes any other two qualifying products. National Treasury mentioned the collective investment schemes, bank savings accounts, fixed deposits, retail savings bonds, REITs, etc, as qualifying products. Let us quickly list our assumptions:

• Similarly to our previous example, I am using 25% annual return. (Again this is attainable).
• Monthly Investment of R500
• Every year, the investor adds a R3,000 into the fund from their annual bonus
• Return per annum 25%
• Term in years 16 (I am using the same number of years from our previous exercise for consistency’s sake. More years at this amount make better investment sense.)
• Tax Rate 0%
• All income like dividends earned is re-invested
• There are no withdrawals throughout the investment period

Year	Beginning of Year	Interest	End of Year	Contribution
Year 1	R3,500	R1,720.12	R10,720.12	R9,000
Year 2	R14,220.12	R4,729.59	R24,449.71	R18,000
Year 3	R27,949.71	R8,583.92	R42,033.63	R27,000
Year 4	R45,533.63	R13,520.30	R64,553.92	R36,000
Year 5	R68,053.92	R19,842.44	R93,396.36	R45,000
Year 6	R96,896.36	R27,939.41	R130,335.79	R54,000
Year 7	R133,835.79	R38,309.48	R177,645.27	R63,000
Year 8	R181,145.27	R51,590.75	R238,236.02	R72,000
Year 9	R241,736.02	R68,600.49	R315,836.51	R81,000
Year 10	R319,336.51	R90,385.39	R415,221.91	R90,000
Year 11	R418,721.91	R118,286.03	R542,507.92	R99,000
Year 12	R546,007.92	R154,019.21	R705,527.13	R108,000
Year 13	R709,027.13	R199,783.86	R914,310.99	R117,000
Year 14	R917,810.99	R258,396.06	R1,181,707.05	R126,000
Year 15	R1,185,207.05	R333,462.57	R1,524,169.64	R135,000
Year 16	R1,527,669.64	R429,602.64	R1,962,772.27	R144,000

Results

• Total Amount Invested is R144,000 ((R500 X 12)+(3000))X16
• End of Term Balance is R1,962,772.27
• Total Interest (income) earned R1,818,772.27

It does look impossible to turn R500 per month into almost R2 Million, but if this particular fund continues performing as well as it currently does, this outcome is a possibility. As mentioned in the previous post, this government incentive means no income tax, no dividends withholding tax and no capital gains tax.

Once again, please do:

1. Ensure that your investment product of choice does qualify to be one of the tax free savings accounts. Most exchange traded funds (ETFs) qualify.
2. Note that our exercise is on a 16 year term, however one can go on until they reach the allowed maximum contribution of R500,000 in their lifetime (at the moment: August 2015) whilst avoiding to exceed R30,000 (increased to R33,000 in 2017) in any one year.
3. Note that withdrawals cannot be re-invested and still count as part of the lifetime limit.
4. Report to SARS in the section under income earned in the tax free account and declare your income as non-taxable.

Note:
Thanks for the amazing emails. I keep all emails anonymous when I do respond to them through this platform. Feel free to make a follow up question or comment using the "Contact Us" button above.

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CHOOSING ETFS FOR MY TAX FREE SAVINGS ACCOUNT

If you have been following this blog for a while, you will probably have guessed that I will be choosing ETFs for my tax free savings account. I’m quite predictable, I know hey. I have a bit of an obsession with the Exchange Traded Funds and have written about them quite a bit in this blog especially when I was giving investing advise to teenagers, to those in their 20s and general information to those who email me questions. The ETFs remain the best choice for those who prefer to take a less hands on approach to equities investing.

There are a number of ways that one can use to take advantage of the new tax free savings. I cannot have been the only one who patiently waited to see if the exchange traded funds will be suited to the tax free savings account. How delighted I was to read that all institutions that have a banking or collective investment scheme license will be eligible to offer products through this tax free savings or investment account. This benefit is actually even extended to stockbrokers that are registered with the Financial Services Board (FSB) and the Johannesburg Stock Exchange (JSE). In all, almost all certified financial service providers can easily offer products that exploit this great benefit.

Most will agree that R30,000 R33,000 per year (maximum) is quite a lot of money to be saved in a low performing savings account. Ag, any amount of money should be invested where it attracts a decent amount of interest. I definitely think my R33,000 would be better off invested in the ETF or a combination of ETFs than in most savings accounts that are in existence. That's the reason that I am choosing ETFs for my tax free savings account.

Below is a little exercise to see how one can potentially gain in the ETF investment with this generous tax benefit.
NB: the exercise is based on the initial tax free account annual allowance of R30,000. This has been increased to R33,000 from March 2017.

Assumptions: 

• I am using 25% return. (The ETF that my son is currently using averaged 27.67% per year over 5 years and around 30% during my son's investment period).
• Annual Investment at the beginning of each year R30,000
• Return per annum 25% 
• Term in years 16 
• Tax Rate 0% 
•  All income like dividends earned is re-invested
• No withdrawals throughout the investment period

Year	Contribution	Beginning of Year	Interest	End of Year
Year 1	R30,000.00	R30,000.00	R7,500.00	R37,500.00
Year 2	R60,000.00	R67,500.00	R16,875.00	R84,375.00
Year 3	R90,000.00	R114,375.00	R28,593.74	R142,968.75
Year 4	R120,000.00	R172,968.75	R43,242.19	R216,210.94
Year 5	R150,000.00	R246,210.94	R61,552.73	R307,763.67
Year 6	R180,000.00	R337,763.67	R84,440.94	R422,204.59
Year 7	R210,000.00	R452,204.59	R113,051.15	R565,255.74
Year 8	R240,000.00	R595,255.74	R148,813.93	R744,069.67
Year 9	R270,000.00	R774,069.67	R193,517.41	R967,587.09
Year 10	R300,000.00	R997,587.09	R249,396.75	R1,246,983.86
Year 11	R330,000.00	R1,276,983.86	R319,245.97	R1,596,229.83
Year 12	R360,000.00	R1,626,229.83	R406,557.47	R2,032,787.28
Year 13	R390,000.00	R2,062,787.28	R515,696.81	R2,578,484.11
Year 14	R420,000.00	R2,608,484.11	R652,121.02	R3,260,605.13
Year 15	R450,000.00	R3,290,605.13	R822,651.28	R4,113,256.41
Year 16	R480,000.00	R4,143,256.41	R1,035,814.10	R5,179,070.52

Results

• Total Amount Invested R480,000.00  (R30,000 X 16)
• End of Term Balance R5,179,070.52 
• Total Interest (income) earned R4,699,070.52

Choosing ETFs for my tax free savings account

I know, this looks a bit far-fetched. Well it may be a bit optimistic but it is possible to turn R480,000 to R5 Million in less than two decades (keeping all other things equal). Even more awesome is the fact that dividends and capital gains will attract no income tax, no dividends withholding tax and definitely no capital gains tax.

Important to Note:

1. Double check with the financial service provider that your investment product of choice qualifies to be one of the tax free savings accounts. Typical accounts that qualify include the collective investment schemes, bank savings accounts, fixed deposits, retail savings bonds, REITs, etc. 
2. National Treasury did confirm that most exchange traded funds (ETFs) do qualify. However, direct share purchases do not qualify.
3. Exceeding the yearly contribution of R33,000 (current limit in 2017) will attract the tax on the amount above the limit. The R33,000 yearly and R500,000 lifetime contribution may be reviewed and adjusted based on affordability conditions and inflation. 
4. Withdrawals are discouraged and cannot be re-invested. This results in the tax benefit being forfeited.
5. Both your service provider and yourself will be required to do annual reporting through SARS annual returns in the section under the income earned in the tax free account and declared as non-taxable income.  

Note:
It has been a hectic few months. Exciting times ahead. I will be renovating a multi-family property soon. I will let you in on the ups and downs of acquiring this property.

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TRADING IN STOCKS

A lot of us want to start investing in the stock exchange like the Johannesburg Stock Exchange (JSE) but are held back by fear. The thought can be quite overwhelming. No surprise there though; a whole lot of things look scary from the outside. Let us try to unpack the basics of trading in stocks, equities, shares or whatever else you prefer to refer to it as.

Trading in Stocks

I know, I'm back with examples that most educated people find undermining or patronising. Reason being that I am explaining to the reader who is like me when I started out. I was really that bad, and worse. This is what stock trading does and does not look like:

1. You start a restaurant that specialises in chicken meals. You need capital, some skills, time and the practical know how. The returns on your investment will be referred to as profits. This is a real brick and mortar physical business and obviously not any form of trading in stocks. 
2. The alternative is to buy the shares of an existing popular chicken restaurant, which makes you an owner or shareholder of a piece of that restaurant. You may be owning a tiny fraction of the percentage but who cares. Your concern is whether your fraction is growing, stagnant or shrinking. You also have a responsibility of reading and following the progress of the restaurant. When it does really well, part of the profits are shared among the shareholders including yourself. This share of profits that you get is referred to as a dividend. Dividends can be an amazing way of diversifying one's income. The higher the number of your shares, the higher your dividends. Also important to state is that, in an event that the company goes bankrupt, your loses are only on what you have invested and never on the assets that you own outside of your stocks. And this is trading in stocks or equities.

Companies that are publicly listed in the stock exchange do so to raise funds that are used in growing and in the running of those companies. Whilst as a shareholder you become a part owner of a particular company, dividends and share growth are never guaranteed. There is an element of risk, especially in the short term of the share ownership. In the longer term the performance of one's shares are more likely to yield higher returns. Pointing you to the name of this blog; safe investing is never a rushed process. It requires a lot of patience.

If you have been with me for a while you may have stumbled on the post on balancing your portfolio. Trading in stocks can can be one of the building blocks of a balanced portfolio. The main advantage of trading in equities is in owning a number of businesses without owning any of them. English can be fascinating, don't you think? Whilst shareholders don't wake up to go to the business they have invested in daily, share trading is not passive in any way. A more passive kind of investing in shares could be an investment through the Exchange Traded Funds (ETFs). Even that cannot be classified as passive because an investor is expected to make some effort in getting a deeper understanding of what is happening in the market. With share trading one needs to follow the company news and the economic or finance news daily. Markets can go crazy in a matter of days or hours. Despair not though, you will love following news when you start trading.

I would not see trading in stocks as a "get-rich-quick" scheme. It is possible to get lucky and make a lot of money or lose it in a short space of time. I so hope that your main goal is making some money constantly without a rush of a gambler. Like most investment vehicles, equities require some patience. One has to save and keep liquid money at hand to buy at the time they see as perfect. The timing is usually determined by the price changes. We buy at low rising prices and sell at high prices.

The trading happens at such a huge scale that it is easy to be ignorant to the fact that there is a willing buyer and willing seller setting the price on the market. The most popular form of trading is done electronically, of course. The stock price that one sees is the one determined primarily by the willingness of the millions of buyers and sellers to act, which is also referred to as demand and supply. A number of events in economies influence this demand and supply. As Economics101 states, high demand will lead to higher prices whilst the high supply reduces the stock prices. This is what is the basis for your trading decision making.

Before taking a decision to invest in a particular stock, you look into the ins and outs of that particular company. What the company does; how it operates; who runs the company; how profitable it is; how much it grew in the past; how is the competition; what is its strategy; etc. When a company gets some sort of negative reports like their product usage getting reduced because of competition, its demand will shrink and so will its share price. This is one of the reasons that the stock traders read and listen to business news. In reality they get paid for following business news. An investor cannot afford to be lazy to hunt for and consume information. And luckily for our generation, information is readily available in print, audio and on visual media. One does not even need to hire an expensive full-service brokerage to manage their trading activities. A lot of companies, including banks, offer cheaper DIY trading platforms.

The Bulls vs the Bears:

You have probably heard of the bull and the bear markets. A bear market is when a lot of the economic indicators are looking bad. This is like the recession market. During the bear market, one needs to time the buying and the selling to make some profits.
The bull market on the other hand is when the economy is looking good. It is an easier time for trading in stocks. An investor needs to have a strategy to deal with all kinds of markets. In the long run, markets have a way of evening the loses and gains out.

Research:

• Trading in stock involves brokerage fees which can be costly. Compare the costs and commissions of available trading platforms. I personally use one of the banks which I found not to have high costs.
• Nothing takes the place of thorough research and staying informed. Know your economy well enough to be able to pre-empt its changes. You have to know where you are going and how you plan to get there. You also need to look at the trends for a specific target sector and each target stock within the sector.
• If in doubt, start with the Exchange Traded Funds (ETFs) where a broker takes a whole lot of responsibility from you. You may take that time to learn the trading ropes from forums, books and some websites.
• Learn about the risks. And YES, it is possible to lose everything you have invested. It may not be likely if you are not trying hard to beat the market, but it is a possibility. Remember that this is not the gamble, its an investment. Starting with good quality growing companies could be a much better strategy. Whilst small caps can be lucrative, they carry a bit more risk.

Note:
I have been away for more than a month. After traveling for a few weeks I came back to my last renovation project. I was exhausted to the point that my doctor ordered me to get rest. As soon as my tenant got settled, I gave myself almost a full month rest from writing. I don't like that, but it was necessary.

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INVESTING R100 OR R200

I get emails everyday but I find it particularly impressive when students and new entrants in the job market think of saving or investing. The amount of money invested is not as important as the early start and consistency thereof. Today we have a new graduate who gets an allowance from his/ her parents or guardian. The young investors are so close to my heart because they are the ones who have the best shot at shortening the journey to wealth. Our graduate here wants to invest R100 or R200 every month. Here goes:

Hi there,
I am in my 20s. I just completed my university degree. I do not have a job yet but I have about R100 to R200 allowance that I would like to invest. My question is where you would suggest that I invest? Would it be in a unit trust or ETF?
Thank you.

I am so happy that you are thinking of starting to invest at your age and current financial status. That is quite commendable. There are limited options for investing R100 or R200 per month. This is due to the costs of investing in general. If I were in your position I would be creative to do either unit trust or exchange traded funds in this manner:

Unit Trusts
I would get information on the cheap/ cost effective unit trusts that exist on the market and put the R150 or so in there monthly. The best way to do research about the fund is to look at its historical performance. Check how the fund has performed in the past 10, 5 and 3 years. That's a good indication of how it will perform going forward. I would definitely keep it going and track its progress to see how it is doing.

Exchange Traded Funds (ETFs)
If you follow this blog, you will know that I am quite fond of this investing vehicle, especially for new investors and those who do not invest much time in reading financial and company news. The ETFs that I know of start at the minimum of R300 per month. However, the lump-sum investment usually starts at R1000. You may be able to save R100 to R200 in one of the banks' interest bearing accounts that allow a small amount to open. You may save your R100 to R200 in that account until it reaches at least R1000. You then invest the R1000 or more you have saved in the Exchange Traded Fund of your choice. Remember to do the research I mentioned in the paragraph above.

Savings Bonds
The bonus idea I have is putting the money in the savings account like you do with the ETFs in the paragraph above. When it reaches R1000 or more, invest it in the savings bonds. If you do not have a good understanding of how savings bonds work, go check these links... What are savings bonds and How to invest in savings bonds.

I wish you the best in your investment choice. Please do come back with the testimony to encourage another young person.

NOTE:
My mailbox is filled to the brim. I have read all the emails you sent but I can only respond to one question at a time. If you emailed me through the contact me form, be rest assured your response is on its way. I love hearing from you by the way. Thanks for your emails.
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AND WE ALL INVEST, SAVE AND AFFORD

One sure way to spend your money carelessly is by justifying your extravagance using fancy finance terminology. Think of how often you hear people mentioning investing or investment casually in their conversation. Because investing makes everything so much more sexy intelligent. Everyone of us is now an investor.

The "Save up to 70%" sale... and I spent.

If I got a rand every time a person mentioned their investing habits in 2014, I would have collected enough to buy me coffee every week this year. My friends have invested in a lot of strange ways, from pairs of shoes to fancy functions using their high limit credit cards. Some days I really wish I can just keep quiet and remind myself that it may not look right in my eyes but it seems to make them happy. And for some reason I just cant keep mum for long as if some part of this is my problem. One of the rare moments of me with a zipped mouth was in a group debate episode that tortured me for days on Facebook in 2014.

Before I say anything I have to mention that I have nothing against any sort of beauty styles that people choose to wear. We all have a right to our choices and priorities, right. So the lady in the debate starts by criticising the idea of expensive hair extensions, popularly known as weaves. The weave in question cost something in the region of R10,000. Some of the debate participants mentioned hair pieces costing twice that and above. A lot of those who argued against expensive weaves referred to them as a "waste of money" and those who were in favour of such hair pieces referred to them as an "investment". Just to humour you, I will share a bit of what I can remember from this heated debate:

The debate starter mentions how some people take three months to pay for a weave. Because I am so weave illiterate or ignorant if you prefer, I was just a spectator. Deep within I was screaming about how expensive these kinds of fake hair are; as if I am paying for them or the wearers owe me something. On a serious note, I need to stop acting as if everyone's financial decision warrants a word of wisdom from me. Everyone has their lives to live and deserves to live it in their own terms. As the conversation goes, everyone pro expensive weave continued using the terms "investment" and "affording". A lot of people in this group were confidently pointing out how they are investing in themselves and how they can afford these kinds of luxuries. I have my doubts, but there is a possibility that they are right on affording.

We all know how we tend to throw an "investment" terminology anywhere to feel awesome. Forgetting that an investment should always yield returns that can be re-invested.

noun: investment; plural noun: investments

- the action or process of investing money for profit

As a matter of fact, there are very few people who get returns from wearing any kind of a weave. Models, weave advertisers or even footballer's wives, maybe. But the rest of us are just spending and definitely not investing. Spending on what is important to us is not always a bad idea. But it is not accurate to refer to it as investing. Similarly, we tend to carelessly use of the term "saving".

In my recent visit to Menlyn Mall, I noticed the word "SALE" displayed in red in all store windows. The same stores marked their sale items, "from price X to price Y, SAVE 70%". Saving is great, except in this case one has just spent, and in most cases on something they don't have a use for. They spent 30% that they could have saved in the true sense of the word. I know I am being too serious about this, but using appropriate terminology does help put things into perspective for an individual. An appropriate choice of words would be "spend", "indulge", "luxury", "pamper", "spoil", etc, in these cases.

As a debate reached what felt like a climax, someone else confidently wrote "if we can afford it, why not". I must say, my over-analysing tendencies can go beyond frustrating.  At this point of the debate I was trying to define the word "affordability" to myself and found it too complex. The dictionary came to my rescue: 

afford
verb
- have enough money to pay for...
- be rich enough for...

Having money at ones disposal cannot only mean they can afford stuff. It simply means they can buy it. Affording should be after one has taken care of ALL their current and future financial needs. There are people who can afford a lot of stuff including that expensive weave. I don't know any among the middle class group. I also buy a lot of stuff I can do without or that I cannot really afford to buy. That may result in me encountering a shortage somewhere in the future. Or I am stealing from my kids and their kids. Whilst it is just expenditure in most cases, it does qualify to be referred to as an investment in instances whereby it is a piece of art or furniture piece that appreciates in value.

The point of this post is that, when we want to invest in ourselves we should get empowerment on something that develops us as individuals and not go out shopping for material things. When we invest in ourselves we should be able to list the returns from that investment. Like knowledge from a book, bonding time with family from a holiday, etc.

And when we are about to spend recklessly, we should always ask ourselves WHY? Is this adding value to my life or done to impress the next person? Sometimes it is a purchase just to pamper oneself. And that too is OK.

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TAX FREE SAVINGS ACCOUNT IN SOUTH AFRICA

Do you have any plans to use the soon to be launched non retirement tax free savings account in South Africa? I am asking because a number of us have been complaining about lack of motivation for savers as a direct result of a low tax incentive on interest income. I personally felt that our government has some dislike towards savers. It seems not. As from March 2015, we will have access to a new tax exempt savings and investment accounts.

non retirement tax free savings account

The South African government has hinted on the new policy to encourage households to save for a few years now. Who can blame them though. Living within our means is somewhat foreign to us. If you are not convinced, go check the employee car parking area in your workplace. I am not talking the CEO/ Managing Director/ Executive allocated parking bays because you may be surprised to see the opposite of what you expect there. We have a culture of spending and we embrace materialism. We are not big on buying experiences like travel and exploring our amazing nature reserves. But hey, we do seem to be a happy crowd. And if you dare resist the pressure to fit in, you will be bombarded with questions: When are you buying a car? (even when you are driving one); So you don't like nice stuff? (meaning very expensive clothing or furniture); Don't you think you deserve better? (meaning you should be swiping a credit card as a symbol of sophistication)...

In reality, it is in the interest of the state to encourage citizens to save. We cannot achieve sustainable  economic growth without sufficient and continuous household savings. Before we look at the details with our magnifying glasses, I have to encourage us to consider taking advantage of this with the highest level of sobriety. Apart from the annual and lifetime limits that bring complexity to this one, anything that has a tax incentive or labelled tax free should be great. That includes your retirement annuity (RA). I do hope that readers of this blog will throw themselves at this one.

The Basics of the Non retirement Tax Free Savings Account in South Africa

• One is limited to a maximum contribution of R30,000 per year and R500,000 lifetime contribution initially. This is at most R2,500 per month over a period of 12 months. Assuming that one exhausts the limit every year, they have close to 17 years of contribution period. This contribution limit will be reviewed and adjusted with inflation.
• One can use the approved bank accounts, collective investment schemes, exchange traded funds (ETFs) and retail savings bonds to access this tax incentive.
• One should only use the accredited financial service providers viz. banks, asset managers, life insurers and brokerages to access these tax-exempt savings accounts.
• Amounts that are withdrawn cannot be replaced at a later stage. Once withdrawn, one cannot get the same tax benefit by replacing the withdrawn amount.

If I were allowed to be ungrateful just for a moment, I would complain about the R30,000 annual contribution and especially the R500,000 lifetime contribution limit of this non retirement tax free savings account. Those are tiny amounts. Do not blame me, I am just being a typical South African.  The current incentive does not immediately replace the existing interest income tax exemptions. You probably know that a maximum of  R1,983 and R2,875 monthly interest earned is tax free currently. An example will be interest you earn from your money market account. This translates to an annual tax exemption of  R23,800 interest income for persons below 65 and R34 500 for people above 65. This is the tax incentive that will be replaced by the new one over time.

Be on the lookout for these types of accounts from March 2015. I definitely will. Exercise caution as not all savings accounts and investment products will carry this tax free benefit. Remember that it is not for an emergency fund type of purpose as withdrawals are discouraged with some sort of a penalty. Once you decide to save/ invest to benefit from this tax incentive, do it as a "save-and-forget about" type of decision. It seems to me that this will be implemented using the existing simple accounts and investments we are familiar with.

My take on this proposal is that, it will be more beneficial to those using high interest/ return saving vehicles like ETFs. This should translate to zero tax on dividends, fund growth and capital gains during the investment disposal. The details do get complex to imagine especially given the limit and possible withdrawals. Tracking systems will obviously be in place, so that should not give us sleepless nights. We should also treat it as a long term investment tool. You only have R500,000 chances of benefiting in your lifetime. thread with caution.

What do you make of this non retirement tax free savings account in South Africa?

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BOND LADDER

If you haven't already read about the basics of savings bonds and how to invest in SA retail bonds, give them a go by clicking on those links and read them. As promised, today we will be looking at how one can ladder their savings bond investments.

A bond ladder is simply used to take advantage of the high interest rate periods and reduce the impact of the low interest rate periods for a fixed rate bond investor. An amount of money that should be invested is divided into smaller lump-sum pieces that mature at different times. If for instance one has R300,000 to invest, they may divide it into three pieces that mature in 2, 3 and 5 years.

Remember that your bond ties the interest rates to the value they were at the time of registration. If the interest rates are 7% for 5 years savings bonds and one invests R300,000; 7% is what they get regardless of the change in the interest rates during the investment period. To try and combat this, an investor staggers that same R300,000 into three R100,000 pieces like this:

Year 2014 December
R100,000 for 2 Year Fixed Rate bond at 7.25% maturing in 2016 December
R100,000 for 3 Year Fixed Rate bond at 7.25% maturing in 2017 December
R100,000 for 5 Year Fixed Rate bond at 8.25% maturing in 2019 December
     
What the laddering does is to release the first R100,000 in 2016 in order for one to reinvest it at higher interest rates if the interest rates have gone up between the investment time and maturity of that bond. If the interest rates go up sometime in 2015 and/or 2016, one will have an opportunity to reinvest their R100,000 (plus interest) after maturity at that higher interest rate. The same happens in 2017 with the second bond and in 2019. You now have three different bonds which diversifies your risk over a period of five years or longer.

The other attractive way to do this is investing the R300,000 at various times. This is what appeals more to me. Lets try an example:

With our R300,000 broken into into 3 pieces invested at different years from 2014.
R100,000 for a 2 Year Fixed Rate bond at 7.25% invested in 2014 and maturing in 2016 December
R100,000 for a 2 Year Fixed Rate bond at 7.25% invested in 2015 and maturing in 2017 December
R100,000 for a 2 Year Fixed Rate bond at 7.25% invested in 2016 and maturing in 2018 December

I will not do the three years fixed rate bond as I find it pointless since both the 2  and  3 years fixed rate bonds earns the same rate. The shorter the period the better in that case.

OR
R100,000 for a 5 Year Fixed Rate bond at 8.25% invested in 2014 and maturing in 2019 December
R100,000 for a 5 Year Fixed Rate bond at 8.25% invested in 2015 and maturing in 2020 December
R100,000 for a 5 Year Fixed Rate bond at 8.25% invested in 2016 and maturing in 2021 December
etc.
With this process you get to have the bonds maturing every year after the initial five years of investment. This does not have to be done annually. It may be every 6 months or any other number of months for that matter. To complicate it a bit one can take bonds that mature at various periods at different years. I know it can spin one's head thinking about this but the point is that one should be collecting interest every year. 

I personally want to invest a set amount every year. For practicality's sake, I will make an example of R100,000 per year over 5 years with all the interest reinvested. This makes my capital R500,000.
R100,000 for a 5 Year Fixed Rate bond at 8.25% invested in 2014 and maturing in 2019 December with R150,845.88
R100,000 for a 5 Year Fixed Rate bond at 8.75% invested in 2015 and maturing in 2020 December with R154,637.37
R100,000 for a 5 Year Fixed Rate bond at 9.25% invested in 2016 and maturing in 2021 December with R160,500.95
R100,000 for a 5 Year Fixed Rate bond at 9% invested in 2017 and maturing in 2022 December with R156,568.10
R100,000 for a 5 Year Fixed Rate bond at 8.25% invested in 2018 and maturing in 2023 December with R150,845.88

I tried to change the interest rates throughout the initial 5 years of investing. You see how one ends up having their bonds mature every single year. I hope it clarifies the point of laddering your investments instead of investing your R500,000 at once. Investing the smaller amounts gives you some power and control as the interest rates change. You also get to have your income every year. Remember that the R100,000 could be R1M for some people. After a five year period that would give you about R500,000 or more in interest annually. The pensioners can opt to get their interest monthly, which makes for a nice monthly passive income.

Something we should all remember is that savings bonds are not high return investments. They are less risky compared to other investments.  If you are thinking of balancing your portfolio, consider building up your own bond ladder. This is very important as one gets older. A secure savings account with a government guarantee is not too shaby. 

Finally, it's a holiday week. I will write another article or two this week because I promised a reader one on earning interest on a credit card.

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INVESTING IN SA SAVINGS BONDS

Yesterday we tried to explain what savings bonds are. With my imbalanced portfolio, I find investing in SA savings bonds quite appealing. And though I hate to admit it, I am fast approaching the "cautious investor" age group. Risk aversion will soon be the name of the game. We need to start shifting some funds to the bonds in a laddered investment fashion. Bond laddering is actually my next post, I have not forgotten. It could be the last post in this series, at least for now.

The one advantage of savings bonds is that of securing your capital. They provide a safer haven for investors who need to preserve their capital, as opposed to the risk they would be exposed to in the stock market. I also have to mention that exposure to risk is not always bad. Especially when you are young enough to recover funds lost in case of a mishap. You can do with a lot of stock trading in your 20s and 30s. As you go towards your 40s, a balanced portfolio starts becoming essential. You will always do well with stocks but of a lower percentage to the total portfolio as you grow older. Forget about how passionate you are about a certain form of investment and look at your portfolio from the outside. Thats rich coming from me, I know. (We are at the portfolio balancing stage people, please don't judge). No one type of investment is good enough to be a portfolio on its own.

I will eventually get to the how part of investing in SA savings bonds, I promise. Let me give a few facts and opinions on the subject first. Savings bonds are one of a few investment options that offer totally passive income. Even though they earn smaller returns than most investment vehicles, they are very unlikely to renege on their promise. If you collect your interest on a certain date, it is coming. Other forms of investment earnings are not as certain. Dividend declarations depend on the performance of a particular company and property rentals depend on the willingness of the tenants to pay. Savings bonds are also made attractive by the fact that they have no fees. Please refer to the previous post for basics on South African savings bonds.

Please keep in mind that we are only looking at SA government savings bonds and not covering the ones that are issued by corporates. 

Investing in SA Savings Bonds. How to:
All South African post offices have information and brochures about SA retail savings bonds. Grab a pamphlet with all necessary information and application forms from there. You may also visit their website at www.rsaretailbonds.gov.za or visit the National Treasury offices near you. You may also call them at 012 315 5888. I also read from their website that one can apply from any branch of Pick 'n Pay.

After applying for the bond and getting registered (issued with some investor number) you can also make the payment in the places mentioned above. Please remember to state your investor reference number correctly. It is too easy to make errors when filling forms and sometimes costly to rectify them. The minimum investment is currently at R1000 and the maximum at R5 Million.
   
Investing in SA Savings Bonds Indirectly
One can also invest in savings bonds exchange traded funds (ETFs). The bond ETFs invest in different government bonds on your behalf for a set period. I am not so keen on bond ETFs because I find the process of investing directly in the SA Retail Savings Bonds simple enough. If you are like me, you have probably invested in the ETFs in various sectors already. I also have a suspicion that an ETF will earn less than the direct bond investment, because of the middle man factor.

Please give your views and experiences on governments savings bonds if you do have some. I love hearing from you. Next week is the long awaited bond laddering post. Have a lovely weekend.

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