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BUSINESS NEWS - While we all have different incomes, most of us can agree that we aim to be financially secure. Knowing how to budget is the first step to achieving financial well-being.
Elbie Pretorius senior consultant at Alexander Forbes, has some pointers around budgeting and saving to help you live within your means.
Necessity or luxury?
Divide your budget into what you need to cover your necessities and then your luxuries. Be ruthless and cut any unnecessary spending. These amounts will add up in building emergency savings, which will alleviate a lot of financial pressure.
Necessary expenses
Insurance (household, personal and motor), medical aid, rent or bond payments, and debt repayments are necessities. In a tough financial climate, these are usually the first things cut from a household budget or where people start to fall behind on payments. They seem like grudge purchases, but you do not want to find yourself in a situation where you need to claim and cannot.
Contact your service provider every year and review your premium to ensure that you are still getting the best value and cover for your money.
Debt
Make every effort to not accumulate debt; if you do, make sure you pay minimum monthly amounts to keep your credit rating in good stead. Where you have more than one account, choose the smallest one and pay it off first. This will give you a sense of achievement and the confidence to move onto the next one to pay down your debt.
Once the accounts are cleared, allocate these amounts to your savings and build up a safety net with emergency funds. Covid-19 has illustrated the importance of having an emergency fund, with many people being retrenched, temporarily out of work or having had their salary cut.
The best way to work out what your emergency fund target should be is to look at your monthly expenses, and strive towards making sure you have up to three or six months’ worth covered.
Groceries
Doing grocery shopping online gives you the opportunity to shop at your leisure. It can also prevent you from impulse buying that seems like a good idea when shopping in-store. Working full day may not leave much time or energy to cook dinners every night and while it is tempting to buy readymade meals, these, along with takeaways, are expensive. Rather set aside some time once a week to prepare meals that you can freeze and use as needed.
Life cover
In the event of your death, are your children taken care of? Some employers offer group life cover which will alleviate some of the burden of providing for your children’s future. However, this might not cover all their needs as well as a tertiary education. Taking additional life cover means a sum of money will be paid to your estate or trust to cover day-to-day expenses and education.
The younger you are when you take life cover, the better the premium will be as you are generally much healthier. Age-rated premiums will start out to be cheaper but become significantly more expensive the older you get. Rather consider level premiums with fixed escalation; they may be more expensive to begin with but will prove to be more affordable in the long run.
In addition, you can take benefits for critical illness and disability (monthly income and lump-sum disability) either as stand-alone or accelerated benefits. Bear in mind that although stand-alone benefits are more expensive, they will not reduce the payout on the whole-of-life cover amount for any claims made before your death.
Saving for your child’s education
It is important to save for your child’s education from birth. On average, a private education for your child from nursery to high school can cost up to R1,5 million in today’s money – without a tertiary education. When it comes to birthdays and special occasions, don't be shy to ask family and friends to rather gift money instead of gifts so that it can be added to your child's investment account where the power of compound interest will work its magic.
A tax-free savings account (TFSA) allows you to contribute up to R36 000 each year for yourself as well as each child. All future growth as well as withdrawals will be tax free. In addition, in the event of your death, your TFSA will be paid directly to your beneficiaries, so executor fees will not be payable. Estate duty, however, will still apply.
Saving for your retirement
In today’s uncertain and ever-changing environment, we often overlook planning for the future for living today and believing that tomorrow will sort itself out. We use easily accessible savings to settle debts and pay for items we want but don’t need.
One of the ways we can save for retirement is to invest in a retirement annuity fund to help future-proof retirement planning. The purpose of a retirement annuity is to provide you with money to buy a pension, called an annuity, at or during your retirement years. That being said, you may withdraw a sum of money tax free up to certain limits when the policy matures. You may withdraw up to one-third of your money from the age of 55 (hopefully we are all wiser and have a good relationship with money at this point).
You can make a tax-free contribution every month (up to certain limits) or invest a large sum of money to top up contributions when you leave your employer or at any other time (up to certain limits) . This may assist in reducing your income tax liability to SARS. Investment portfolios consist of local and international shares, property, bonds and cash, depending on your investment risk profile. You don’t pay any tax within the investment, which means no capital gains or dividend withholding tax. Should you pass away before the policy matures, there will be no estate duty. Financially dependent heirs will receive a share of your accumulated retirement savings.
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