Let your future go according to plan

2010-10-02 09:36

Farrah is a 26-year-old who is sensible with her money. Rather than taking on debt she saved up first and bought her car with cash. She contributes to her company ­pension fund and has emergency ­savings in her credit card.

Because she is debt-free and still ­living at home she can use this opportunity to create real long-term wealth by boosting her savings. Remember saving is not about having “enough” money it’s how you choose to spend that money that matters.

Farrah has four dreams she would like to start saving for: emergency savings, the Brazil World Cup, a deposit for her own home and capital to start her own business.

Although retirement savings are not on her list of savings goals, this is something she needs to include in her financial plan. Currently Farrah is contributing to her pension fund but she needs to ensure that she is taking maximum advantage of this tax-free saving.

What she needs is a financial plan.

Retirement savings

According to Mike Heeley, a consultant at Alexander Forbes, Farrah’s retirement nest egg is on track as she started saving from her first pay cheque. However Farrah needs to ensure that she is contributing the maximum that she can to her pension fund.

Most companies contribute 7.5% of your salary to the company pension fund and you have the option to contribute up to 7.5% to make it 15% of your salary. This 15% is deducted before tax so it reduces the amount of tax you will pay – effectively the taxman helps fund your retirement savings.

Heeley has calculated that Farrah needs to save 15% of her salary to provide an income in retirement of 75% of her current salary at today’s value until age 91. If Farrah only saved 10% she would run out of money by the age of 76. This figure is true for anyone saving for retirement?– even if you start at the age of 25 you need to invest the maximum you can.

Emergency savings

According to Heeley, the rule of thumb is that you should have the equivalent of three months income saved in case of an emergency. Farrah has saved close to that so it will not take her long to reach that goal. Heeley has recommended that the money be held in a money market fund as the interest she receives there will be more than she would get from holding it in her bank account.

Saving for Brazil World Cup

Heeley says that as Farrah has four years to save for this dream she can afford to take some on risk in order to achieve a reasonable return above that of the money market and could invest the money in a low equity prudential balanced fund.

He recommends that she do this for three years, but in the year leading up to the Brazil World Cup when Farrah will need the money she should then hold it in a money market fund to protect the capital.

Assuming a conservative real return (after inflation) of 2% per year over the period, Farrah would need to save about R1 000 per month to reach her goal.

Saving for a deposit

When calculating how much you need to save for a deposit on a home you need to ask a few questions first.

What is the value of the house you want to buy? How much of a deposit do you need? Remember you may also need to put some money aside to pay for transfer duties, depending on the value of the house.

Heeley says Farrah needs to decide when she plans to buy a home. This will determine her investment time horizon and the type of investment to make as well as how much she needs to save each month.

For example, if Farrah wanted to wait until after the Brazil World Cup to buy a property worth R500 000 and to put down a 20% deposit, she would need to save R100 000 in four years. Transfer duties don’t apply on houses up to R500 000 so she doesn’t have to worry about that. She would adopt the same investment strategy as for the Brazil trip and would need to save R2 000 a month towards this goal.

Start-up capital ofr your own business

Heeley says that this would be a longer-term goal of at least 10 years. Therefore Farrah will need to take on more investment risk in order to achieve a return sufficiently above inflation.

She can therefore afford to invest in equities (shares) for a considerable period of time before she starts her business. She would only need to switch this into cash to preserve the capital when she is seriously beginning to think about it.

There are a couple of good ways to do this:
Satrix offers a range of exchange traded funds, which are an efficient way of gaining equity market exposure at low costs. You are guaranteed to get a return equal to the average performance of the market less costs. This is a pure equity investment and does not offer diversification into other asset classes such as bonds, cash or property

2 Unit Trusts
Unit trusts are collective investment schemes that give individuals access to some of the top investment professionals in the country. They provide great flexibility with regards to how the money can be invested.

There are a large number of funds available that one can choose from to put in place a portfolio that is most suitable to your specific needs, ranging from pure equity, bonds, cash and property funds to various combinations of the asset classes.

Although unit trusts are more expensive than index funds as you are paying a professional to actively manage the fund, a good asset manager will significantly outperform the index over time.

Heeley suggests Farrah holds these investments in her own name and not in an endowment policy. Endowment policies are taxed internally at 30% which is significantly higher than her personal tax rate.

Farrah will also benefit from the interest and capital gains tax exemptions which do not apply to endowments.

Endowments are also relatively inflexible in comparison and may also come with additional costs.

How she prioritises her savings is up to her as it is based on the importance of each of these goals to her.

Her shorter-term goals, such as a deposit for her house and the Brazil World Cup can be housed in the same investment as the strategy will be the same. However, the longer-term goal of starting her own business requires a different strategy and therefore should be housed in a different investment product.

How to save for the Brazil World Cup
It’s difficult to estimate exactly what a Brazil World Cup experience will cost as tour packages and ticket prices have not been announced yet.

It also depends on the type of accommodation you want, how long you are staying for and also the strength of the rand at that time.

You may also want to include a few tourist activities – after all when will you get a chance to experience South America again.

It’s unlikely that you would get away with less than R40 000 for a two-week experience by the time you have paid for flights, accommodation, tickets, meals and entertainment.

With around 1 200 days to go, you would need to save R33 a day, R231 a week or R990 a month.

That is just a pack of cigarettes a day!

Some tips for travelling to Brazil

  • Don’t book accommodation through Match, Fifa’s booking agency. The South African experience is that they overcharge substantially. Many foreigners waited until the bed nights were given back to hotels to book.

  • It’s a good idea to start doing your research on Brazil and the cities you wish to visit. While many football fans who visited South Africa tended to ignore our tourism industry, you can include a Brazil travel experience into your football experience.

  • Useful websites include:
Brazil Travel Blog, Brazil Travel Guide and Trip Advisor.

Join the conversation!

24.com encourages commentary submitted via MyNews24. Contributions of 200 words or more will be considered for publication.

We reserve editorial discretion to decide what will be published.
Read our comments policy for guidelines on contributions.

24.com publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
Comments have been closed for this article.

Inside News24

Traffic Alerts
There are new stories on the homepage. Click here to see them.


Create Profile

Creating your profile will enable you to submit photos and stories to get published on News24.

Please provide a username for your profile page:

This username must be unique, cannot be edited and will be used in the URL to your profile page across the entire 24.com network.


Location Settings

News24 allows you to edit the display of certain components based on a location. If you wish to personalise the page based on your preferences, please select a location for each component and click "Submit" in order for the changes to take affect.

Facebook Sign-In

Hi News addict,

Join the News24 Community to be involved in breaking the news.

Log in with Facebook to comment and personalise news, weather and listings.