You're told to build up your savings reserves while whittling down debt in order to become more financially free.
But when it comes to the practicality of it, when you earn very little and depend on pay day loans or your credit card to make it through the month after fulfilling your monthly debt obligations and expenses, there is very little to live on – never mind save.
“For me, the first step towards achieving financial success is often the most difficult, but absolutely the most important. The first step is acknowledging that money is complex and irrational, and therefore that you need a professional financial adviser to help you make the right money moves. I tapped into the knowledge of my financial adviser to help me with the formula to financial success,” Charlotte Nsubuga-Mukasa tells Drum when we ask her how low-income learners can start saving.
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“When it comes to saving, most important consideration is to speak to a financial adviser – your needs are unique, and the solutions you need will be, too. Part of the considerations should be to make effective use of the available opportunities to optimise your tax,” says the Head of Momentum Brand Marketing as she shares the following top five most effective savings vehicles for low income-earners.
- Retirement annuity (RA)
"When you want to save for the long term, specifically for retirement, then a retirement annuity is a great option. Because you can deduct your contributions to a retirement annuity from tax, this vehicle really stretches your rands because of the tax rebate that you will receive from the South African Revenue Service (SARS).
"In addition, the investment returns you earn on a retirement annuity are exempt from tax."
- Tax-free savings account (TFSA)
"Switch up your money moves with this great long-term savings vehicle. When you contribute to a tax-free savings account, your investment returns and proceeds are exempt from tax. A yearly and lifetime limit applies to the contributions, currently R36 000 per year and R500 000 respectively.
"You can withdraw from your tax-free savings account, but a form a penalty applies: You cannot top up the available lifetime limit when you have withdrawn. Best is to leave long-term savings alone.
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"A linked investment focused on long-term goal-based savings can provide an effective way to save regular amounts over the long term while allowing you to use your personal tax exemptions to optimise your tax. This is ideal if you want to save for a specific goal and your effective tax rate is less than 30%."
- Endowment
"An endowment is ideal for allowing you to nominate beneficiaries on the policy. When you die, the proceeds are protected from creditors and the service provider pays the money to your beneficiaries without delays that would otherwise apply if the money formed part of your estate.
"If you save for your child’s education, you can a pay a small additional amount of insurance to make sure that the company continues to pay your contributions on your behalf when you pass away. This is a great way to ensure that your child will be able to study one day."
- Emergency fund
"Having an emergency fund to stay in the driver’s seat. This enables you to manage any bumps in the road that you may experience and allow you to leave your long-term savings to continue, when life happens."
