You know it is Janu-worry when you are back at work, traffic is seemingly worse than last year and the memories of quality time spent on summer holiday with your loved ones are fading fast. Although it is a month in which resolutions are made and often broken, the month of January brings about an unusual earnest to get things done – it is as though our minds like the idea of a clean break. A new year to write down (if you still write and date things!). This could be to finally get yourself in shape, to start a new hobby, to sort out your finances or to reconnect with old relations. These always seem like nice ideas, until you realise the effort needed to achieve it.
There is a saying that asks how one eats an elephant? The answer, quite ironically is little by little, which highlights one of the most important psychological aspects of achieving big goals: Incremental efforts. In the context of your financial affairs, we’re often faced with the “savings” or “retirement” conundrum, and it is quite easy to look at an optimistic goal without appreciating the smaller (incremental) steps which need to be taken to get where you want to go.
A Tax Free Savings account is one such product which, if utilized properly, can easily show-off the benefits of incremental efforts. The concept is basic: You have an annual maximum limit of R 33,000 to invest, with a lifetime limit of R500,000. Once invested, your money will grow tax free. There will be no taxes on capital gains, interest or dividends. The ideal use-case of such a product is where you have a long term to retirement (10years +), you are exposed to local and offshore growth assets, and you are utilizing your full annual limits. This nest-egg can then make up a significant part of your income in retirement, with zero tax on withdrawals. Bargain!
We see this product as an optimal way to save up discretionary assets, to be used for retirement. If you are one of the few early adopters who started investing in a Tax Free Savings account in 2015, you are about to embark on your 4th year of tax free investments. Congratulations!
If you missed the boat, and feel like you would like to start saving tax smart, remember that there is no time-limit on this strategy, only a contribution limit. Little by little, year by year, you will be able to build up your discretionary, tax free capital to reach your big “one-day” goals. To get your 2018 tax year contributions in, make sure to get them in before 28 February 2018. We’d urge you to not wait until the last minute, which increases the probability of disappointment!
We’re always keen to hear from you, and invite your thoughts on this and other financial planning topics.
