By Rita Cool
South Africans are facing one of the toughest economic environments in modern history.
High interest rates are not only applying pressure on people with bonds and vehicle repayments, but the current economic environment is a hotbed for inflation, leading to an increase in the prices of goods and services.
As consumers’ disposable income decreases, families face the unenviable task of cutting down on spending, and in the process, they might forget to look at the longer term and building wealth.
Treat SARS as your friend
The tax filing season is when taxpayers find out whether they owe SARS money or if they will be receiving a rebate.
These rebates can be substantial if consumers maximise their transportation, medical aid tax credits and retirement contributions.
When allocating the tax rebate, remember to take advantage of the R36 000 per year tax-free savings account contribution. This allows your money to grow and be accessible when the household budget is at its tightest.
Although the tax-free compounding benefit becomes evident over a longer period, you can access the investment in an emergency.
A gift from SARS
The tax year-end on 29 February is around the corner. You can still benefit from making contributions towards retirement funds, which include pension or provident funds and retirement annuities, to get tax back.
You can contribute up to 27.5% of your taxable income, up to R350 000 each tax year, and get the tax benefit on the contribution. The tax you get back can help with your budget and cash flow later in the year.
Eliminate or reduce short-term debt
Companies are under as much financial pressure as consumers. Bonuses are either a luxury or are being scaled back.
Those lucky enough to receive a bonus should consider allocating a portion of this amount to reducing short-term debt. Bonds and vehicle repayments are considered debt, but are considered better debt, as a house is an appreciating asset and a vehicle allows consumers to do their jobs.
However, short-term debt, such as credit cards or short-term loans, can be burdensome. While they offer immediate access to cash, the money spent servicing this debt is significantly more, especially as interest payments can spiral out of control.
Eliminating debt may impact a household’s budget in the short term, but reducing these repayments will prove beneficial in future challenging economic climates.
Your financial adviser is a trusted partner
Let's acknowledge the obvious. A significant number of South Africans perceive insurance as a reluctant expenditure, as there are no immediate, tangible advantages to paying premiums for an occurrence that might never happen.
Not being sufficiently insured is a risky and unnecessary position that could leave consumers exposed financially when they can least afford it.
Considering that approximately two-thirds of the vehicles on South African roads are uninsured, this means there is an almost 70% chance that an accident might involve an uninsured driver.
Additionally, most South Africans want to use private healthcare facilities in an emergency or when there is a medical procedure.
Speak to your financial adviser and reassess your insurance cover. Instead of cancelling it, consider shopping around to improve the terms or reduce costs. You could also ask your adviser if there are ways to improve your cash flow while remaining insured.
Consider what cover you still need and what can be cancelled, especially if you are over insured due to additional cover through your employer as well.
Reinvest where you can
Insurance needs change as you get older or your lifestyle changes. Some consumers need less than others.
After ensuring that you are adequately insured and have built up an emergency fund equivalent to 3 – 6 months’ worth of income, maximise investments into your retirement annuity or other wealth-building financial products.
Albert Einstein once called compound interest the Eighth Wonder of the World; the end of this quote says: “Those who understand it earn it. Those who do not understand it pay it.”
Warren Buffet also praised compound interest, calling it an investor’s best friend, and compared building wealth through interest to rolling a snowball down a hill.
The sooner you start implementing your financial plan to reduce debt or save for your future, the more you will benefit from compound interest. Saving will increase your funds over time and reducing debt will result in paying less interest on your loans.
Ripple effects make a difference
There is no doubt that consumers are under financial pressure and are being forced to make tough decisions. However, it is still possible to build wealth by making use of opportunities. Small financially sound decisions add up in the long run. Work smarter as well as harder when it comes to building wealth.
Speak to your financial adviser to discuss your options and make sure that it is time well spent.
*Rita Cool, head of Individual Consulting Strategy, Alexforbes
**The views expressed here are not necessarily those of IOL or of title sites.