Savings, investment is crucial to achieving financial freedom - Old Mutual

Article from Personal Finance, supplied by Old Mutual.

With slow economic growth continuing to put pressure on consumers, now is the time for South Africans to curb unnecessary spending, pay back debt as quickly as possible and invest carefully, says Elize Botha, Managing Director of Old Mutual Unit Trusts.

In his budget speech, Finance Minister Tito Mboweni announced an increase of R15 billion in tax paid by consumers. Fuel levies will increase by 29 cents per litre for petrol and 30 cents per litre for diesel. 

“While these increases are not significant, relative to previous tax hikes, this is little consolation for the man in the street who is already under pressure. Within the current economic environment, it is not only Government that needs to cut down on spending. The average South African will need to cut back on non-essential spending if they want to be able to save,” says Botha.

As was widely expected, no increases in personal income tax were announced. Instead, to boost collection of personal income tax, taxpayers who have received nominal increases in salaries or wages to offset inflation, will be pushed into higher tax brackets, resulting in an increase in income taxes, but no increase in real purchasing power.

The 2018 Old Mutual Savings and Investment Monitor revealed that South Africans are financially under pressure, with many supporting their extended families and high amounts of debt to repay. “Now is the time to take a conscious look at your expenses, see what you can cut back on, avoid unnecessary spending on luxury items and pay off short-term debt, such as credit cards or retails accounts, which carry higher interest rates, with any spare money you may have,” advises Botha.

Botha suggests establishing how much money you can put away each month, by using the simple 50/30/20 budgeting rule: 50% of your salary should go to your living expenses, 30% towards servicing debt, and 20% for investments.

For first time investors, Botha suggests using their tax free-allowance to invest in a local tax-free unit trust exposed to global markets. “This means investors will pay no capital gains tax on the growth of contributions to the maximum of a lifetime limit of R500 000, regardless of the fund’s performance, which is a great incentive,” she says.

Sustainability was also a key theme in the Budget, which is not surprising, with carbon tax (tax levied on the carbon content of gas released into the atmosphere) implementation coming into effect on 1 June 2019. Botha believes that the demand for investment in sound, quality and responsible companies will continue to grow as investors continue to align their personal philosophy with their financial goals.

“Consumers, especially millennials, are holding companies more accountable for how their behaviour impacts society and the environment. A rapidly transforming world makes responsible investment an imperative, as having a long-term investment view is an essential part of ensuring a sustainable future. Environmental, social and governance (ESG) investment funds have repeatedly demonstrated that the funds can not only meet, but often outperform investors’ return expectations,” Botha says.

While the 2019 budget might have highlighted a bumpier road ahead for the national economy, this doesn’t mean that South Africans need to sacrifice their long-term financial security. “Although it might not feel like it, there is still capacity to save and invest, given that households currently spend 67% of their income on living expenses and consumption. It is essential to differentiate between essential and non-essential spend. It is not always important to keep up with the Khumalo’s – financial freedom is far more valuable,” Botha concludes.