January marks the start of both a new year and a fresh and exciting new decade with many challenges and surprises in store. So, as we wrap up 2019 and prepare to set off into the roaring 20s, I found myself pausing to reflect on the key financial lessons that life has taught me so far, offered here for the benefit of others walking their own financial journeys.
The very real danger of debt. One of my hardest lessons has been the importance of getting rid of unnecessary debt and doing my best to repay debt as quickly as possible.
Growing up, my mother struggled with her finances and built up all sorts of debt through store cards and loans. She was living beyond her means. Having a child to care for didn't help, and we eventually ended up losing our family home.
That was the most difficult time of my life, and I vowed from that moment on to be cautious with debt. To this day, the only loan I have is a home loan, and whenever I incur debt, I always make sure to pay it off as quickly as possible.
Many people underestimate how much money they can save in interest charges by repaying debt quickly.
For example, if you have a home loan of R1 million with an interest rate of 10.5 percent and a 20-year term, by repaying only the minimum amount due each month, you would pay the bank a total of nearly R1.4m in interest charges alone over the 20 years.
If, however, you topped up your repayments by only R500 each month, you would shave nearly three years off your repayment period, and save more than R230 000 in interest payments. And by increasing your loan repayments by R1 000 each month, you could cut your repayment period by nearly five years, and save nearly R390 000 in interest payments.
The best defence against wasteful spending. After my son was born in 2017, I spent a great deal of money on unnecessary baby things. I soon realised that creating a budget and sticking to it was my best defence against overspending and impulse buying. Having a clear-cut budget has helped me tremendously, as I now know exactly where my money is going, what my limits are on spending, and where I need to cut back.
Without a budget, it is difficult to monitor your spending, and many South Africans overspend perhaps without even realising it. According to the 2019 Old Mutual Savings and Investment Monitor, for example, 72 percent of the South African households surveyed were unable to consistently make ends meet every month, as their expenses outpaced their incomes.
The best part is that creating a budget is simple. All you need is a pen and paper, or you can create a spreadsheet on your computer, or use one of the many free apps that are available - whatever works best for you.
Your first step is to record all your expenses for one month. Next, group these expenses together, look for any problem areas, and set yourself some spending limits, remembering other financial goals, such as saving and investing.
The early bird catches the worm. Before I started working in the financial services industry, the only savings vehicle I was aware of was a stokvel. I am grateful to have been exposed to many more types of savings vehicles since then, and I have been able to pick investments more suited to me and my individual needs, preferences and goals.
Most importantly, I have learnt that it doesn't matter how small your initial contribution is, but that the key to success is to begin saving and investing as early as possible. In my experience, the sooner you begin investing, the more your wealth can grow through capital growth, interest and dividends.
For first-time investors, a good place to start is to consider investing in a tax-free savings account (TFSA). Every person can invest up to R33 000 each year (or R2 750 a month), or up to R500 000 over their lifetime, in a TFSA without paying a single cent in tax on your investment's growth and returns. This means that the investments are free of taxes such as capital gains tax and taxes on the interest and dividends earned, giving my savings a powerful boost over time.
As a parent, I am also investing in a TFSA on behalf of my son. The investment that I have made will count towards his lifetime limit, but by starting his investment for him when he was born, I have given him a 20-year advantage before he would be able to use his own earnings to save.
Give, and you shall receive. I believe this wholeheartedly, and I have seen this tenet at work in my life, as well as in the lives of those around me.
Many people in our country do not have the means to see to their basic human needs, and with the holidays around the corner, this is the perfect time to give back to those who are less fortunate - whether this be the gift of your time through volunteer work, clothes, food or a financial donation.
Those who make financial donations to recognised public benefit organisations (PBO) may also be able to claim a tax deduction, making donating a win-win.
In order to claim a tax deduction, the PBO needs to have received approval from the South African Revenue Service (Sars), and must provide the donor with a section 18A certificate confirming your donation. A list of approved PBOs is available on the Sars website.
Deductions for donations to PBOs are limited to 10 percent of your taxable income.
Silindile Ngubo is a fund accountant at Cannon Asset Managers.
PERSONAL FINANCE