Money Saving Tips
Updated: Apr 3
A question that gets raised repeatedly in the current economic climate is “What are the ways in which I can save more money?”
Whilst all the traditional answers like preparing a monthly budget, spending less on non-essential items etc, are nevertheless still applicable, this article suggests some of the less obvious ways to save money.
The first 2 tips, are related to reducing the personal tax payable on your income and reducing the tax erosion on the value of your investments, thereby equating to more money in your pocket.
The first suggestion is related to your retirement savings. Money invested by taxpayers into a retirement savings account (whether in the form of a pension, provident or retirement annuity fund) is tax deductible up to a maximum of 27.5% of your taxable income or your remuneration, whichever is higher. This applies equally to salaried employees or taxpayers that are self-employed. The maximum deduction allowable in any given year of assessment is R350 000 (which only applies if you are earning more than R1.27 million a year).
The benefit of an additional contribution to your retirement fund is two-fold, not only are you investing your extra income into your future retirement via a forced saving, you are also effectively getting money back from SARS on your contributions. The tax saving on these contributions is equal to your applicable tax rate (according to the SARS tax tables depending on your taxable income level) multiplied by the retirement contribution amount.
It should also be borne in mind that you can stick to your current monthly retirement contributions, that you are comfortable with, and then should you have some additional money or savings at the end of the year of assessment (i.e. before 28 February each year) you can make an additional once-off lump sum contribution into your retirement fund (up to the maximum discussed above) in order to maximise your tax savings at year end.
You can then use your tax refund/savings from SARS to invest into a tax-free savings account or to make additional lump sum payments into your bonds – which brings us to the next tax saving tip.
The second suggestion looks at the underutilised tax-free savings account. Money invested in a tax-free savings account (TFSA) earns interest and dividends tax free. Similarly, any gains made on the underlying investments are also tax free. The maximum contribution allowed per year is R36 000 with a lifetime limit of R500 000 per person. Remember that your whole family including your children can each contribute up to these maximum amounts.
The exempt income earned can be reinvested (and does not count towards the annual or lifetime contributions) and because it is tax free the value of the tax-free investment could be almost double in 20 year’s time than it would have been had the same contributions been made into investments that are not in a TFSA.
The third suggestion is not a tax related one. It is based on the so-called “Snowball Effect”. This principle work as follows: Choose the debt that is charging you the most interest and focus on paying off that one first. Once your most expensive debt is paid off, take all of that money that you were paying on that debt and apply it towards the next most expensive debt. Continue this until you have settled each of your debts. Another variation of this philosophy is to start with the smallest debt and to pay that off first as opposed to paying off the most expensive debt first. Once the first smallest debt is paid off take the money that you were putting towards that first debt and apply it towards the second biggest debt. Keep in mind that you are still paying the minimum monthly amount due on all the other debts. This results in a significant saving on your annual interest expense due to the compounded interest saving.
The final suggestion is to consolidate all your debt where possible into an access bond. Your bond will generally be the cheapest form of debt finance with the lowest interest rate. There are two important advantages to doing this. Firstly, when you deposit extra savings into your home loan account it reduces the outstanding balance and the interest charged on it, again with the compounded effect, this results in massive interest savings. In addition, by structuring it as an access bond, you will always have access to the money you have saved in your bond should you need it for an unforeseen emergency or even for a more profitable investment opportunity that arises in the future.
As the famous 80/20 rules goes – 80% of your results (in this case your personal financial freedom) comes from only 20% of your efforts. So instead of focusing on cutting back on each and every expense and luxury purchase, make sure that you are first implementing these strategies which will result in a much bigger saving that depriving yourself of your favourite café latte once a week.