Would you like to retire with over a million rand in the bank? Find out the right way to start saving for retirement.
The borrower is slave to the lender. Your most powerful wealth building tool is your income. And if you’ve committed your income to paying everyone else, and not yourself, you can’t invest it properly and become wealthy.
Allan Grays’s emotional “Fathers Share” TV ad shows how hard it can be taking away a portion of your hard earned income every time you get paid. But it really does pay off in the end…
The Art of Saving
Saving is a tricky business. And most of us just feel that we don’t have that extra amount we can put away every month. If you feel you can’t afford to save, then it’s time to start re-evaluating your spending. Giving up certain luxuries for the sake of having a better life when you’re old is worth the sacrifice. Getting rid of debt that offers no benefits, such as credit card debt, will give you more money to save every month.
Saving for retirement is not simply a case of throwing money into a savings account every month for the next 20 to 30 years. You need to use a strategy that will give you maximum returns.
Let’s look at what we as South Africans pay in debt every month. The average monthly car payment in 2018 was R3383.39 a month, according to Wesbank. Imagine you bought a cheaper car and paid it off in 3 years rather than 5. And then saved that R3000 a month in a decent interest-bearing account.
You would have just over a million rand in the bank in 16 years.
Add to that the average credit card repayment South African’s fork out every month. A whopping R1500. With just those two debt repayments you could save R4500 a month.
You would have just over million saved in 13 years.
Getting out of debt in order to invest is the quickest way to wealth.
We’ve worked out a saving plan for the next 30 years (below). For starters we’ve added the lowest amount you need to save monthly. But if you download the sheet you can start playing around with figures.
As you will see in the calculations, the more you save the more you get out, thanks to compound interest.
Get a copy of your free savings calculator here.
Year 1 Savings Plan
Start saving as much as you can now. Year 1 is about getting enough money to invest long term.
You need to find an amount you can put away every month for the next 20 to 30 years. In order to have over a million saved you will need to put away a minimum of R850 a month.
Most fixed deposit accounts (this will come into play in year 2) require a minimum deposit of R10 000. Why go down this route? Because fixed deposit saving accounts offer a higher interest rate than standard saving accounts.
Your month to month saving will be done in standard savings account. FNB offers the highest interest rate of 5.25% a year for a standard monthly savings account. If you download the Saving Calculator above, you will find the interest rates of other providers in the green drop down box under “Standard Monthly Deposit Savings Account”.
Notice how little interest you make in your first year. This is because wealth growth will begin in year 2 when you add the amount you saved into a 12-month fixed deposit account.
Year 2 to Year 30 Savings Plan
The higher your fixed deposit amount, the more money you’ll make in the next 12 months. Once the 12 months are up, you will take out the amount from your fixed deposit including the interest earned. Tymebank is currently offering the highest interest rate for fixed deposits – 10%.
Now remember that saving you did in year 1? Well year 2 will be no different. You need to keep saving every month. Once the 12 months are up you will add those additional savings to your fixed deposit amount. And this process will go on for the next 20 to 30 years.
Why only 12 months? Because a fixed deposit means you cannot add to it or take it until your agreed term ends. You might find banks offer higher interest rates on fixed deposit terms up to 5 years. But remember, you want to add your savings and you want to have the option of placing your money in a different bank if they offer better interest rates.
Tax on your savings
‘Nothing is certain but death and taxes’ – Benjamin Franklin
Unfortunately, paying tax is inevitable. When you start saving, you don’t pay tax on the amount you put into your savings account. This because you’ve already paid tax on this money (income tax, usually from your salary). You do, however, pay tax on the interest. Interest is like an income and therefore will need to be taxed.
In South Africa, you can earn up to R33 000 per year in interest tax free. Or a maximum of R500 000 per lifetime. Once you’ve reached this threshold, you will be taxed 40% on your interest.
The biggest reason most of us cannot afford to save
Most of us cannot afford to save because all our money ends up in debt repayments. If you’re paying R8000 in debt repayments for credit cards, store cards, and a personal loan, you are potentially losing out on saving that R8000. Debt won’t just go away. It will continue to grow unless you act now.
In order to start saving for retirement, you need to attack your debt so that you can get your saving game plan in place.
If you feel you can’t manage your debt and you have no money left at the end of the month because of debt repayments, it might be time to get professional help. Debt Rescue has helped thousands of South Africans become debt free. You can too…