You work hard for your money and you know that you should be saving more of it. Developing a determined attitude towards savings is the first step which will get you on the road to financial freedom. So how do you start? Here are some essential questions that you should ask yourself:

South African change jobs on average 7 times in the working phase of their lives and 95% end up without sufficient funds when they retire. The main reason is that they cash in their pension funds instead of preserving them every time they move jobs.

The recent World Economic Forum on Africa held in Cape Town has an important place for all countries on the continent. It aims to synergise the efforts of Africans to improve their economies.

The number 72 has an uncanny ability to calculate the future value of money. So put away your financial calculator and let’s do some mental arithmetic.

The inflation rate is a measurement of the average cost of items which is closely monitored by the Department of Stats. The price movements of around 400 items are measured to establish the annualised inflation rate. The rate is watched closely by the Reserve Bank which is mandated to keep it in a range of 3% to 6%. One of their mechanisms used is the adjustment of the interest rate to either stimulate or contain the economy.

When deciding upon an investment the main aspects to consider are:

Risk – the possibility of losing capital.

Return – the yield of the investment over time. This could be interest from cash deposits or bonds, rental income from property or dividends from shares.

Liquidity – how freely are the funds accessible

Costs – the charges applied to the investment. Mainly the fund manager, the administrator and the advisor.

Tax –  taxes applied to the returns as well as capital gains tax when you sell the investment.

The following comparison includes the common investment options available based on general returns and costs and clearly shows that the home access bond is a great place to save your cash in the short term.

The value is found in saving the interest applied to your monthly bond instalment. The bank rules off at the end of each month and applies interest to the average balance in the month. By having a higher balance through your extra savings the interest applied for the month is lower and so the rest of the instalment pays off more of the capital owed. The effective rate saved is the rate of interest that the bank charges you. In the comparison, the current prime lending rate is applied.

Where else can you get 9.25% interest, guaranteed, no costs, no tax and immediately available?

Investing is a deliberate approach to making the most of your money over a specific period of time.
Your investments should be balanced against your lifestyle needs – both present and future.

For example, if you have a life-changing event in the short term such as retirement then you should be investing far less aggressively than someone who is 35 and has just paid off all his debts and wants to save for the next 20 years.

Speculation is betting on returns. Particularly in a short space of time.

Here are three things to avoid which will keep you on a path of investing rather than one of speculation.

Using past performance to predict future returns

The big mistake is to take the historic returns of a fund over time and draw a straight line into the future. Returns are affected by many variables and
no one can predict these. If one could just imagine how easy it would be to make a lot of money. Economies and markets follow cycles and assets are affected by these swings over time.

Timing the market

Investing is all about compounding the returns achieved over time. Speculation is about trying to time the top and the bottom of the cycles of various markets. There is a lot of evidence using historic data that clearly shows that if you try and time the market you will get it wrong more times than right. Investors understand how markets move over the long term maintaining the course through the ups and downs and benefiting from the compounding along the way.

Borrowing to invest

Investors will be aware of their exposure to debt as the cost of borrowing neutralises the returns they get from investments. If you have a credit card debt of 20% and get a return from your unit trust of 15% then effectively you are negative 5%. Investors will deliberate over short, medium and long-term objectives ensuring their exposure to debt reduces sooner than later. Speculators will ignore debt believing that they can outperform the cost of borrowing over any time horizon.

Investors realise that it is all about time in the market. Speculators will bet that they can achieve high rates of return without losing capital – especially in the short term.

Reason 1 – Tax effective for high taxpayers
Following last week’s topic on why you should not have an endowment, it stands to reason that you will benefit from investing in an endowment if your tax rate is higher than 30%. The latest budget proposals have raised the top marginal tax rate to 41% which presents a benefit for taxpayers in this bracket benefiting even more when compared to a unit trust investment. What needs to be considered are the exemptions on the interest (R23 800) and capital gains tax (R30 000). If these will be taken up by other discretionary investments over the period of the endowment then the combined investment will be more tax effective.

Reason 2 – Offshore Investments
The taxation applied to offshore investments is tricky and complicated. By wrapping your investment in an endowment policy you avoid the headache as the administrators are obliged to pay the applicable taxes to SARS on your behalf.

Reason 3 – Payable outside the estate.
An endowment is a policy contract which allows for a nominated beneficiary. This enables the investment to be paid outside the estate in the event of the death of the owner. This is pretty useful in terms of providing much-needed access to funds whilst the estate is being wound up. Furthermore, additional owners can be added to an endowment allowing the survivors to continue with it for as long as they wish instead of having to cash it in in the event of death.

It horses for courses when choosing an endowment. The main advantage is the tax benefits which tend to benefit the higher taxpayers.

The one big lesson we can learn from the Budget

The 2015 budget proposal confirmed that we as a nation are between a rock and a hard place. It was clear that the minister needed to find every smidgeon of revenue (the rock) and try to curb expenditure (the hard place) with very little room to manoeuvre.

The principles followed in the national budget are no different from our own personal budget. Income needs to cover expenses. If you cannot increase your income you either borrow more ( not so easy when you are already stretched) or tackle expenses. So the one big thing we should take from the budget is that we will need to get our own households in order, in the face of the pending tax increases.

The tax scales for the next year have not compensated for inflation so we are all worse off from the start. Add to this the waiver if items where taxes were increased, namely:

Petrol
Electricity
Alcohol
Tobacco

Then still to come is the effect of the fuel levy on inflation which is bound to take away the brief respite we were having from the drop in the oil price.

The average South African household is already struggling and income streams for those lucky enough to be employed are limited. So the one and the only thing to do is become our own ‘minister of finance’ and make an extraordinary attempt to tackle our expenses and cut the cloth accordingly.

Tough economic times call for tough economic measures. The National Budget has laid down the cards. We need to play them diligently.