So you have your financial shield in place and you’ve put your present self in a safe space with a financial and psychological buffer. Now it’s time to get intimate with your income and commit to your future self.
Spending too much of your income now means an insecure future, and spending too little means an unfulfilled present. There is a meme that captures this beautifully: “I am stuck between ‘I need to save money’ and ‘you only live once’”. The truth is somewhere in between. It’s important to take care of the needs of both your present and future self.
There is a balance to strike which may take some time to achieve.
A good way to start this journey is to calculate how much you are making after taxes and contributions. If you are salaried, understand how much you are paying for any medical aid, tax, and pension or preservation fund contributions. How much do you have left in your account after these items have been paid.
If you get paid irregularly, for example, if you’re a freelancer, then this might be a bit trickier. Rather calculate your post-deductions income over the last few months and then take an average as your base.
Next, get familiar with your spending habits and patterns by reviewing your bank transaction history and then break your spending into three buckets:
Bucket 1: Present you - needs
Example - food, rent/ mortgage, petrol, medical aid
Bucket 2: Present you - fun
Example - eating out, movies, new clothes, travel
Bucket 3: Future you - love
Example - pension, provident fund or retirement annuity contributions, paying down the capital component of your bond, any other long-term saving for your future goals or assets.
Remember this is why understanding your pre-tax/deduction income is important. If you are receiving your salary/income after a pension or provident fund contribution, you need to add it to bucket 3 as you already contributing this to your future self even if you receive your salary after contributing. In the same way, if your salary/ income is paid after medical aid contributions, you need to add that back into bucket 1.
This is a deeply personal exercise with no right or wrong answer. For example, gym or yoga might be a need or fun for you.
Lastly, add them up to understand how much you are spending on each bucket every month. Make sure this is a judgment-free exercise. You are looking to understand where you are right now and understand your starting point.
Next, set a long-term plan. A good rule of thumb is 50/30/20 - 50% for present needs, 30 for fun, 20 for future you. This is a very general guide; if you are older and you haven’t saved enough you might need to drastically increase the future contribution. You might be just starting and any allocation to your future self is a challenge. However even just starting is a step in the right direction.
Next, find ways to optimise your income. For example, investigate if your employer matches retirement contributions and make sure you maximise this.
Another great way to optimise your income is to utilise the tax benefits of a retirement annuity. Your contributions to a retirement annuity can be deducted which is a way to optimise your after-tax income. There are some constraints to this, as a maximum of 27.5% of your remuneration or taxable income (whichever is higher), and no more than R350,000, is tax deductible in a tax year. You can contribute more than this but after you've reached these limits, your contributions are rolled forward and automatically deducted in future years.
If you are a freelancer, a retirement annuity may be your main source of retirement savings. If you are salaried and contribute to a provident /pension, you can still contribute to a retirement annuity over and above this if you choose to.
Bear in mind that, unlike the tax-free savings accounts, this tax benefit “carrot” comes with a ‘stick’ in terms of liquidity restriction. You can only retire from the retirement annuity from the age of 55. However, this kind of forced discipline is helpful for those who like to “dip their hands in the cookie jar” or lean too heavily in the direction of “you only live once”.
A good financial tip if you are behind in your retirement savings, and have over-prioritised your present self: to get back on track and achieve more balance, every time you get an inflationary salary increase immediately redirect this with a debit order to your retirement savings. You won’t “feel” it as much and you will improve your savings and get back on track.
Finally, it’s time to choose which investment. Retirement annuities are bound by regulation 28, which ensures your investments are diversified by asset class. Investec has two options available:
The Investec BCI Balanced Fund of Funds invests your savings in many different cash, bonds, property, and equity investments. It is also diversified by the fund manager, as we partner with the finest managers for you to find opportunities and maximise your medium-risk savings.
The Investec BCI Balanced High Equity Fund. This is a single-manager fund that has exposure to various asset classes but a bias towards equity exposure. The Fund is actively managed using a top-down view of economies and markets to assess the relative attractiveness of equities, bonds, property and cash, and to determine an optimum exposure to offshore markets.
By using balanced funds to assist you to balance the care you give to both your present and future selves!