This feature is sponsored by PSG Wealth. Email your money queries to [email protected]
SAVINGS MUST COME BEFORE SPENDING
How do I find the balance between my personal saving and spending when I have my family to support as well?
Name withheld
Ronald King, the head of public policy and regulatory affairs at PSG, responds: Living beyond your means will derail building your financial security, and this risk is even greater when supporting a family.
An important first step is developing your budget. Determine what expenses you have, including your family, and make sure you write everything down, sticking to the budget you set. Covid-19 has taught us that there are many things we can do without, so cut out all unnecessary costs and luxuries. Your expenses must never exceed your income. Don’t spend tomorrow’s money to pay yesterday’s debt.
Savings are extremely important. You must save for retirement long before spending on Netflix or take-out. Shorter term savings, such as an emergency fund, or for a specific short-term goal (such as a holiday) can help you avoid going into debt. Even small, regular contributions to savings can grow to meaningful money, if given enough care and time.
Chat to an adviser to get your financial plan aligned with your current circumstances and goals.
SHORT-TERM FOCUS CAN BE MISLEADING
I keep a close eye on my investment performance, which can be unnerving. How often should I be checking?
Name withheld
Adriaan Pask, chief investment officer at PSG Wealth, responds: Although looking at performance statistics is a useful tool, one has to query how effective it is to evaluate performance on a daily basis. We know growth assets can be cyclical and go through periods of strong under- and outperformance, for various reasons. Therefore, past performance does not dictate future performance, which nullifies the merit of using short-term performance reports to gauge how well your investment is doing.
Investors often expect future returns to resemble recent past returns, which, in our experience, is far less the case than the reality.
When investing for growth, equity investing is often part of that portfolio composition, but to evaluate equity over a period of a few months can lead you down the wrong path. Covid-19 has caused some chaos in the markets, but your focus should be on the long-term assessments of your portfolio performance relative to predetermined benchmarks and, more importantly, your financial plan’s objectives. Often, these come with applicable investment horizons, which are critically important to keep in mind.
Working with your financial adviser can make a big difference in getting through these volatile times.
EMPLOYEES SHOULD STAY IN GROUP RA
I run an SME and many of my employees are asking whether they can opt out of contributing to our company’s group retirement annuity (RA), in favour of more money in their pockets. I can continue the contributions, but how do I emphasise why it’s important to keep their contributions in place too?
Name withheld
Jac de Wet, a financial adviser from PSG Wealth Somerset West Mall Ring Road, responds: This is understandable given the tough economy, but it is best to encourage continued contributions. Most insurers or investment platforms offering group RAs do not have the same rules as pension funds, for example. It will also depend on the wording in your employment contracts, but generally RA contributions are voluntary, and it is ultimately your decision to contribute on your employees’ behalf.
Although the rules of most funds allow a participating employer to terminate or pause its participation in the fund, and thus the payment of contributions to it, on written notice to the fund, please first obtain clarification from the fund administrators whether you are allowed to make any changes.
Your employees also need to understand that they currently enjoy a tax deduction because of their retirement contributions, and if they opt to receive these as a salary increase instead, this may result in them falling into a higher tax bracket, which would mean that they would effectively be paying more tax, and not saving on expenses, or saving for the future either.
The long-term benefits of regularly contributing as much as possible to retirement funds cannot be emphasised enough. Not only do employees detract from the compounded return they could get if they cease contributions, but they also forego the opportunity to put themselves in the best possible position to have enough disposable income post-retirement, and to become financially free.
I’d encourage you to present what a change would look like, compared to staying invested. Consulting a financial adviser to assist for an accurate comparison could also help.
GETTING BACK ON TRACK WITH SAVING
I’ve depleted my emergency fund. How do I start again, and what is the minimum amount that I need to save?
Name withheld
Schalk Louw, a financial adviser from PSG Wealth Old Oak, responds: The first step towards replenishing your savings should be to compile a comprehensive budget to monitor your spending habits. Once you’ve established what your monthly expenses are, as well as where you can cut back on spending, you should allocate as much as possible towards your savings.
There is no minimum amount. They say that even a journey of a thousand miles begins with a single step. Take the first step and commit yourself to a savings habit. Being disciplined and making consistent contributions via debit order or by setting up a regular withdrawal from your online banking profile, is the best way to achieve your goal.
Set aside a fixed amount or a percentage of your income each month, based on your budget, in an appropriate savings vehicle, reassessing your financial situation regularly to ensure that you make adequate provision for your financial goals.
A savings account or emergency fund shouldn’t be seen as an investment to dump whatever is left of your income each month. Expenses should be seen as what is left of your income after savings or emergency fund contributions. It should form part of a well-structured financial plan that you stick to.
Saving is a lot like a good diet: maintaining good health involves sacrificing certain treats over the short term, so you can enjoy the benefits of good health over the longer term.
HOW BEST TO USE A CASH PORTION
I’m retiring from my company’s pension fund soon and would like to reinvest the cash portion I will be paid out. Is it better to include it with the rest of my retirement savings, to buy into a living or life annuity, or should I look at something else? Ideally, I’d like to access the money (and hopefully good profits) in five to 10 years, and I am relatively healthy.
Name withheld
Pierre Puren, a financial adviser from PSG Jeffrey’s Bay, responds: Given your needs, as provided, it would be wise to opt for a withdraw equal to the portion needed to address your liquidity needs post-retirement.
Keep in mind that you are granted the opportunity to access up to one-third in cash of your pension fund, but that any amount over R500 000 will be subject to a once-off tax deduction per the retirement tax tables. Once an annuity (life or living) has been purchased, no further lump-sum withdrawals are permitted.
In the case of a living annuity, you will have the opportunity to amend your chosen income annually to an amount no less than 2.5% or more than 17.5% of your capital value, by means of a monthly, quarterly, bi-annual or annual payment.
Working closely with a financial adviser will help to ensure all considerations are included in your decision.
PERSONAL FINANCE