By Mark Hawes
When it comes to personal finance, numerous problems are associated with managing your own money, unless you first learn and practise good habits under the guidance of a licensed financial adviser.
Often, you don’t recognise the issues that are standing in your way. And if you do, you don’t necessarily know how to fix them, with the result that your financial position stops improving – and could even get worse.
Using a professional service to continuously improve your financial outcomes also improves your own awareness of your wealth. Intuitively then, to have more money to spend on the things you want, spend less on the things you don’t – such as taxes and interest on debt.
Improving tax efficiencies
An effective tax plan is based on where you are in your income lifecycle. If done correctly with good advice, this enables your wealth lifecycle.
The first phase is earning income followed by building wealth and then, naturally, sustainable spending.
Phase 1: Earning an active income
From day one of your first salary payment, you need to declare all taxable income, including rental income. Yearly tax planning should take advantage of all tax deductions available, such as medical aid deductions and retirement fund contributions. You will feel the effects of improved personal cash flow in the next tax year. If you earn commission, consulting income, or taxable bonuses, get professional assistance for additional tax planning opportunities to improve your cash flow.
Phase 2: Build wealth
Look for the lowest tax rates using all available legal structures for no or low tax on growth and investment income. Most people are surprised at the number and ease of structures and products available that will provide lower tax rates. In addition, tax delayed is tax saved. If you don’t need the money, don’t pay the tax on your savings by taking your retirement savings in cash when leaving your employer.
Phase 3: Sustainable spending
The last thing we want our savings and investments to do is to finance a large tax bill if it is not necessary. It is possible to reduce your overall tax after retirement by taking some income from taxable sources and the rest from already taxed sources.
All in all, a professional financial adviser is invaluable in planning your investments. If it is done correctly you can save tax, improve your cash flow and thereby increase your wealth over time.
At all times, consider your legacy planning to pass on your hard-earned wealth to your heirs and keep investments that can create wealth for the next generation.
Mark Hawes is a certified financial consultant at Alexander Forbes
PERSONAL FINANCE