Opinion

#MoneyMatters: Household Saving Ratio

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One of the best legacies of former finance minister Nhlanhla Nene will always be the introduction of Tax Free Savings Accounts, (TFSAs) implemented in December 2015.

As a direct response to South Africans low savings rate and high indebtedness, the minister introduced TFSAs with a tax incentive. Before their introduction, any income earned on investments, dividends or interest was subject to tax, capital gains tax was payable on any growth on investments. All TFSAs are exempt from any tax.

The household Saving Rate in South Africa remained unchanged at -0.80 percent in the third quarter of 2016 from -0.80 percent in the second quarter of 2016. Personal Savings in South Africa averaged 4.93 percent from 1960 until 2016, reaching an all time high of 23.80 percent in the second quarter of 1972 and a record low of -2.70 percent in the fourth quarter of 2013.” -Statistics SA

These TFSAs are designed in such a way that they do not become a tax haven for the rich, but rather that they benefit the poor and middle class when used efficiently. There’s a lifetime cap on these accounts of R500 000 and an annual cap of R30 000. The treasury will review and update the limits from time to time. A harsh penalty of 40% will applied to any amount over the limit.

It goes without saying that  South Africans, both young and old should take advantage of TFSAs, with a long term view. It would take at least 16 years to reach the current lifetime limit.

 

A few don’ts:

– Don’t open TFSAs if you have bad consumer debts like clothing accounts, credit card debts, personal loans. Kill them first.

– Don’t open TFSAs if you don’t have an emergency fund, because TFSAs should not be used as such.

– Don’t open TFSAs if you’re not already maxing out your Retirement Annuity tax benefits, which currently means contributing 27.5% of your income.

– Don’t open TFSAs for children’s tertiary education, or their 21st party or first car, rather save that money in a separate investment, and preserve their lifetime limit for themselves to use as they wish when they’re adults.

 

One do:

– Every year, at the beginning of the tax year, put money into your TFSA, and forget about.

Disclaimer: I’m not a financial adviser.

I was deep in debt a few years ago, I managed to crawl my way out, by means of self education on personal finance matters. Now I  want to help others get out of debt and learn about effectual investing. My goal is to attain economic freedom, both for my self and others, through good money management skills.” – Paul Mamakoko

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