Our South African wallets are a beleaguered lot. This month, electricity prices are going up. Well, it seems all prices keep going up, thanks to our enemy, inflation.
Between the rising cost of living, getting taxed, and interest rates that are so reluctant to go down, it’s easy to feel like the financial forces are out to get you. What we can control, is how we manage our money.
So, in the ultimate showdown – between feeling overwhelmed about what we don’t understand about money, and empowering ourselves, how do you win? Let’s talk strategy.
Round 1: Outsmart the silent pickpocket, inflation
Without grabbing a textbook, inflation means that over time, we can buy less and less with our money because prices keep increasing. Governments calculate inflation by looking at a broad rise in the price of a basket of goods and services over time.
So, what must you do, quickly stock up and buy whatever you can? No, there is only one way to tackle Mr. Inflation. Put on your shiny pants and boxing gloves and start … investing.
- When people say cash is king, they forget growth is better. Only through exposure to assets that will help your money grow faster than inflation, can you hope to beat it. That’s why your long-term money can’t hibernate in a bank or money market account.
- Compounding is your BFF. Compounding sounds like a big word, but it means you earn interest on your money, and then you start earning interest on the interest. Unbelievable, but that’s when your money gets wings. And the earlier you start, the more your money can work for you.
- Consider these investments first. As I describe below, making the most of tax benefits is a great way of catching inflation unawares. If your growth is 12% and inflation is 5%, you score 7%, and you don’t want tax to eat into that. That’s why it’s better to invest in a retirement annuity (RA) or a tax-free savings account. That is why many financial advisers will suggest these savings vehicles that offer tax-free growth first.
Round 2: Dodging the taxman’s sneaky left hook
When we were little and hoped to become a truck driver or run our own cupcake shop, nobody warned us about taxes. Unfortunately, if you want to earn decent money, you don’t get to opt out, but you can get strategic.
- Maximise your tax benefits. By investing in your retirement, either at work or through a retirement annuity, you get money back in your pocket. The government rewards you for helping your future self by giving back a percentage that equals the tax rate you pay on your salary. The more you invest, the more you get back. Now, take that on the nose, opponent no. 1.
- Use your tax-free savings account allowance. You can invest up to R36 000 per year without paying tax on the growth. Like with the retirement annuity, it’s the money equivalent of eating cake without calories.
Round 3: Defend yourself against interest rate hikes
Rising interest rates are a nasty fist to deal with if you have debt. But be your own coach and listen to this advice:
- Tackle expensive debt first. Credit cards and personal loans charge high interest rates. It’s best to clear them as fast as possible.
- Pay more than the minimum. A little extra on your bond or car repayment can save you thousands in interest over time.
- If rates drop, try to keep paying the higher amount. When interest rates decrease, keep paying the same, and you’ll pay off your debt sooner.
The clincher: Play the long game
With the above in your armour, you will go a long way. In the end, financial success isn’t about luck, it’s about strategy and making the right moves. You have boxing gloves for the attack, too:
- Start small but start now. Even if it’s just R500 a month in an investment, consistency wins.
- Diversify your money moves. You’ve heard that we shouldn’t have all our eggs in one basket. Have an emergency fund and savings for your short-term needs. Regarding your long-term savings, speak to a financial adviser to make sure your investment is spread over various assets. The secret is that one asset can make up for another that is going through a dodgy patch – and in the long run, all will even out.
- Think like your future self. It’s within your control to be the cool boxer who can retire without stress, afford nice holidays, and not panic when you face financial punches.
You can beat enemies like inflation, taxes, and rising interest rates with the above uppercuts. Wipe your brow, put in your mouth guard, and get ready to “float like a butterfly and sting like a bee”.
* Jonas is the head of marketing at Momentum Savings.
PERSONAL FINANCE