Tax-Free Savings Accounts (TFSAs) HOT or NOT?

Tax. You’re starting to pay it. You’ll learn to hate it. What do tax and death have in common? They belong in the same Whatsapp group.Before you actually die from it, perhaps it might be useful to learn how to minimise the tax you have to pay. There’s no better place to start than a tax-free savings account.

In my previous column I presented a scenario showing that if you invest as much as 15% of your salary in your retirement annuity (RA), the income tax you would pay if you earned R15,000 a month would fall to R1,122.75 from R1,527.75, giving you tax saving of a R405 a month. This week we take a step-by-step approach as to how you can invest this tax saving through a TFSA.

Whatever the tax amount it is that you save via your RA, try to resist spending it on a Netflix account. When you earn more, you can spend more on frivolous pleasures. Sure, the latest PlayStation game or the much-anticipated release of that new matt lipstick may make us feel in good in the short term. But think long term: how much more pleasure would we get investing that money for that “boujee” holiday you’ve been dreaming of. Or save up for a car – far better to pay cash for your ride than to take out a long-term loan where, after interest, you pay about a third more than the actual selling price.

At the age of 24, trust me when I say I understand the concept of enjoying a want rather than a need. However, there is greater potential in investing for the longer term. And being millennials, we are suited to high-risk investments that have the potential to gain higher returns. That’s because if the investment loses ground in the short term, we have lots of time before retiring for it to recoup and grow. Intellidex financial analyst Orin Tambo says that over time, equities have proven to generate better returns than other forms of investment such as cash or property.

Did I also mention that July in South Africa is national savings month? Prem Govender is chairperson of the South African Savings Institute, which organises savings month and she highlighted for us the difference between saving and investing. “Saving is short term in nature and investing is long term,” she says. “So if one wants to save for short-term goals for which you may need quick access to cash without being penalised, then ideally that should be with a bank.However, if the goal is long term, then ideally the investment should be in collective investment schemes or property.” Tambo adds that an investment has the potential of exceeding the rate of inflation as opposed to a savings account.