Go full out for tax free savings accounts – but with two provisos

As the month progresses, expect to see lots of advertising from financial institutions trying to entice your money into their tax free savings account net. It’s a great initiative, so use the full R30 000 allowance and treat the investment as a nest egg you’ll only look at decades hence.

But to avoid future disappointment, take a close look at fees your investment will attract. Here’s why. In his 2005 letter to his shareholders, Warren Buffett explained the argument rather well.

Over the past century, between 31 December 1899 and 31 December 1999, the Dow Jones Industrial Average index rose from 66 to 11 497. That spectacular surge, Buffett calculated, actually translates into an increase of just 5.3% a year. Such is the power of compound growth. On the other hand, knock a percent or two off via costs and you get an idea that fees, too, impact long term investment very quickly – in a negative way.

So on tax free accounts, my advice is twofold: Invest your R30 000 into a low cost exchange traded fund, preferably one which tracks a foreign stock market. The US is best, but the UK will probably work just as well. And refuse to pay anything more than R90 in total costs, because that’s what Standard Bank OST is charging. It has set the total fee bar at just 0.3%. Refuse to pay anyone else anything more.

From Biznews community member Darryl Bennett

Tax free savings are not as good as retirement funds… it’s after tax money and interest and capital gains tax exemptions negate the benefit. It’s an admin nightmare waiting to happen.

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