EDINBURGH — Every South African is paying the price for Jacob Zuma destroying economic growth through state capture, patronage and ineptitude. The poor must pay through higher VAT and the never-ending struggle to find jobs at a living wage in a high-unemployment environment; hard-working salary earners must take income tax hits and still pay privately for education, health and other services that the state should lay on. Don’t expect tax rates to drop. It is unlikely stolen funds will be recovered and economists expect it to take many years for South Africa to recover. In the meantime, there are some practical steps you can take to improve your family’s finances and get your wealth-building on track. Dawn Ridler, an independent financial adviser based in Johannesburg, sets out some easy ways to prune spending and increase income. – Jackie Cameron
By Dawn Ridler*
The 2018 Budget will impact your disposable income – what can you do?
The Budget 2018 might have looked tame on the surface – a one percentage point increase in VAT, wealth tax for the fat cats, no increase in personal tax and a bit of a fuel levy increase. This is an illusion, the people most affected by this budget are the ordinary middle class – the working class. There are about 1,9m taxpayers who earn more than R350k pa, contributing 80% of the tax. (https://africacheck.org/reports/1-7-million-people-pay-80-sas-income-tax/). If we’re lucky this will just be temporary, and when the economy picks up (and the stolen funds are recouped) the VAT increase will come down again and the real tax rates decreased – but we all know that never happens, so what can you do to survive – or even thrive?
- Take a bit of time to understand your tax, and what allowances and deductions you can be taking advantage of to get a rebate or bring down your average tax rate. You can email me for the 2018 SARS tax booklet (also available on their website) and look at retirement investment allowances, interest and CGT allowances, car allowance, medical aid tax credits. It’s one thing to get help to file your taxes, it is quite another to abdicate the responsibility to someone else. I encourage everyone to at least try and do their own eFiling.
- You cannot build wealth if you consume everything that you produce (and then borrow to consume even more). This gives you two options, produce more income, or consume less – you choose. Cutting back on expenditure will have an immediate positive effect, increasing your income is not so quick or easy – but still possible.
- Investments and savings without defined objectives are almost meaningless. These objectives will dictate timelines and the asset allocation that should be used. Wealth is built slowly over decades, and if you don’t have a strategy from the start then that is time you’re never going to get back. Having an advisor to help is the best option, but if you’re just starting out you may not be able to get a qualified advisor to help you (because you just can’t remunerate them for their time, whether directly by paying for a plan, or indirectly via fees or commissions). Regulations in the financial advisory profession are becoming increasingly onerous, so this is going to become more of a problem, not less. The internet has made it much easier to upskill yourself (following my blogs for instance).
- Because the tax brackets have not increased in line with inflation, if you get a salary increase you are going to lose more to tax, and your take-home pay will be less in real terms. (real is the actual increase minus inflation). If you’re offered an increase or promotion with an increase, use the tax tables and your payslip to do the math. Perhaps you could negotiate more leave instead (there are 260 working days in the year, about 10 of which are public holidays, perhaps another 15 are annual leave.) This is a real problem on income above R555,601pa (R46,300 a month – guess what – if you’re in this tax bracket you’re considered a wealthy by SARS.) This tax bracket increased a whopping 1%, so any salary increase above this is going to be taxed at 39%. Even if you’re in the R423k range (R35k pm) the shift was only 3%. Inflation is currently at 4.5% – roughly equivalent to one day’s extra leave. These are the current tax brackets:
- The space with the biggest tax breaks at the moment is retirement savings. Find out how much you should and can (often very different numbers) contribute to maximize your tax break. You can usually get your payroll department to deduct the monthly Retirement Annuity contributions too and get the immediate tax relief. If you’ve been inclined to blow your tax returns, this is a way better option.
- Get organized, that way things won’t fall through the cracks and lapse or incur late penalties. You’re welcome to contact me for my popular free organization system called The RedFile. Analyze all the fees you’re paying. Bank fees are usually horrific – are you getting value for money – even better more back in easy to use loyalty benefits than you pay in fees (yes, it is possible, I do it). Credit Card fees and interest – do you really need more than one? Store Cards disguised as Credit Cards (like the Pick n Pay Card) – why bother (have a closer look at loyalty points – if they are 0.1% – why bother, on some bank loyalty cards you can get as much as 5% off (Ebucks shopping at Checkers on level 5). Check the asset manager fees on your unit trusts – are you getting the increased performance (after fees), anything over 1% should be looked at carefully, your financial planner will be able to help with this.
- A side gig is an obvious way to increase your income and if there is the potential to eventually turn this into your day job – even better. As a salary earner you’re always going to find it hard to reduce the tax you pay. There are several kinds of side gig: You can barter your time for income (Uber, child minding, dog walking, courier etc); Rent out space or an asset you own (finite, but is not a one-for-one barter for time); dropship – this is also finite unless you get help because of the amount of time required to manage the orders) or passive income where all the work is done upfront but the income stream is almost infinite (the holy grail but not that easy or cheap). You can, of course, combine these. Brainstorm the things you would like to do and then research a number of options with their return on both time and capital investment. This income has to be declared to SARS so investigate whether you do this as a sole proprietor or in a company. You are going to have to upskill yourself in a number of areas – accounting, taxation, marketing to name a few. Look for online courses on a place like Coursera or Mooc (usually less than the cost of a paperback).
- Cutting back on consumption is always the least popular way to maintain your standard of living so here are some tips to make it more palatable. Firstly, don’t cut all the fun out of it – just like a diet, this is a short-term solution that will backfire. Rather find alternatives to the fun things you do if they are killing your cash-flow. You could look at improving your cooking skills if you eat out a lot. Streaming entertainment rather than DSTV is another obvious alternative. Domestic help is another area where, properly handled, can still be a win-win with a ‘sharing’ scenario within your neighbourhood, especially if you have a room that can be rented out for that purpose (this has already been happening throughout the country for years). I am not promoting more unemployment but this is just part of the ever-evolving economy. This sharing need not necessarily be done by the day but could include half days or even hours. Per hour this is going to cost you more, but a full-time domestic worker today will set you back over R5k (living wage – minimum wage is half that) a month. Schooling is a high expense area that you can probably do little about, but when it comes to tertiary education have a rethink. Public universities and colleges are going to be under severe resource strain which will inevitably lead to a decline in the standards. All employers want new graduates with experience – these two attributes do not have to be mutually exclusive if the school-leaver does an online or distance learning diploma or degree.
- Cash-flow is king. This business mantra is just as applicable to individuals and families. If you have an emergency fund (3 times family expenses) then you aren’t going to have to go into debt when life happens. Use your credit cards but do not let them use you. Pay them off 100% before they are due and you’ll not pay any interest. If you’ve got yourself so under-water with debt that you’re just getting deeper and deeper in a hole, research Debt Review – it is way better than getting judgements or being declared bankrupt which will follow you around for a decade or more.
- Get all the family on the same page. Don’t hide money problems from older children, you’ll do them no favours in the long term. If you have a spouse who is ‘not good’ with money you may need help in changing their habits and mindset (a coach rather than a shrink). Today you have to be really wealthy (and have a serious prenup) to have a stay-at-home partner, especially once the children are older. With more than 50% of first marriages ending in divorce, anyone who opts to stay at home and not contribute to the household income is putting their future financial security at severe risk ( I see it every day in my practice).
Action: When taxes go up, they rarely fall so you need a long-term solution. Reducing consumption is a one-off. Job and income flexibility is obvious way forward.
- Dawn Ridler is an Independent Financial Advisor with extensive experience in both financial advisory and business. Her unusual combination of an MBA, BSc and CFP ® has evolved into an ‘ecological’ and holistic approach to advisory, which she has tagged ‘Wealth Ecology’ in her company, Kerenga.
This article is published here on BizNews.com with the kind permission of Dawn Ridler. Copyright: Dawn Ridler