Share

How to manage savings as a contract worker

accreditation

Evans writes:

I am 30 years old and work as a contract worker, which means my salary is not fixed and ranges from zero in some months to R8 000 a month.

I currently contribute R750 a month towards my retirement annuity and also contribute R500 a month to a tax-free savings account. I want to increase my savings by R500 a month from next year, but I don’t know if I should increase my retirement annuity or my tax-free contribution, or look for another financial product.

Boitumelo Mothoagae, head of customer ­relationship management at Liberty, replies:

It is excellent that you are already saving and would like to increase your savings contribution. This means you are one of the 25% of people in your age group who are saving for retirement.

Before making a decision to increase your savings, however, you need to look at your overall financial situation.

You indicated that your income is not fixed. Because it is not fixed, you need to ensure that whatever financial needs you pay for each month are covered.

Unless you have an emergency fund, this will make it very difficult for you to maintain a savings plan or manage your finances well.

For example, during the month when you earn no money, you may be unable to pay for any of your living needs as well as your savings.

This means that the following month you may have to pay double – for the previous month that you missed and the current month.

If, in the following month, your income is not enough, you may again miss these payments, making it very difficult to pay triple the amount required to bring your payments up to date.

An emergency fund that is the equivalent of at least three months (preferably six to 12 months) of salary would help you during your months of low income, as you would still be able to pay for all your financial requirements.

You must firstly draw up a budget to determine what your average income is in a 12-month period and what your expenses are in that period. Your income should then be split as follows:

. 50% for your financial needs (such as rent/mortgage, food, transport, etc).

. 15%-30% for your savings (such as retirement planning, emergency fund, risk cover, etc).

. The rest can be used for any other financial requirements you may have (such as entertainment).

Try to ensure that all your expenses are covered by your average income and do not require that you use your maximum income (R8 000).

Once you have your budget set up, go and see a financial adviser, who will look at your overall financial situation. Based on your input, they will determine what your financial requirements are and help you come up with a financial plan suited to your financial needs.

For example, you are already contributing 10% of your maximum income to retirement, and, in total, your savings contribution per month is 16% of your maximum income of R8 000, so it might not be necessary to increase your retirement contribution, as this percentage may be higher for your average income.

In addition, because your income is variable, you may want to put your extra savings into a vehicle where the money would be available at short notice, and a retirement annuity will only be available for access at age 55 if you are healthy.

Your adviser will be able to tell you which savings vehicle is best suited to you. For example, because your income is not that high, an endowment (which gets taxed at 30% during investment) may not be the best vehicle for you, as the tax rate on it is higher than your marginal tax rate.

As you indicated above, you have the new tax-free savings plan, where there is a maximum contribution amount (R30 000 annually) that will remain nontaxable.

Your current total annual contribution to this is R6 000, so you may add the increase to this savings plan without breaching the R30 000 annual cap. However, discuss this with your financial adviser to determine that this is your best option.

There are various benefits to the tax-free savings vehicle:

. No capital gains tax on a switch within this account or on withdrawal.

. No tax on dividends – your account will earn the gross dividend, which will be reinvested.

. No tax on income – all interest and other income will be reinvested tax-free.

. No performance fees or initial fees. However, advisers will be able to charge an initial adviser fee, agreed with the client.

. No additional fees will be charged except the annual service fee of the fund selected. This may include a trail fee to the adviser.

. Even though the amount that can be contributed has a lifetime limit of R500 000, there are no limits on how big this account can get. Therefore, if invested in high-performing portfolios, the investment may grow to more than this.

. Easy access to funds because there is no lock-in period.

Consult a financial adviser who will do a full financial needs analysis for you to set up a financial plan that will determine whether you need to increase your savings right now, and, if so, which area requires the biggest increase. The adviser will also be able to determine the best savings vehicle and the tax implications specific to you.


The law
Where can I report an illegal emolument attachment order?

Nkosenhle writes:

I took a loan from a credit provider in 2002 and, after a few payments, I was unable to continue. The company issued an emolument attachment order (known as a garnishee order) against my salary.

Despite having settled the amount, after a period of time, they started to deduct money off my salary again.

They claimed I had signed for another garnishee order, but I had not. I paid for a lawyer, who got a court order for the company to stop the deductions and refund me, but now the company is refusing to pay back the money and is sending me letters of demand. What can I do?


Reana Steyn, deputy credit ombud, replies:

We have seen many complaints from consumers along similar lines.

The only thing that is unusual is that the consumer went to court. Usually, consumers do not have the money or know-howto take a matter to court.

They will then do nothing until they learn about our office and log the complaint with us, and then we will take up the fight for the consumer.

I am confident that we will be able to assist the consumer, as long as he logs a complaint with us, which he can do telephonically or via our website.

To lodge a complaint, email creditombud.org.za or phone 0861 662 837


Is cash appropriate for tax-free savings?

Hlakanyane asks:

I am a 52-year-old man and I currently contribute R2 500 a month into a tax-free savings account. This is invested in cash and standing at R10 000 so far.

Is it better to leave it in the bank, or go direct through the JSE? What are the pros and cons for each?


City Press replies:

Tax-free savings accounts (TFSAs) are best for long-term investments because one of the biggest tax savings is on capital gains tax, which builds up over time.

Under current tax legislation, even if you are invested outside of a TFSA, you are able to earn R23 800 in interest each year before you pay tax, so you can invest about R400 000 in a bank account before you pay tax. So, for cash savings, a TFSA is not a real benefit.

Another reason TFSAs should be considered for longer-term savings is that if you withdraw funds, you are not able to replace them, and this affects your overall lifetime limit of R500 000.

Assuming you are using the TFSA for a longer-term investment (more than five years), you need to be invested in a product that keeps up with inflation and grows your money, such as equities (shares listed on the JSE).

This could be accessed via unit trusts and exchange-traded funds.

Most unit trust companies as well as providers of exchange-traded funds, which include Satrix and various stock brokers, offer TFSA options. Understand the costs and make sure they match your time horizon and risk profile. 

Where can I go to consolidate my loan?

Tstati writes:
I am looking for a loan to consolidate my debt. There are several companies I came across with this product, but I’m not sure how credible the majority of them are.

City Press replies:

Debt consolidation is not necessarily a solution to a debt problem.

Reports from debt counsellors show that in about 80% of the cases where individuals have consolidated all their debts into one loan, they do not adjust their lifestyle or living expenses and end up reopening the credit lines they closed with the consolidation loan.

This just leads to further indebtedness and, ultimately, legal action or debt review.

Be very aware of this risk when you decide to consolidate and make sure you are making the adjustments to your budget so that you do not access further credit.

In terms of credit providers, the major banks offer consolidation loans.

If they turn you down due to your credit record, then smaller credit providers who have greater risk tolerance will offer a loan, but at a much higher rate and with higher fees. If you do not qualify for a bank loan, then you may find the other offerings too expensive to be worthwhile.

Also be very wary of loan scams, where consolidation loans are offered but you are required to pay legal fees or consolidation fees upfront. No credit provider will ever ask for upfront payment.



We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Voting Booth
Do you believe that the various planned marches against load shedding will prompt government to bring solutions and resolve the power crisis?
Please select an option Oops! Something went wrong, please try again later.
Results
Yes
21% - 103 votes
No
79% - 394 votes
Vote