Should I invest, save or pay debt? City Press answers your personal finance questions

2018-08-03 11:03

Your financial questions answered by City Press' financial experts, curated by Maya Fisher-French.

How to preserve your pension benefits

Letsoko writes:

I’m working in the mining industry and we will be retrenched in two month’s time. Fortunately there is a contractor who will take over and we will be paid severance packages. I am 48 years old and I would like to move my pension fund to a product where it will be safe, and where it will grow.

City Press replies:

It is great that you are focused on preserving your pension. Not only are you taking care of your future, but you are also avoiding paying tax on your pension withdrawal.

There is new legislation which requires employer retirement funds to offer the preservation of an employee’s retirement funds should they resign or be retrenched. Most employer funds already comply.

Speak to your current employer to determine whether you can leave the funds with them. This would be invested in line with your current pension and would be the easiest route to preserve the funds. As a rule, the costs of an employer fund tend to be less expensive than taking out a preservation fund yourself.

Where to invest my bonus?

Mirabe writes:

August is my bonus month and I will have an extra R3 000 which I plan to invest for a rainy day. Which investment vehicle can I use, and for how long I can save the money?

I don’t have any foreseeable plan to use the money, but at the same time I want it to give me some extra money, and help me to create an investment culture.

City Press replies:

When it comes to putting money away, you need to have some idea of what the funds will be used for in order to match the sum to the correct investment.

The key is “how long before you want to access the money?” If you plan to use the money in the shorter term, you cannot afford to take any market risk.

But if you plan to invest for five years or more, your risk is that inflation will outpace your returns if you do not take some market risk.

You mention you want to use the money for a “rainy day”. Any savings or investment plan should start with an emergency fund. This is money that is immediately available if you have an emergency, like a hospital admittance, car accident or your fridge stops working. It is these unexpected events that usually push us into taking out expensive credit, so it is an important safety net. If you do not already have an emergency fund, this would be a good kick-start.

If you have an emergency fund and are prepared to leave this money to grow for the next five years, you could look at investing in equities (shares) via unit trusts or exchange-traded funds. In order to be tax-efficient, it is a good idea to start with a tax-free savings account (TFSA).

These are offered by most investment houses. For example, Satrix has a low-cost, low minimum range of funds that you could invest in as a tax-free investment.

Alternatively, unit trust companies offer actively managed funds as TFSAs. These are invested across a range of asset classes including local and offshore companies, property, bonds and cash.

There are many to choose from including household names such as Investec, Allan Gray and Coronation.

Ideally, you should use the TFSA as way to start investing monthly and build your wealth.

Invest or pay debt

Johanna writes:

I am in serious debt, but fortunately I have R100 000 from savings.

I recently qualified for a debt consolidation loan which allows me to pay one amount and which will be finished in four years’ time.

I want to find a trustworthy company to invest the R100 000.

The plan is to invest for two years then withdraw the interest only. This will help to ease the burden on the amount the debt is taking from my salary.

City Press writes:

If you want to use the R100 000 to ease your debt repayments it may make more sense to pay a portion into your loan rather than investing for interest, as the interest you earn from the bank is less than what you pay the bank in interest.

A good strategy would be to keep some funds for an emergency and use the rest to accelerate your loan repayment.

For example, you could keep around R40 000 as an emergency fund which will ensure that you do not have to take out more debt in the case of an emergency. You could invest this amount in a 32-day notice account. Find out from your bank which account would give the best interest.

You could then use the remaining R60 000 to accelerate the loan repayment.

For example, if your debt consolidation loan is R200 000 and you pay off R60 000 you have two options:

  • It reduces your repayment from R5 668 to R3 967 per month over 48 months.
  • You keep your repayment at R5 668 per month and settle the debt within 24 months.

This assumes a 16% interest rate and does not include any additional service fees.

The higher the interest on the loan, the bigger the impact the R60 000 would have on the debt repayment.

Try to start saving each month into a tax-free savings account. You can start with as little as R300 per month.

Once you are debt-free you can channel the money you were paying towards debt into the investment account.

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May 19 2019