Readers’ questions about investing a bonus, cancelling a rental agreement and more.
1. Where should I invest my bonus?
Q: 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.
A: 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.
2. Do I need a business account?
Q: I am a social worker in private practice. I have a business and personal account, which I find cumbersome to manage. What is the point of keeping business and personal accounts when I am the sole owner of the business? If I close the business account, will I be unable to get funding? Are there tax implications if I support business and personal expenses from a personal bank account?
A: Keeping a business account separate from your personal one depends on the type of business you have. If you are building up capital in your business or have employees, it makes sense to separate the accounts. However, if your only income is your consulting, which you use as your salary, it may not be necessary to have a separate business account with the additional costs that come with it. What is more important is managing your cash flow and tax obligations. So, while you may only need one transactional account, you should have two savings accounts linked to your bank account – one in which you accumulate your tax liability and the other for building up a cash reserve to provide a buffer for those months when your business income drops. In terms of funding, the bank will not look at the type of account you have, but rather at your income and how you manage your monthly expenses, so make sure you keep your bank account in good standing, which may be easier to do if you are only managing one transactional account. From the SA Revenue Service’s perspective, you need to declare all your income and have invoices to justify your expenses. These may be easier to reconcile with a separate account, but you still have to have a file with the paperwork.
3. Can I terminate my rental agreement?
Q: I signed a rental agreement for a year, but I have to leave before the 12-month period ends due to a job opportunity. Am I allowed to do this?
Annie McLelland of LettingWorx responds:
In terms of the Consumer Protection Act, the consumer (tenant) has the right to give 20 working days’ notice, but reasonable penalties will apply if the property is not timeously re-let. The landlord must make every effort to re-let the property, and any landlord using a good agent should be able to rent the property again in a couple of months. The act talks about a reasonable penalty being applied, and regulation 5(3) stipulates that a supplier (landlord) cannot “charge a consumer a charge that would have the effect of negating the consumer’s right to cancel a fixed-term consumer agreement as afforded to the consumer by the act”. This means that the penalty must not be so great as to dissuade the tenant from wanting to cancel the lease. So you, as the tenant, could be liable for a penalty, but not liable to pay for rent for the remainder of the contract. A reasonable penalty is thought to be about two months of rent. You may also be liable to pay any agent’s commission and costs of marketing.
4. How do I save and pay off debt at the same time?
Q: I recently started my internship at an auditing firm. I have some debts I would like to pay off, but I also need to save for my tuition fees for next year. What should I do?
A: Although paying off debt should be a priority, you first need to make sure you have built up an emergency fund so you do not need to tap into credit again. You need to save for your tuition fees so you do not need to borrow money in January. Draw up a proper budget which includes writing down each day what you spend your money on. Find areas where you can cut back and create some extra cash to focus on your goals. Focus on building up an emergency fund of at least R5 000. This will create a buffer so you do not need to access debt in the case of an emergency. Once you have that put aside, work out how much you need to be saving each month to pay for the tuition fees and start putting money away at the beginning of the month, before you start spending. Once you hit the goal of covering your tuition fees, start putting more
5. Should I put down a deposit on a car?
Q: I’m a young adult in need of advice. I am currently saving up for a good deposit for a car. What are the pros and cons of saving up to put down a good deposit?
A: A deposit is very important for several reasons. It can reduce the interest rate. A bank will view the fact that you could save for a deposit as a positive factor when calculating the interest rate payable. You have shown an ability to manage your finances and the risk to them of losing money is lower if the car debt is less than what you paid for the car. It will lower your monthly instalments and you will pay less interest in total as you are borrowing less.
For example, you buy a R150 000 car and finance it over 60 months:
Monthly repayment: R3 547
Total repaid over 60 months: R212 820
Monthly repayment: R3 202
Total repaid over 60 months: R192 120
Total saving net of deposit: R5 700
You can shorten the financing period – and save more money.
Monthly repayment: R3 447
Total repaid over 54 months: R186 138
Total saving net of deposit: R26 682
If you use the deposit to shorten the financing period, your R15 000 has in effect given you a tax-free return of nearly 80% in just five years. When it comes to financing, the lower the interest rate and the shorter the time frame, the less you pay.