There are seasons in our life when saving and investing (two different skills) are easy, and then there are times when they can be really challenging. An obstacle that rears its head in these tighter seasons is that money decisions are largely based on habits that rely on repetitive behaviour.
Some of us begin our working life with a good habit of saving a small amount each month. In time, we’re able to invest this money. But when life demands that money from us, it’s not always easy to return to that habit of saving to rebuild and grow our wealth. For others, we don’t form that habit early on and as our costs and responsibilities increase, creating a habit of saving is even more complicated.
Several years ago, our world-class Treasury Department created Tax-Free Savings Accounts (TFSAs). They put specific stipulations in place to allow some freebies and avoid the abuse of these investment vehicles.
Often we ignore these.
In a nutshell, if you have taxable income, you can deduct up to 27,5% of your income in the form of a Retirement Annuity contribution or into a TFSA and get up to a 45% discount on your contribution via the tax system.
But, in the interest of helping taxpayers develop a habit of saving, they have put an annual and a lifetime limit in place, which means you can’t simply dump a whack of cash into the account as and when you please. Each year, you can only invest R36 000 (or R3000 per month), and in your lifetime, you can invest a maximum of R500k.
This means that it will take you at least 14 years to accumulate the maximum allowable contributions, longer if you only want to invest R1000 per month. It’s a clever system that encourages building the habit of saving, which we know, is far more beneficial in the long run.
It’s fantastic to invest large sums when we receive bonuses or come into a windfall, but these can be dangerous if we withdraw on the investment as quickly as we contributed to it.
The other benefit of the TFSA is that it’s tax-free, so there are absolutely no taxes levied against your investment and its growth. It is a long-term investment, but when you realise your tax-free account well into the future, all capital gains will be free of tax.
Whilst the tax-free benefits are notable, the habit-formation support that this investment vehicle offers is far more notable. Whilst we are limited to R3000 per month in a TFSA, we could extend ourselves another R1000 into a different investment portfolio.
And slowly, as we build the habit, we could invest much more than that every month, or every quarter, or every tax-year end. We all have different needs, tax situations, risk tolerances and investment profiles, so let’s connect and discuss the best tax planning tools for you.