How to brace your money for 2021 (#233)

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01/03/21 • 23 min

2020 gave us all a new appreciation for the humble emergency fund. In this episode of The Fat Wallet Show we think about some steps you can take to prepare your money for the year ahead.

Win of the week: Celma

I turned 55 and had to visit my bank (Nedbank) a few months later.

I asked them if there is any reduction in bank fees when you turn 55 and to my surprise my bank fees got waived provided I make a R10 000 deposit. I only get 2.5% on the deposit, but save about R300 in monthly bank fees. The facility is probably available to everybody but seems like you must ask about it - it is not as though they tell you or advertise it.

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Zee

I've been listening to you guys like a fiend for the past 3 months and I have managed to follow your instructions of having insurance, reducing living expenses etc. Now I'm at that stage of forming my retirement strategy. Annnnnddd I'm pretty much having a bit of a breakdown as to whether I'm going in the right direction.

So I'm 28 and working in South Korea. I've never had any debt, I don't pay rent, car, I have no kids or financial dependents. This allows me to save about 54% of my pay, which is split between my RA 16% and about 4% Unit trust (which I top up with my annual bonus) both with 10X .

Then 30% in a ZAR Easy Equities monthly (I just opened my TFSA which I will max out on the 1st of March as I have already saved the R36K). Ohhh I have saved 3 months salary as an emergency fund.

Should I keep the UT as a means of saving a year's worth of salary for when I am old and wrinkled and the medical costs are eye wateringly high or to supplement my income when the market falls apart. Orrrrr should I just leave that and go beast mode into EasyEquities and the RA.

I also wanted to know if I should push to save up to a 6 months salary even if it takes me more than a year? And put it into a money market or savings account cause the prospect of going back to being unemployed for a long period of time scares me to death!

2020 gave us all a new appreciation for the humble emergency fund. In this episode of The Fat Wallet Show we think about some steps you can take to prepare your money for the year ahead.

Win of the week: Celma

I turned 55 and had to visit my bank (Nedbank) a few months later.

Subscribe to our RSS feed here.
Subscribe or rate us in iTunes.

Zee

Then 30% in a ZAR Easy Equities monthly (I just opened my TFSA which I will max out on the 1st of March as I have already saved the R36K). Ohhh I have saved 3 months salary as an emergency fund.

Previous Episode

Don't let the door hit you on the way out (#232)

If nothing else, 2020 was humbling. There were many things we thought we knew about the market, about gold, about interest rates and about predicting the future that just turned out to be not so.

In this year-end episode of The Fat Wallet Show we share some thoughts and insights, as well as a nice bottle of bubbles.

Here’s to a happier 2021.

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Win of the week: Tayo

One thing I do however is set up separate scheduled transfers with different references if I have a more specific goal.

So instead of transferring R100 every month into my EM, I'll have a transfer with reference UPGRADE_KITCHEN of R20, another with R10 for UPGRADE_PHONE_FUND and the rest a normal EM dump.

This way I can just search for UPGRADE_KITCHEN on 22seven and I can see how much I've saved up for that particular goal.

Extra points for using the same UPGRADE_KITCHEN reference when taking out of that 'fund' so I know how much I've spent and how much I have left.

I make sure to keep it simple:

Keep those goals as broad and few as possible (I only have 3 at the moment)
Don't overthink it.

1 bank account (also 1 banking charge), no excel admin

Next Episode

RAs and tax (#234)

For all the flack they’ve been getting, there’s no easier way to reduce your tax liability than pension fund contributions. In this week’s episode of The Fat Wallet Show, we help Megan correct an assumption about her tax savings on retirement annuity contributions. We use the opportunity to talk about offshore allocation and prescribed assets.

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Win of the week: Megan

I listened to your "To RA or Not" episode today, and one of the questions (about RA contributions vs paying off a bond) reminded me of a dilemma I've been wondering about for a while.

I'm 25 and working as a junior engineer. My marginal tax rate is at 26%. I'm currently putting R3000/month into my TFSA (Satrix MSCI World ETF with Easy Equities) and R2000/month into a Sygnia RA with decent fees. I save R1000/month in a TymeBank goalsaver for holidays. After that I can't really afford more savings at the moment, which means I'm not adding anything to my long-term discretionary investments. (I have an emergency fund and enough short-term investments for my needs and goals.)

My question is this:

Considering

1) The Regulation 28 requirement on the RA which limits global diversification,

2) My low tax bracket, and

3) The fact that Rand devalues around 4% per year to the dollar,

is the RA really worth it?

Putting money into an RA saves me 26% now. But what if I were, instead, to put that R2000 into a discretionary investment (e.g. MSCI World ETF)? If the MSCI World outperforms the local 70% of my RA by 4% a year (which seems likely imo), then surely the discretionary fund would be "outperforming" the RA in the long term?

For arguments' sake, with the assumption that global returns outperform Rand returns by 4%, then after 10 years, R2000 in the RA + 26% (assuming I could magically reinvest the tax return instantly) would be worth

(2520 x 0.3 x 1.04^10) + (2520 x 0.7) = R2883.

While R2000 in the discretionary global ETF would be worth:

(2000 x 1.04^10) = R2960.

(I mean this in relative terms, I don't really expect 0%).

This difference would only get greater over time due to compounding.

The other thing is that the RA money will all get taxed in future. And that the RA fees, although low, are higher than the discretionary fees.

So while I fully understand the tax benefits of an RA for people earning at 45%, I'm not as convinced for those of us in some of the lower brackets. What do you think? Is my assumption wrong about global markets showing better returns? Is it normal to feel this uncertain about putting so many eggs in the SA basket, or am I being silly? Is an RA worth it for me now, and if not, when does it become worth it?