Roy asks: I am 26-years-old and starting a new job.There is no pension or provident fun included in the contract.
I own a property which will be rented out furnished for about R4 200 per month and I have a bond of R4 500 per month. I am concerned that interest rates will be going up after the World Cup.
I received a lump sum from a provident fund with my previous employer and have no other investments.
I plan to do the following investments
- R2 000 per month into EFT’s Satrix40
- R2 000 extra into my bond repayment monthly
- R1 000 into a retirement vehicle (unit trust — Coronation or Cadiz, not too sure which one)
I have a vehicle paid off and will receive company housing, so my monthly expenses are not too high. I do have about R16 000 credit-card debt.
What should I do with the lump sum? Invest it one-off into a unit trust as a lump sum or spread it monthly it over time to prevent a short-term loss?
I also have about R60 000 cash which I’ll be looking to keep available for an entrepreneurship scheme I’d like to try.
Maya replies:
What you are really looking for is a financial plan and you need to sit down with a financial planner to set your short-term, medium-term and long-term goals. However there are some basic rules that you can apply.
Don’t cash in your pension
My first question is why you took your provident fund as a cash lump sum? You could have transferred this to a retirement annuity like the Coronation or Cadiz investment you mention and paid NO tax.
Find out if there is any possibility for this decision to be reversed, but it is unlikely.
Pay off debt
The first focus should be on paying off your credit-card debt. The R60 000 cash is generating about 7% interest, while you are paying at least 20% on your credit card. Pay off high interest short-term debt first and then build up your savings.
Budget
You say you expect your expenses to be low, but draw up a proper budget once you start your new job so that you know exactly what it’s costing you to live. Sticking to a budget will also stop you from going into debt. There is no point saving on one hand and going into debt on the other.
Satrix
If you like the Satrix range of exchange-traded funds (ETF) also consider Satrix RAFI. This is an index where the shares are weighted by their relative valuation so you are buying shares that are relatively cheaper to their peers. Check out www.satrix.co.za for more information
Saving into a retirement annuity
You can save up to 15% of your before-tax salary so there is room to save at least R2 000 in this vehicle. This is where a financial advisor can help you set your goals. What are your goals for your Satrix savings? If it is for retirement it may be better to increase your retirement annuity and decrease the Satrix amount so that you benefit more from the tax breaks. But it is also important to have what we call “discretionary” savings outside of retirement vehicles to provide for flexibilty on retirement and medium-term goals.
Saving into your bond
Paying off your bond is an excellent way to save, but it is also important to be investing in other growth assets for your longer-term needs so at retirement you have a roof over your head and a retirement fund to live off.
You seem to have this balance right. By paying in extra into your bond you are also protecting yourself against future interest rate hikes. You can use the extra cash you are investing in your bond as emergency funds.
Investing the lump sum
There is such a debate about where this market is headed at the moment. What we do know is that it is looking expensive at the moment. Experts recommend phasing it in over time. Once you have selected your unit trust you can invest the lump sum in the same asset manager’s money market fund and arrange to have the money phased in over time.
Cash investment
Make sure you are getting the best return on this money and shop around. Fixed deposits tend to offer the best rates. You can earn up to R21 000 of interest tax-free so that is not an issue at this stage.
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