Lara asks: My husband and I got married last year and pooled our joint savings to put down a deposit on a house worth about R1,3-million.
We do have quite a bit of disposable income left every month that we tend to put into the bond. I’m worried that we’re putting all our eggs into one basket and that we should be considering other investment opportunities or even buying a second property.
I’m worried that a second property might bog us down financially if I decide to have kids and maybe scale down to a half-day position or stay-at-home mom. Could you give us some advice on what would be the best way for us to deal with our extra money?
Maya replies: You are fortunate to be in a sound financial situation and you definitely need to use this opportunity to build a financial base before having children.
There are different schools of thought about paying off your bond but personally I believe that one should have a diversified approach to savings. Definitely put extra into your bond, but also make sure that you are saving separately for other areas of your life like retirement and children.
There are several things you need to look at:
- Tax free saving: You can deduct up to 15% from your taxable income by saving into a retirement fund. Make sure you are taking full advantage of that through your company retirement fund. Speak to your company and make sure you are contributing the maximum you can.
- Retirement funding: If you have not been saving for retirement since age 25 you may find you need to boost your retirement savings. It may be worth speaking to a financial advisor to do a calculation on where your retirement savings should be at this age.
- Planning for a child: If you want to take time off to have a child, start living on the reduced household income and save the rest. You can start a monthly savings for your future child’s education (at current costs you can’t start saving too early). As this will be long-term you can invest in an equity (share) investment like unit trusts or exchange traded funds (see related articles). Please remember when you take time off work to still save for your retirement. This is the biggest reason women are so underfunded in retirement — we forget about retirement savings when we take time off to be moms.
- Paying off the bond: Bank economists recommend that you always pay at least 10% extra into your mortgage each month. For example if your mortgage is R10 000 then you would pay R11 000. This is to protect against rising interest rates. An amount between 10% and 20% would be prudent.
- Emergency savings: You need to have an emergency savings account of about three months salary. This is for those unexpected emergencies that could put you in debt. You could keep this in a money market fund or in your bond. Personally (I think it is a female thing) I like to keep my money in separate “pots” so I keep mine in a money market fund even though it is more tax efficient in my bond.
- Spending savings: Do a lifestyle audit for the next five years and see if there are big ticket items you may need to buy — like a bigger car for example. These savings should be low risk so a fixed deposit like Capitec is a good start, or again your bond. Just make sure you know what money is being saved for what in your bond (the money “pot” thing again)
- Discretionary savings: Have long-term savings outside of your retirement savings. These savings can create choices for you later in life — if you want to change careers or take an early retirement. Again unit trusts or exchange traded funds are appropriate vehicles.
- Second property: A good property investment can be a great way to create long-term wealth. However, as you mentioned, it does have its downside because you are committed to a second bond and it could put financial strain on you if you struggle to find a tenant. This may be something to look at once you have gone back to work after having a child. For further information on how to build up a property portfolio go to www.hope.co.za
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