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A parent’s guide to tax-free investing

A parent’s guide to tax-free investing

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Seugnet de Villiers - Multi-Manager Investment Analyst

I am an Investment Analyst with a degree in Mathematics and a knowledgeable understanding of the power of compounding but as a mother of twins, I am still learning how to budget with, and for, my new dependants.

As I reflect on the birth of my boys almost five years ago and what I have learned about investing since, I cannot help but think of Mike Tyson’s famous quote, “Everybody has a plan until they get punched in the face”. Nappies, doctor outings, school fees etc. – all required in two’s – was a difficult task that knocked my lights out a few times. This has been exacerbated by our collective experience of rising inflation, rising interest rates and volatile investment performance. It has not been easy to practice what I so often preach to clients, “no matter what, stick to the plan”. My reality has been more of a bob and weave around the plan, but I have learned a few important lessons to help me stay as close as possible to the plan.

These are some of the most important lessons I have learned on this journey:

· Keep it realistic

Take the time to record how much your disposable household income is, how much your debit orders add up to and how much you spend on food, petrol, toiletries, retail therapy and other things every month. Be brutally honest, assess and record everything as this will give you the critical feedback you need to develop a realistic investment plan. It will provide you with a clear indication of how much you have left at the end of the month to invest, on a consistent basis, and areas you can cut back on to create extra cash to invest.

In our household, this exercise has revealed some frightening results over the last few years. Some were self-inflicted and could easily be fixed with a more disciplined approach to shopping for toys, cute outfits or mountain bike tyres. Others were out of our control, like the increase of our monthly electricity bill and home loan payments, these were harder to fix and required sacrificing some of the luxuries we allowed ourselves.

· Make it a habit

I am a firm believer in “out of sight out of mind” when it comes to investing. Having a realistic and sustainable plan and setting up monthly debit orders is a very effective way to achieve your investment goals and grow your wealth. Like many other families, there have been times where we have had to adjust our monthly debit order amounts to keep up with a phase of expenses like household renovations, a host of unforeseen car mechanic bills or our boys growing into the next phase of their lives and requiring capital outlay for things such as big boy beds and big boy car seats. Be that as it may, our rule is to never quit the habit. Every bit every month helps.

· Do not let a good opportunity go to waste

This is not in reference to the vast amount of Black Friday deals that flooded your inbox during the entire month of (black) November. I am referring to no-brainer gems in the investment world like tax-free investing and investing your greenbacks (if you bank with Nedbank) in a unit trust.

Tax-free investing is like a limited edition, “not to be missed” special. A tax-free investment allows you to invest R36 000 per tax-year and R500 000 in your lifetime, and the sooner you can fill this bucket of your investment portfolio, the sooner your money gets exposed to the power of compounding, without needing to worry about paying tax on dividends, tax on interest or tax on capital gains realised when you disinvest in the future. At up to R3000 a month, it is high on our priority list for each family member, and something we actively use to secure and achieve financial freedom for our boys.

Let’s quantify it using a pure equity fund to maximise capital gains, since we don’t need to worry about the impact of capital gains tax and we have time on our side: If we contribute R3000 per month towards each of our son’s tax-free investment accounts from today, we will reach their lifetime contribution limit of R500 000 when they are 18. At this point, they will have access to their tax-free investment and will be able to withdraw it all if they wish.

Or, they can keep it invested and have the following to look forward to:

- At age 30, they will have an estimated R750 000 in today’s terms (R3.3 million projected) to put towards their first houses, or

- At age 40, they will have an estimated R1.2 million in today’s terms (R8.5 million projected) to put towards starting their own businesses, or

- At age 65, they will have an estimated R4 million in today’s terms (R92.5 million projected) to put towards their retirement, which will materially take the pressure off from saving for retirement with their own earnings.

As with all other aspects of parenting, it is a big task to educate our boys on the value of money to ensure they make good investment decisions when they are older, but the material contribution we can make towards our boys’ financial freedom with a tax-free investment is worth the effort.

The Nedbank Money App also offers a great opportunity by allowing you to invest your greenbacks into one of your unit trust accounts. I have personally selected the Nedgroup Investments Opportunity Fund – excuse the pun – to track just how much a few hundred Rands invested every now and then can grow and it has been a pleasant surprise. All these seemingly small opportunities to contribute to my family’s financial well-being motivate me to keep playing this “game”, and it has been rewarding.

· Finally, celebrate implementing your long-term plan

This leads me to another little nugget I discovered upon reflecting. Celebrate the successes, big or small. So often we are consumed by worry or focus too much on the poor decisions we’ve made (the mom guilt I go to bed with every other night is real!) and the problem with this is that our perception impacts our emotions, which impacts our decisions. Our decisions have the power to become habitual and if we look at our financial journey through a negative lens, it may adversely impact our emotions and lead to poor decision-making, unhealthy financial habits, or even to feeling “why even bother” and giving up on saving. On the other hand, if we celebrate all our successes we foster a positive outlook on our investment journeys, which will leave us feeling happy and motivated to keep making good decisions. So, look for the successes in your investment journey, celebrate them, learn from them, and keep going.