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There are three key ways to build wealth, whatever your income level: spend less, save (or, more accurately, invest) more and get a better return on your savings. And December provides an excellent opportunity to put the first two into practice.
Millions of people are seduced by the siren call of materialism, which sounds out the loudest during December. TV adverts, billboards, magazine and cinema adverts are all geared to encourage you to spend heartily during the festive season. Whether it is for Christmas or Chanukah gifting, New Year merriment or that well-deserved holiday, we are bombarded with exhortations to spend, spend, spend. Yet – when the wallet is empty and the credit card is maxed out – most people ultimately come to the realisation that money and possessions do not guarantee happiness.
As we hurtle towards the end of the year, most of us are looking forward to taking some time off. We can’t wait to be able to take a holiday after a year of hard work. We are almost there, there’s a faint smell of coconut sunscreen in the air, but most of us still have to put in some hard work. So don’t take your eye off the ball just yet.
People often make the mistake of spending differently during December, believing that it’s just one month and so it’s okay to splurge. And perhaps the worst mistake to make is to try to impress others or “keep up” with your friends. It is far better to treat the festive season just like any other month: stick to your budget and only buy necessities. At the same time, keep an eye on January when there may be significant additional expenses waiting for you, such as school fees and higher medical aid rates. The first part of creating wealth is to preserve the capital and income that you do have. Try to hold back this December.Where possible, go for the inexpensive option. Make a game out of it. And whatever you do, do not go into debt to finance gifts, entertainment and holidays. There is always a way to make do with what you have.
The other side of the coin is to invest more. If you are fortunate enough to be employed and receive a 13th cheque, invest the money immediately. This is the most painless way of preserving and creating wealth – to use funds that are outside of your normal income, funds that you don’t usually have to rely on to get by each month. The temptation to use a bonus to buy often meaningless treats and pleasures can be strong, but giving in to it will prevent you from establishing true wealth.
Consider preparing early for tax season. You can invest up to R30 000 per tax year in a tax-free savings account. If you haven’t already opened one, take this opportunity to do so. If you have one, be sure you’ve added your R30 000 for the current tax year. The advantage of these funds is that you pay no tax on any interest income or dividends earned by the investment and there is no capital gains tax (CGT) payable when you withdraw your investment.
You could also use any extra income that you receive in December to top up your retirement annuities (RAs). Contributions to RAs are tax deductible up to 27.5% of your gross remuneration or taxable income (whichever is the higher and subject to an annual limit of R350 000). In addition, the investment returns within the RA are tax free and the benefits are also taxed on a favourable basis, making this a highly efficient form of investment.
You may think that December is a difficult month in which to make spending cuts and to invest more, but it can be an easy one. This is especially true if you receive a 13th cheque, which presents the perfect opportunity to either reduce debt or to invest and set yourself up for a lifetime of wealth creation.
If you have not already done so, consider also engaging the services of an accredited financial adviser. Bearing in mind the old adage, “if you fail to plan, you effectively plan to fail”, it is pertinent to keep your financial well-being top of mind and plan accordingly. Start the new year on a firm footing, having planned ahead for the year – and years – ahead and stuck to your budget for December. Paul Leonard is regional head: Eastern Cape at Citadel. This article originally appeared in the 1 December edition of finweek. Buy and download the magazine here.
