Dean Gerber is a CA (SA) who works at VAT IT.
Cape Town - A friend once told me about a co-worker who was given share options in the company they worked for. The company grew quickly and within five years the strike date for the options had come and gone. The co-worker did not even remember that he had owned the share options, nor realised that he had lost over R15m by not purchasing the shares on the strike date. You’d think he would have at least put a reminder on his phone. I’m sure he didn’t sleep very well for a few months.
This might be an extreme situation, but it highlights a very important part of financial education that is not taught in formal institutions and that most people lack as a result - a general sense of personal financial awareness. People are willing to work hard and long hours to earn money, but spend no time protecting it or understanding how best to use it.
I am not surprised anymore by friends who tell me that they've never looked at their payslip or checked their bank statement; that they don't know how much tax they pay each year; or who ask whether they should pay off their house before their car (they shouldn't).
Here are five financial tips in the hopes of creating a little more awareness:
1. Consider the gross/net tax effect when making every-day decisions
People are generally scared of anything tax related. However, in certain situations, it can be beneficial to get into the habit of considering basic tax effects on decisions you make every day. As a start, I’d encourage you to calculate your marginal (additional) tax rate. I know it sounds complicated, but it’s not.
Take the total amount you earn each year (for most people this is your cost to company), and use the tax table below to see what bracket you fit into.
I’ll use the highest tax bracket of 41%, which will illustrate my point best. If your marginal tax rate is 41%, it means that you will pay tax of 41% on every additional rand you earn. Here are some examples of how you can use your tax rate to change the way you think about and eventually make decisions:
1.) When you go shopping for luxury items, gross up the cost of whatever you are buying using your marginal tax rate to calculate the pre-tax value of the amount you are spending. For example, your marginal tax rate is 41% and you want to buy a TV that costs R10 000. You would multiply the 10 000 by 100/(100-41) to get the pre-tax value: R16 949. In simple terms, this means that you would need to earn an additional R16 949 in order to buy that TV or to replace the R10 000 you are spending. This will make you think a little more before spending the money. You could also work out your average tax rate to calculate the pre-tax cost in money that you have already earned. But since money earned is usually spoken for, I like to look at purchasing luxury items from a marginal cost perspective.
2.) You have a lump sum invested in a fixed deposit or money market account. You may not have considered the fact that interest income is only exempt up to R23 800 p/y (and R34 500 p/y if you are over the age of 65). If you had say R500 000 invested in a fixed deposit at an interest rate of 7%, you would earn R35 000 in interest for the year. This means that the R11 200 that you earned above the exempt amount of R23 800 is taxed at your marginal tax rate. If your tax rate is 41% for example, it means that you are effectively only earning interest of 4.2% (i.e. 7% X 59/100) on every additional Rand that you put into the fixed deposit. If that’s the case, then in real terms, you are actually losing money because you are earning at a net rate that is lower than inflation! You may well be better off using your bond as a savings facility or investing elsewhere.
3.) You own an investment property in your own name and you rent it out to a tenant. SARS will allow you to depreciate/write off items purchased for that property (as long as they are contributing to you earning income on the property). There is therefore an immediate tax benefit to furnishing the property. If, for example, you buy a bed for R5 000, you can claim the R5 000 spent as a tax deduction. In this case, at your marginal tax rate of 41%, the bed is actually only costing you R3 000 (R5k X 60/100) after taking into account the upfront full depreciation for tax purposes.
2. Appeal your insurance premiums annually – especially at major age milestones
Most people understand that it’s a good idea to shop around for the best price on short-term insurance. We’re well educated through the marketing strategies of the insurers themselves. However, once insurance is in place, one normally doesn’t bother to question it again.
It’s a good idea to phone your insurance company on an annual basis and ask them to re-assess your premiums. I find that they are normally able to offer a further discount. This is especially true at major age milestones like 21 and 30. Insurance companies place a lot of importance on your age when assessing your risk. The biggest milestone is undoubtedly 30 and your premiums can come down significantly because you’re a safer bet to the insurance company. But this won’t happen automatically. You need to ask for it.
3. Assess whether bundled banking pricing would save you money
If you’re on a “pay as you go” banking pricing plan, it might be worth looking into the various pricing models that your bank offers. Most people are on pricing models that charge for every debit order that goes off your account or every cash withdrawal that you make from an ATM. If you are paying per transaction, you should compare your average monthly banking fees to the cost of a bundled/unlimited pricing option.
You may find that you’re exceeding the cost of the bundled price on a consistent basis and it would actually save you money to change the plan you are on. You’ll also have the added benefit of not having to worry about how many transactions you make per month and what they cost.
For the more affluent readers, some banks will scrap your monthly bank charges if you keep a large cash balance in your current account. As an example, FNB Private Clients will waive its R365 monthly fee if you have a balance of R75 000 in your account at all times. That’s the equivalent of a post-tax interest rate of 5.8% (365 X 12/75k). So if you have already reached the interest threshold, keeping a R75 000 balance in your account would be equivalent to earning effective interest of 9.9% (5.84% x 100/59) assuming you are on a 41% marginal tax rate.
4. Know when you are being treated for a Prescribed Minimum Benefit (PMB) medical condition
Anyone who has been in hospital or had a close family member in hospital knows the strain that can be caused by the various financial issues surrounding hospitalisation. Not only are the costs of private medical care extremely high, but the immensely complicated rules, codes and billing systems of the hospitals, doctors and medical schemes make this experience far more difficult. Patients and their families are often left with massive medical bills to pay out of their own pocket.
This is regularly due to the disconnect between medical practitioners and the medical schemes. The general public and many practitioners are completely uneducated on the very important concept of a PMB condition (Prescribed Minimum Benefit), how to apply the correct ICD10 coding to those conditions and present invoices in a manner that is acceptable to Medical Schemes.
The Council for Medical Schemes publishes a list of 270 medical conditions, which medical schemes are required to provide full cover for. In my own opinion and personal experience, the hospitals and medical aids do not go out of their way to make it known to patients that they are being treated for a PMB condition or what their rights are in terms of these PMB conditions. Sometimes this is deliberate and other times it’s because the practitioners or their accounts teams just don’t know any better.
It can be very valuable to know what conditions are on this list as it has the potential to save your family large amounts of money and alleviate financial burden in times of crisis.
5. Join a hotel group rewards programme whenever you travel:
Whether you are a frequent traveller or you go on a family holiday every now and then, you should make sure to join the rewards programme of the hotel group that you will be staying with.
Many hotel groups give their loyalty members free room upgrades, even if you’re not on their gold/platinum status or equivalent. This is not necessarily a rule/policy for these groups; however, if the hotel is partially empty on a given night, they are likely to upgrade even the loyalty members on the lowest status.
Whenever I travel overseas in non-peak periods, I always book the cheapest possible room in a hotel, and am usually upgraded to a better room if there is space in the hotel.
* This guest post is by Dean Gerber CA (SA), who works at VAT IT. He can be contacted on: firstname.lastname@example.org. Previous articles available at gerberdean.wordpress.com.