Review your budget and bump up your savings where possible

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April 8, 2019

Budgeting is a vitally important tool in managing one’s finances. It enables you to balance your spending with your income and if followed through it can keep you out of debt or enable you to get yourself out of debt. It can also save you money by allowing you to make the most of your money.

The key to making your budget work for you is to regularly assess it and make changes as needed. There are tremendous savings that can be made from making simple changes to how you spend on household, car, financial and insurance expenses. Examples include purchasing items that you need in bulk or family packs, opting for energy efficient appliances, monitoring your home loan and reviewing your various insurance policies each year.

Once these little changes have been made and you begin to see extra cash in your budget, the best thing you can do for yourself is compound these savings into more savings. The way to do this is to invest them tax-efficiently. This allows you to maximize tax benefits available to you. The following are ways in which you can use your savings to invest and optimize your tax benefits.

  • Save in a tax-efficient way

Retirement savings and Tax-Free Savings Accounts (TFSAs) are two investments to enable you to save tax-efficiently.

Contributions made towards a retirement savings product qualifies for a tax deduction. This means that contributions made towards your retirement savings reduces your income tax. The additional bonus is that you are boosting your retirement savings by doing this!

A TFSA is a tax-free investment plan. It allows you to invest up to a certain limit in a tax-free savings account investment without any tax being levied on the investment. If, however, you breach the contribution limit, your investment will immediately become taxable.

  • Invest savings in an investment plan and manage your capital gains tax

Capital gains tax is levied on the growth in value of your capital invested. Individuals are given an annual capital gains exemption of R 40 000. This exemption means that when you realize a portion of your investment or all of it, the capital gain that will be subject to capital gains tax is reduced by R 40 000.

In terms of maximizing your tax benefits, you can realize R 40 000 of capital gains each year without paying capital gains tax. This switch of the realized portion will reduce the future capital gains tax that will be payable. This is because the switched portion will when reinvested have this new base cost.

There are generally many areas in a budget from which savings can be made and put to better use.  By investing these savings for the future, you can help yourself get closer to reaching a financial goal, to being able to retire comfortably, or even to assist you if you have a rainy day. It is therefore always a great idea to continually review you budget and bump up your savings!

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)