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"You're deftly managing your own finances, but now it's time to grow those numbers and save for the next generation," says Liberty's Maxine Muller.
As a career builder - well on your way to having a seat at the executive table, you're finally feeling secure. You're on top of your debt – mostly. You've got a retirement fund in place, an emergency budget, and you're past the point of living paycheck to paycheck.
But now what? Maybe you want to buy a house (or two). Perhaps start a family or add to your existing one. It's at this point in your life where generational wealth must become a central consideration of your finances. Good investments can last for generations if they're well looked after, and every parent wants to give their children all the advantages possible to ensure their success. And it's been said time and time again: generational wealth will be the key to breaking the cycle of poverty and inequality.
"It's time to get your finances to work for you – and your children. Even in the face of 'black tax' and other financial obligations, there are many ways to save, invest, and build generational wealth," says Maxine Muller, Executive Adviser for Liberty.
"We're very likely about to experience an economic recession, but there is good news, these things move in cycles. Investing now during an economic downturn means that as the economy recovers, your investments will also bloom," says Muller.
Invest in Unit Trusts (leveraging the power of investment)
For many South African's unit trusts are highly flexible and can be started with a lump sum or through a monthly accumulator. Investment returns will be taxed at your marginal income tax rate which could be anywhere from 0% and 45%, especially taking the interest exemption of R23,800 for under 65s. So, it pays to do your research or check in with your Financial Adviser.
Meanwhile, you can also entirely avoid paying tax on interest, local dividends, and capital gains, if you invest through a unit trust fund structured as a tax-free investment. "These are some of the most accessible investments when you're in a financial pinch but with a long-term view, investing in a strategically diversified portfolio tailored to your desired outcomes and being consistent with your investment plan, it is a great place to start," says Muller.
Diversify your investment portfolio even further through Endowments
These are an option for those individuals on the higher income tax bracket, as endowment plans are a more efficient investment vehicle from a tax perspective. The insurer will pay tax on your behalf at much lower tax rates than those applicable to high-net-worth individuals. Income returns in the endowment will only be taxed at 30% capital gains at an effective 12% tax rate, as opposed to 45% and18% respectively. After the first 5 years, you can withdraw from the investment at any time with zero penalties or negative tax implications. Beyond the tax benefits, they can also be used for estate planning, as they are payable to nominated beneficiaries immediately upon your death, therefore ensuring that executor fees are not payable on the value of the proceeds. As with unit trusts, you can also entirely avoid paying tax on interest, local dividends, and capital gains, if you invest through an endowment structured as a tax-free investment like Stash by Liberty.
"With any investment the risk appetite of the client and investment strategy of the underlying funds are considered. But because of the limitation on accessing funds within the initial 5-year period, in an endowment an investor is incentivised to take a more aggressive investment approach and make optimal use of the time in the market." says Muller.
Education helps maintain generational wealth – make sure your kids can have the best
Your child is going to need at least 12 years of primary and secondary education, and thereafter higher education, so starting an education fund for your kids is a no-brainer when you tally up all the rands and cents involved in their educational future. "Putting something away each month for our children's education is as important as your other savings plans. But many people don't realise that you have to consider education inflation as well. It's best to build out an entire education fund plan starting when your child is born, to lessen the annual impact on your cashflow later," says Muller.
However, there are also options to ensure that your child finishes their education even if you are unable to work due to a disability, pass away or suffer a critical illness. In 2021, Liberty's EduCator benefit paid out more than R25 million in claims under their Lifestyle Protector cover to ensure that children were able to stay in school and complete their education, even though their parents or caregivers had passed away – or couldn't work due to a disability.
Income Protection can protect you and your savings from being wiped out in an emergency
You and your family are accustomed to a certain lifestyle, so if something tragic happens, you don't want to lose it. "Income protection really shined during the COVID-19 pandemic, as it helped many people maintain their incomes even when they were unable to work, It's important to keep in mind that income paid from properly structured income protection policies will be tax exempt in the hands of the recipient" says Muller.
Income protection usually covers a percentage of your salary but can be increased to the full amount – and can cover you all the way to retirement – depending on the type of insurance. If for some reason you can't work due to an illness or injury, the last thing you want is to have to dip into your savings and funds that were earmarked to build your children's future.
Avoid the what if's and the I should have's - acknowledge your unique circumstances and get risk cover that meets your needs
One of the most important things to remember when protecting your future whilst investing in your future is avoiding "the perks" of it all. "Some risk and investment products offer incentives that aren't directly related to the risk and investment you have chosen to undertake, which means you're likely not getting the best returns because some of that money goes to the perks," says Muller.
Finances are highly personal; we must avoid trying to keep up with the Joneses. "Big purchases need proper consideration, and we can't just make them to compete with our neighbours," she says.
"Lastly, don't forget that debt is always manageable. You just have to go through your finances and learn everything you can about your spending habits. And here's a freebie: always remember that a Financial Adviser is trained to help you understand your finances down to the finest detail. We're here to help you," she concludes.
This article does not constitute tax, legal, financial, regulatory, accounting, technical or other advice. The material has been created for information purpose only and does not contain any personal recommendations. While every care has been taken in preparing this material, no member of Liberty gives any representation, warranty or undertaking and accepts no responsibility or liability as to the accuracy, or completeness, of the information presented. Please consult your financial adviser should you require advice of a financial nature and/or intermediary services.