The savings vehicles to help you realise your financial goals

Published on 30th June, 2021 at 07:45 pm

Saving for a car or your child’s education? There’s a vehicle for every financial goal. We asked the experts which is ideal for each.

First, understand your savings goal horizon

Short term
These goals can range from six months down the line to as far as three years away. Examples include saving for a car, a wedding or an emergency fund.

Medium term
If you’re looking at saving for a goal you hope to reach in five to 10 years’ time, this would be considered a medium-term goal. “Medium-term savings goals involve some risk to obtain capital growth, and investment products may offer higher interest rates than normal savings accounts you would expect for short-term goals,” says Riaan Crowther of Sleewijk BlueStar, underwritten by Sanlam. Examples of this type of goal include saving for your child’s education or a deposit on a property.

Long term
Your long-term goals sit in the range of time beyond the next 10 years and projecting as far as 40 years into the future. A typical example is retirement, which can be as far as 40 years away if you start saving in your early- to mid-20s.

Here are top considerations you should know as an investor in the ‘new normal’. Consult with a financial planner to invest according to your short-, mid, and long-term needs and goals. Book a meeting with one today.

The best savings vehicles for each category

Short term
Savings account
Short-term savings goals, especially those where you need access to the money in less than a year’s time, require a flexible savings vehicle. “For these you are looking for low risk with easy access to money,” says André Wethmar, a senior financial planner at FinPrufe Wealth BlueStar, underwritten by Sanlam. Because there is low risk in this type of savings vehicle, Crowther adds that you shouldn’t expect the type of growth that you would in a longer-term vehicle. “Savings accounts are the most common vehicle for short-term goals. This type of account is a good place to keep unneeded, easily accessible funds for a short-term period,” says Wethmar. “Money will earn some interest; however, investors may be tempted to access their money more often than not.”

Use this calculator to work out how much you need to save each month to meet your financial goals

Unit trust
To lower the chance of giving into the temptation of accessing your money, Crowther and Wethmar both suggest considering a unit trust for short-term goals. “This gives you the flexibility to save on your terms from as little as R200 per month, or R5 000 once off,” says Wethmar. This type of savings vehicle comes in the form of a portfolio of investments managed by a fund manager according to a particular investment mandate. “It is perfect for anyone looking to invest in non-retirement savings in a diversified portfolio in order to achieve their goals. Funds are generally paid out within 5-7 working days,” says Crowther. Note that with a unit trust, the interest is taxed according to your marginal tax rates, with an interest exemption of R23 800 for taxpayers under the age of 65, and R34 500 for taxpayers over the age of 65. Capital gains tax is applicable with certain exemptions.

Here are some more perks of a unit trust.

Medium term
Unit trust
If you’re saving towards a deposit on a property or your child’s education, both experts say a unit trust is a good option, but you can bump up the risk quotient to enjoy slightly better returns. “You could choose to take up a higher risk fund, which offers more equity and property exposure to your investments. These funds normally have higher volatility, with the potential to outperform lower risk investments over the longer term,” says Wethmar.

Endowment policy
If you are in a higher tax bracket, you could consider an endowment policy too. “This makes the most sense if your marginal tax rate is higher than 30% – provided that you’ve already used your annual tax-free interest exemption,” explains Wethmar. An endowment policy is a life insurance contract designed to pay a lump sum after a specific term (when it matures), or on death. “You’ll receive the benefit on maturity as an after-tax amount,” says Wethmar. “One of the attractive benefits of an endowment policy is that you can choose to nominate a beneficiary, and no executor’s fees will be charged on the proceeds of the endowment policy when you pass away.”

Long term
Retirement annuity
Want to build a sizeable pocket of funds for 40-50 years from now? Take advantage of compound interest and the time that lies ahead with a retirement annuity (RA). You can use it either as your main savings pot if you don’t have a pension or provident fund through your employer, or it can be used to supplement your existing retirement savings, says Crowther. “Contributions can be deducted from your taxable income (up to certain limits), and no tax is payable on investment returns. Upon maturity from age 55, a lump-sum benefit (depending on certain limits) is tax-free,” he adds.

If you were to pass away before your RA matures, it’s also excluded from your estate. “Retirement funds (this includes pension, provident, preservation and retirement annuity funds) governed by the Pension Funds Act do not form part of a deceased estate,” says Crowther. “While you may have nominated beneficiaries to your RA, the trustees of the fund may decide how to distribute your funds,” he continues. “Thus, debts and estate duties cannot be covered by an RA. However, where you have no beneficiaries nominated and no financial dependants, the retirement funds will be paid directly into the estate. Because the money paid to the estate will be subject to the winding-up process, the executor is entitled to charge a fee, although the money will not attract estate duty.”

Read more about what makes a retirement annuity a smart investment choice here.

Use this retirement savings tool to help you calculate how much you need to put away each month to reach your retirement savings goals.

Tax-free savings account (TFSA)
This is another tax-efficient savings vehicle best suited to medium- to long-term goals. “A tax-free savings account is a great long-term wealth creator, as you would receive all your growth tax-free,” says Wethmar. “This could help you build a nest egg for your retirement to complement your pension.” Remember that you can invest a maximum of R36 000 a year, and there’s a lifetime contribution limit of R500 000.

Use this tool to calculate your tax deductions for the current tax year.

Should you group your investments?
Say you have three short-term savings goals and two medium-term savings goals. Should you group all your short-term savings into one vehicle, and do the same with your medium-term savings? There are pros and cons to both, say Crowther and Wethmar. “Some people prefer to keep saving goals separate to easily track progress and know how much they have saved at any point in time,” says Wethmar. The downside to this is that you may incur more fees than a grouped approach, since you’ll be running separate savings vehicles concurrently. Discussing your financial goals with a qualified financial planner is key to making the savings vehicle decisions best suited to your needs, say both experts. Book a meeting with a qualified financial planner today.

Want to know how experts invest? Read this.

Speaking to a financial planner before making any investment decisions is a smart call. Speak with one today to make a decision best suited to your financial goals.