Its value depends on how it forms in relation to your spending.
While accepting that the averages are fraught with gaps, the observation that the average wage in the formal sector in South Africa has increased by 727 rand per month – from 22,395 rand in March 2020 to 23,122 rand in 2021 – is nevertheless interesting. .
The figure comes from the latest Quarterly Employment Statistics survey recently released by Statistics SA.
Thousands of people would be very happy with a salary of R 23,000 per month, while many are probably just as happy not to earn just R 23,000 per month – illustrating the plague of average earnings from various professions in different industries.
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Moreover, the increase in the average wage is probably more the result of the decline of 552,000 jobs in the formal economy over the past year than an actual wage increase.
However, the R23,000 is the statistical average of 6.64 million people employed in the formal non-agricultural sector, which raises the question of the average lifestyle in South Africa.
Paying taxes is the primary responsibility of anyone lucky enough to still have a job.
Sidney Fletcher, senior tax adviser at Tax Consulting SA, says someone under the age of 60 will have to pay 3,258 Rand of tax out of 23,122 Rand per month in the current tax year, leaving a net salary of just under R20,000 per month.
“If a person’s total salary for a year is less than R500,000 from a single source without any allowance, it is subject to PAYE [pay-as-you-earn tax] and they do not have to submit an income tax return.
âHowever, I would still advise taxpayers who worked part of the year and / or contributed to a pension fund and medical aid that were not part of the employer’s payroll to submit a declaration. of income, âsays Fletcher.
He says employees can reduce their tax obligations.
âThe most common and risk-free method of reducing taxes is to contribute to a retirement fund. Contributions to the pension fund reduce your taxable income and your tax payable. People who are employed and whose income is subject to PAYE will receive the benefit monthly, while also having the benefit of saving for their retirement, âsays Fletcher.
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Contributing R1 500 to a retirement fund will reduce tax payable by R385 per month – from R3 258 to R2 873 – but reduce the monthly disposable income to R18 746.
Just under R19,000 per month after tax, and a long-term savings plan is still a good income for an individual, as well as for a family of two parents and two children. (Research from Stats SA shows that the average family has 2.6 children.)
SÃ©bastien Alexanderson, CEO of National Debt Advisors, points out that Stats SA also found that around half of South African families are considered poor, while around 30% are considered working for the middle class. He says a lot of people earn less than Rand 8,000 a month.
âThe value of your income depends on your expenses. The person who earns R12,000 a month without debt and with limited and manageable expenses might be able to afford luxury items, as well as have money to spare each month.
âHowever, the person earning Rand 25,000 a month may have huge expenses and a lot of debt to pay off, which leaves them exposed to not having enough money for daily living expenses and much less. savings.
âIn our experience, it’s not about how much you earn, but how your earnings relate to your day-to-day spending and debt repayment,â says Alexanderson.
He says national debt advisers have found affluent households have been hit hard by Covid-19 in the past year. âIf you made R60,000 a month with monthly living expenses and debt payments of R55,000 a month, and your income fell to R40,000 a month, then you were in trouble.
” It’s not [simply] a matter of income. How much you earn is only important in terms of how much you spend, âhe says, adding that if a person’s expenses consistently exceed their income for months at a time, then they should consider professional advice. .
Alexanderson says that too often people deny the reality of their situation and leave it until it is too late to find workable solutions.
Pierre Muller, consulting partner at Citadel, agrees that too much debt and a lack of proper financial planning are at the heart of people’s money worries. He notes that people often spend too much money and get into too much debt.
A typical example is an expensive new car. âIf you go into debt to make a purchase, suppose R500,000 at 18% interest, payable over five years, your payment is R13,200 per month.
âAfter five years you have paid R300,000 in interest only. Therefore, you paid a total of R800,000 for something that might only be worth R200,000 after five years.
âAs a depreciating asset, a new car loses about 20% of its value the first year and 15% per year thereafter.
âIt’s the epitome of short-term pleasure versus long-term pain,â says Muller.
âIf we spend too much now and too little on important financial items, when calamity strikes in life, there will not be enough reserves to fall back on. This often leads to debt and begins or continues a vicious financial cycle.
He says it’s best to save until you can at least put down a large deposit to shorten the loan term. As a result, you earn interest on your savings instead of paying interest on a loan.
Muller stresses the importance of good financial planning to ensure a better financial future.
The first step is to recognize and take stock of your current financial situation. âIf you don’t know where you are, you can’t go forward.
âWhether you are in debt or want to build your financial future, the best time to face the reality of your situation is today and any situation can be improved with a clear path and time,â says Muller.
It gives some indications:
- Determine your financial goals and be realistic.
- Compile a list of your assets and liabilities, including all current investments and policies. Include income details for you and your spouse.
- Include your dreams or aspirations, like owning a vacation home or buying a vintage car.
- Consider the tax implications, if any. The advice of a financial planner cannot be overstated when it comes to the complex world of taxation.
- Be aware of the effects of inflation on the value of investments, especially when planning for retirement.
- Beware of the “Yolo” (You Only Live Once) mindset. It also encourages young investors to take very concentrated risks.
- Hire a professional financial advisor to prepare a detailed analysis for you and always establish what the initial costs will be. This advisor should be your financial coach to help you stay motivated, persevere, and reach your financial goals.
- Beware of financial scams.
- Involve your partner or spouse.
âCreating a personal financial plan starts with identifying your goals. Remember that every goal should be achievable within the context of your lifestyle, âsays Muller.
âIt serves as a reality check, taking into account your resources. If your resources are insufficient, some goals need to be adjusted to be more realistic. Goals usually depend on your monthly budget.
Tips for the average employee
The first goal of a person earning an average after-tax salary of around R20,000 per month should be to save for an emergency fund of around three months of living expenses, which would cover them in the event of loss of income. his job or some other unforeseen circumstance, says Muller.
âIt’s important to keep in mind that retirement savings are often not available in an emergency,â he adds.
âA person earning R20,000 should consider what expenses they will still have even if they have no income.
âThe person could save on travel expenses to get to work or on employer pension fund deductions. If they still need R16,000 a month to survive, the target for an emergency fund should be around R48,000, âMuller said.
Thereafter, the focus is on investing for retirement. âIt’s important not to delay this because retirement may seem far away, but the earlier you start, the more compound interest you’ll benefit,â Muller said.
If you’re comfortable in retirement living on 75% of your pre-retirement salary, you need to save the following:
- 17% of your salary each month if you start investing at 25;
- 22% if you start investing at age 30; and
- Almost 60% if you don’t start saving for retirement until you’re 45.
How to best save?
Muller says good investment options for the average single person who wants to save for an emergency fund, a new car, or a vacation include tax-free investment plans.
While the maximum annual contribution is capped at 36,000 Rand with a total limit of 500,000 Rand, funds are available when needed.
âWhen the annual limit of Rand 36,000 is reached, one can opt for an investment in a trust with similar investment options and flexibility,â says Muller, noting that term deposits and other cash investments currently generate cash. very low yields.
A couple with children
Having a spouse and children dramatically increases monthly living expenses, such as more life coverage to care for the family if the primary breadwinner dies, more people dependent on medical aid and saving for higher education.
“It’s probably best for a couple to work backwards in their budget,” says Muller, “by deducting all major expenses and investments from their paycheck and seeing what is left to spend.”
This exercise is often a red flag to be careful not to spend on âwantsâ and end up with too little to save and invest, says Muller.
The Covid-19 was a wake-up call
Experts interviewed by Moneyweb noted that the Covid-19 pandemic is forcing people to look at their income, expenses and financial future – or should have motivated them to do so.
Muller says that a good financial plan creates financial security and ensures people reach their goals.
âHe gives direction and meaning to his financial decisions.
This article first appeared on Moneyweb