The Fat Wallet Show with Kristia van Heerden

Podcast: Tax-free vs education

In Latest, The Fat Wallet by Kristia van Heerden

The tax-free investment case is so appealing, it’s almost always a good idea to do your tax-free investing before anything else. Even fancy algorithms like this one finds that. Sadly, life happens to our money and a full tax-free allocation isn’t always possible.

This week, we help a father of four figure out how to balance his educational priorities with his tax-free allocations. The good news is there’s no one right answer. You have many options, including pausing your tax-free contributions and taking it up again later, as Njabulo pointed out in this podcast. The bad news is sometimes two options have more or less the same benefits and shortcomings. In that case, it’s time for the soft sciences.

I always talk about the importance of knowing what you want your money to do. Since Tinus chose to have four children, we can assume his family and children are his top priority. His finances should reflect that. Secondly, a great education will empower his children and offer them a greater likelihood of being financially secure themselves. Tax-free is important, but it’s not the be all and end all.


Tinus

I try to max the contributions for myself, my wife and my four kids every year, even if it means I need to sell from my existing portfolio to get the required cash.

I hope that I’ll be able to teach my children enough about finances that they’ll handle their TFSAs with care once they turn 18.

My initial idea was that they would pay for their own studies from the TFSA, but it would probably not be very smart to start withdrawing from the TFSA as the real opportunity of compound growth is just massive if they can keep the investment going.

Projecting the value of a maximum annual contribution up to the R500,000 level and 8% annual return, the account at age of 18 would sit at around R1.2m. This R1.2m becomes R31m by the age of 60, which should allow them a comfortable retirement from the TFSA alone.

Surely this “asset” in the child’s balance sheet would make getting a study loan much easier if required, especially if the TFSA is then moved to a provider that also give study loans (type of a soft security).

How do you balance the contributions made to your child’s TFSA and provide for their studies? I’m leaning towards maxing out the TFSA and face the music to pay for studies when the time comes.

I have always believed in choosing stocks with good momentum. For this reason, I initially chose the Satrix Momentum Unit Trust for two of my children’s TFSAs and I’ve been contributing to them all along with TFSAs at Satrix directly.

I noticed that there is now a Satrix Momentum ETF, that seems to be exactly the same as the unit trust, just lower cost. ABSA NewFunds also have a momentum-based ETF. I am considering moving these two kids TFSAs over to EasyEquities for easier admin and future flexibility, but would like to stick to a momentum type fund for now. How do these options compare (the methodologies are not the same as is evident from the current holdings in each fund).

For my two youngest children I chose the Sygnia 4th industrial fund (mainly because it sounded cool and I thought choosing technology for my 0 and two-year-old can’t be a bad idea).

Their investments have done very well (just lucky timing to be honest). From your recent podcast I could pick up that you are not a massive fan of this fund (it invests in guns etc) and I know that there are performance fees as well. What would be other options in the technology space, just a simple Nasdaq ETF?

Find our house view on tech ETFs here.


Cleaned bleeped show is below.


Win of the week is Hannes for sharing a great car financing tip.

For anyone interested in calculating car affordability (because some of us love cars and it’s also our hobby, not just a means of transport), Dave Ramsey has a cool rule stating that you can afford the car ONLY if you can tick off all three of the following:

– You are able to pay a minimum of 20% deposit on the car.

– You are able to finance it for a maximum of four years (48 months).

– The monthly repayment (after 20% deposit and a max four-year term) is less than or equal to 10% of your gross monthly salary.

I’ve done the math like this and it removes a lot of the thinking involved in buying a car, especially if you’re a petrolhead. Use it / don’t use it. 🙂


Alistair

I received my very first dividend from my Ashburton 1200 in my TFSA today (yay), but I was quite shocked to see I paid 26.76% tax.

That seems like an extremely high price to pay for a tax free account – I was under the impression it would be much lower. I do know we are subject to foreign dividend tax, but considering this is how much tax one is paying… is it even efficient to put ETFs like the Ashburton 1200 in a TFSA? Surely (if your finances allowed it) it would be significantly better to fill your tax free with local ETFs and all foreign ones outside of it? Or is the advantage of not having to pay capital gains tax so great that it completely out-shadows the tax on dividends (and the growth that taxed amount would have had)?

I’m curious what difference this tax would make over a period of 40 years, conservatively assuming the growth of the Ashburton 1200 was the same as that of the Satrix 40 (and assuming dividends are reinvested).


Anne

I have an offshore investment with Allan Gray. The money split between Orbis Sicav global balanced fund and Nedgroup Investments Core Global fund.

I wanted to make an additional contribution, and had a relook at the fees. TER 1.08 and admin fee of 0.5%.

It the investment worth the fees? Should I rather stick to ETF in EasyEquities?


Ned inherited R2m.

With such a large amount of money, the fear of investing is damn real. My biggest fear is that I find myself fiddling around with my money until I find myself in a “ah fuck” situation. As a result, I have over R1.9m just sitting in cash. I realise this is a bad thing and I plan to move it all to EasyEquities, minus the emergency fund.

The real fear comes in with my discretionary investments.

I’m 29 and a major career improvement is imminent if all goes well. This will bring with it a MASSIVE change in salary. The plan is to continue dumping all my excess salary into tax free and thereafter discretionary investments. I’m not too sure about an RA at this stage as this is something else I’ve been putting off.

The only real investments I have outside of the tax free are about R18k in Ashburton 1200, top 40 and mid cap ETFs through FNB which I’ve been contributing to since about 2014/15.

Investment fear is a very real, very scary thing. It just gets worse when there’s more money. I realise now how important it is to start early and when you don’t have so much money to stress over. I wish more people would realise that investing isn’t only for rich people. It’s the best thing you can do for yourself.


John

In SA we have the Top 40, so an equal weight equates to 2.5% per share. Our biggest share is Naspers which is about 22.5% of the index, so Naspers is 9 times bigger than the equal weight. (22.5 divided by 2.5)

In the USA they have the S&P500 so an equal weight is 0.2% per share. The biggest share is Apple which is about 3.6% of the index, so Apple is 18 times bigger than the equal weight. On a relative basis Apple is twice as concentrated as compared to Naspers in our market.

Now I am guessing but I believe most of the data to validate the equal weight model has come from the USA and not from SA. This could mean the the equal weight model is not effective in SA.

When the expects say “over the long term shares have outperformed the other asset classes” I guess that they use the the overall index to validate their statement. I guess they are not referring to some bespoke index with smart beta components. To me any “smart or not so smart beta” is moving away from passive investing towards active investing even if the costs are lower. Passive investing should be no more complicated than reproducing the index.

Is it cheaper for CoreShares to change the methodology of an ETF compared to launching a brand new ETF with a different methodology? My guess is that it is.

I believe that CoreShares must stick with their model or front up and tell the market their model is broken.


Martin

I am a 26-year-old Mountain Guide living in Somerset West. I have a wife and a one 1.5 year old little girl dinosaur. My wife doesn’t work.

I am busy studying and I hate traffic so I leave home at 04:30 most mornings to avoid traffic to Cape Town where I then have 1.5 hours to listen to your shows and do other studies while I wait for my clients to arrive. I finish work at 11:00 and can spend most of the rest of the day with my wife and daughter.

Recently I started my own business and make a reasonable income during the summer months and then eat only putu in winter.

I save a fair amount of my income, mostly because we live very basic with no debt.

Anyway my questions are the following:

I don’t plan on living in South Africa for very long, another four years, at most. What impact will this have on my TFSA? Will I be able to keep it growing and fill it while we travel? I don’t plan on emigrating anywhere, so my bank accounts should stay in SA for the moment.

Would it be smart to start investing in a RA if I’m not going to be in SA. Can I transfer my RA across borders later in life?  

I know you did that blog post on the global property ETF, but I was wondering if that is a good investment into my TFSA?  I thought I will only get tax exemption on local property like the satrix property ETF. Will I get dividends on those two global ETFs? What Property ETFs should I be looking at?


The Fat Wallet Show with Kristia van HeerdenThe Fat Wallet Show is a no-nonsense personal finance and investment podcast hosted by Kristia van Heerden and Simon Brown. Every week we answer questions by a growing audience of finance enthusiasts. Submit your pressing money and investment questions to ask@justonelap.com.

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