OPINION: Money for the future is for when life changes, retirement beckons, and the need is to enjoy a new lifestyle without worrying about everyday basics, writes John Manyike.
The temptation to spend money is always with us, and staying strong in the face of ‘get now and pay later’ schemes is making it more complicated than ever before to hit the balance of knowing what you need, want and desire and making sure that you have the money you need, for now, tomorrow, and the future.
Getting to grips with the differences between the three concepts is important because as the borders between them blur, the more difficult it becomes to lead a happy life and avoid the misery caused by runaway personal debt.
Getting across these major financial barriers means understanding that nothing is achieved if you don’t have goals. Putting money aside for living and providing for emergencies is the goal for now.
Having cash available for that dream holiday, a new car or varsity education for your children is for tomorrow. Money for the future is for when life changes, retirement beckons, and the need is to enjoy a new lifestyle without worrying about everyday basics.
It all boils down to investing in your life and not investing in a lifestyle. It’s easy when you are young to move jobs, take that money in your company pension plan and blow it on what you want. Fortunately, the ability to do that will become more difficult when the ‘two-pot’ system is introduced in 2023.
But, like all things intended to make things better, the two-pot system also has unintended costs. The system is intended to help people in distress access a small portion of their retirement savings before retirement and stop the habit of changing jobs to get hold of pension money. So, it has a savings pot and a retirement pot.
It sounds fine, but two things aren’t stressed enough. The first is that money taken out of the savings pot will be taxed at standard rates.
This means that if, for example, you are paying 40% tax, the money in your hand will be 40% less than the amount withdrawn. The second is that money can be withdrawn annually to the allowable 33% of total retirement funds.
This means that some people will begin seeing the savings pot as a way of getting a yearly bonus. Meanwhile, the true impact will only be felt when they retire and face having a smaller pension to sustain them as they get older.
The danger is that long-term goals and a stable future will be traded for achieving short-term goals. Add the current tough economic conditions when household budgets are under pressure, and the temptation to enjoy a lifestyle and withdraw money could become irresistible.
Even if the intention is to use the pension fund money and save money elsewhere to make up for the money that has been withdrawn, this is difficult for most people to do. However, there may be a circumstance where people need to access these funds due to the impact of Covid-19.
Tried and tested over time, the concept of now money, tomorrow money and future money should be stuck to if possible. As has often been said, ‘Your future is decided by what you do today, not what you put off until tomorrow.
Taking action today means deciding what your priorities are and starting to plan for coping with funds for unexpected emergencies, setting short and medium-term goals and thinking about the long-term future.
When it comes to saving and investments, time is valuable. The earlier you start your financial planning, the more time you have and the better off you will be. Best of all, when it comes to retirement contributions, the better your life after work will be.
* John Manyike, head of Financial Education at Old Mutual.
** The views expressed here are not necessarily those of IOL or of title sites.
IOL Business