Don’t be tempted to dip into savings and investments, warns JustMoney.

Inflation has hit a 13-year high in South Africa, and with further increases in living costs on the horizon, many South Africans are having sleepless nights. Money worries have led many people to consider cashing in some savings or investments, in order to get by.

The Money-Stress Tracker survey, released by DebtBusters, a leading debt counselling company, indicates among other things that over half (52%) of the people polled feel stressed and anxious about running out of money before month- end. Over 70% indicated that the financial stress was spilling over to their work life, while another 76% said that even their health was being affected by their financial issues.

There are, however, consequences to drawing on your savings or foregoing your investments, whether completely or in part, says JustMoney.co.za Marketing Manager Shafeeka Anthony.

“It’s understandable to reach for a cash lifeline when you feel like you are drowning financially. However, there are implications to consider before taking drastic action,” she says.

Anthony advises asking yourself the following questions before withdrawing savings or investments that may have taken decades to accumulate:

1. Why do I need the cash? Are you facing a real emergency? There is a difference between paying for essential repairs to your car, so that you can continue working, and drawing on your savings to splurge on a holiday. Differentiate between a want and a need, and never access investments if you can avoid it.
2. Am I budgeting correctly? If you are tempted to dip into your savings, take the time to go through your bank statements to understand where your money goes. Examine what you earn, and how you spend that income. Careful planning and budgeting could prevent you having to access your savings prematurely.
3. Can I earn more? Before you dig into your savings, consider other ways of making money. Explore working part-time or as a freelancer to help make ends meet. You could also rent out a spare room in your home, or work for a ride-hailing service.
4. What are the tax implications? Withdrawing funds before your retirement will affect how much you can withdraw tax-free later on. Also, if your investment has been performing well in the markets, you could be liable for capital gains tax.
5. Am I sacrificing compound interest? Compound interest is calculated on the principal amount invested, and the accumulated interest – it is interest earned on interest. If you have R100,000 invested for ten years at an interest rate of 10%, you will have R270,000. If you withdraw that now, you will lose R170,000 worth of interest over the next ten years.
6. Am I heeding the wrong financial advice? Many so-called financial experts on social media pontificate about impending stock market crashes, and warn that banks will seize your savings and investments. Rather take the advice of a reputable, professional financial adviser. Keep those savings and investments intact and focus on long-term goals rather than short-term fluctuations.
7. What is the cost of taking out a loan? If you really must access cash, consider where you will pay the least interest, and access funds there. If you have a home access bond, this usually offers the lowest interest rate. Credit card interest is generally the highest. If you access money on your credit card, and do not pay your bill in full by the time it’s due, you’ll end up paying compound interest. This could rapidly get out of hand.

“Drawing on savings can seem like a good solution when you are struggling with your budget,” says Anthony. “But this could jeopardise your financial goals and destroy the gains accumulated over many years. Retirement may seem a long way off, but there will come a time when you can no longer earn an income.

“If you are struggling with the cost of living, and you can’t repay your debt, seek help from a reputable debt solution company. There are various debt solutions to consider, such as combining  all of your debt repayments into a single monthly amount, at a lower interest rate.

The only positive reason for moving your cash out of a savings account, says Anthony, is to make your money work harder.

“With inflation on the rise, you don’t want your money to lose its purchasing power over the long term. The general rule is to have six months’ worth of living expenses accessible in your savings account. If you hold more cash than this in an everyday savings account, then it could be worth moving the excess to a suitable investment that offers better returns. This will help you to keep up with, or beat, inflation.

“Of course, before making any changes, it is worth speaking to a financial adviser, who will take a holistic, objective view of your finances. Also, speak to your tax consultant about the tax implications of withdrawing or re-allocating funds,” says Anthony.

JustMoney.co.za, established 15 years ago, is a trusted voice within the personal finance sector. The JustMoney website offers articles, money management tools and a wide range of financial products and services. Over 200,000 South Africans subscribe to the newsletter to stay informed and become financially savvy. Find the website here.

Issued by Meropa Communications