Recently I went to a two-year-olds birthday party, family friends with little babies, Grannies, Aunties and Uncles were there to celebrate. A beautiful get together with a bewildered little birthday man.
Why was he bewildered?? He was surrounded by a pile of beautiful shiny parcels.
As the little fellow tore open each glittering parcel, he appeared overwhelmed. What to hold, play with first – the train the truck, the trumpet?
My brain went into financial mode. All these beautiful parcels cost many rands.
In 6 – 12 months these toys outfits will be outgrown, and all those rands will be gone.
Could contributing to a savings scheme be a better long-term option for this little boy, especially for close family members who want to give him a strong financial foundation when he becomes an adult? The answer is simple – Start a Tax-free account for your child, godchild, grandchild, niece or nephew.
The Benefits of a Tax-Free account for a child:
- No tax on interest, dividends or capital gains earned within the account
- Over time this can lead to significantly higher returns compared to taxable accounts.
- An early start provides compounded growth – Starting young gives investments
- more time to grow.
- Even modest monthly contributions can snowball into a substantial amount by adult hood.
- The funds are accessible at any time.
- Maximum of R500 000 capital savings
Financial Education Opportunity
- Involving the child in the process teaches them about saving, investing and financial responsibility.
- It can foster a healthy money mindset early on.
Traditional Savings accounts have limitations – See comparison below.
Comparison of Savings accounts against a Tax-free Account.
The Resolute Tax Free has provided an average return of 13.88% (over 10 years) against a cash Savings Account of 7.11%.
Interest earned on the Savings Account may be taxed thus reducing returns.
Taxpayers under 65 years of age have an annual tax exemption of R23 800.
People 65 years and older- the annual exemption is R34 500.
There is no tax on interest and dividends and capital growth earned on a Tax-Free account.
The difference in savings just from tax free growth and better returns will result in increased capital growth over time.
The Future Results
Saving R3 000 per month will provide an amazing capital return when the child reaches 18 or 21. These funds can help buy a car, support a university degree or even to start a business.
Below is an example of a savings of R3000 per month in the Tax-free account (maximum R36 000 per annum) over 18 and 21 years.
18 Years Old Nominal Value: R 1 729 194
18 Years Old Real Terms: R 605 812
21 Years Old Nominal Value: R 2 427 078
21 Years Old Real Terms: R 963 034
Conclusion
Being able to provide your adult (bewildered little child) with the surprise gift on his/her 18th or 21st birthday of nearly a R1million is an amazing start to any young adults future.
