Think carefully before cashing in your savings

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 to get by.

The Money-Stress Tracker survey, released by DebtBusters, a leading debt counselling company, indicates among others that more than half (52%) of the people polled feel stressed and anxious about running out of money before month end.

More than 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. It is 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.

I advise 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.
  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. 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 10 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 10 years.

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.

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.

The only positive reason for moving your cash out of a savings account 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, it could be worth moving the excess to a suitable investment that offers better returns. This will help you 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 and objective view of your finances. Speak to your tax consultant about the tax implications of withdrawing or reallocating funds.

 

  • Anthony works for JustMoney.co.za

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