How’s a Tax Free Investment account different to my existing savings account?

Most people have a savings account of sorts, but what’s a Tax Free Investment account and how is that different other savings accounts?

It’s easy to feel a little overwhelmed by seemingly simple decisions about saving and investing money. With so many products and options to choose from, we don’t always know what the differences are and why one would choose one over another.

Let's explore the different accounts and their benefits.

What is a savings account?

A savings account is simply a bank account where you can save money and earn interest. This would be separate from your daily transactional account, where your salary is paid into and where all your debit orders and EFT’s are taken from.

Why do I need a savings account if I already earn interest on my main account?

The savings account is a way to keep your money separate and out of temptation’s way — especially if you intend to later use that money for a big purchase, or to cover you in case of an emergency. With African Bank’s MyWORLD account, the Savings Pocket you open will earn even more interest than your Primary Account, with 6.5% on any positive balance.

Here are the advantages of opening a MyWORLD Savings Pocket:

  • SA’s best interest rate,
  • No monthly fees
  • Less temptation to splurge
  • The ability to easily track your savings

Which bank is best for saving money?

Looking at fees, interest rates and convenience, it’s hard to beat African Bank. You’ll earn 5.5% interest p/a on the MyWORLD transactional account and 6.5% p/a on a Savings Pocket. Other accounts, such as their Fixed Deposit, earn even higher interest rates. Try out the calculator to see for yourself.

What's a Tax Free Investment account?

All the interest that you earn on your savings, as well as growth on all your investments, is taxable. You may not realise this as your investments may be small and the first R23 800 interest earned is not taxed (if you’re younger than 65). With a Tax Free Investment, all growth on the investment is tax free, irrespective of the amount.

There are some restrictions though: you can only invest R500 000 over your lifetime and the annual limit is currently R33 000. These figures can change going forward and will be announced in each year’s National Budget Speech.

Is a Tax Free Investment worth it on my average salary?

You’ll need a lot of money before you’ll get to earn R23 800 interest in a year and you may not see any benefit from a Tax Free Investment account now. As the example below shows, this is best employed with a long term goal in mind:

Imagine starting your investment at the age of 25 and saving money each month, up until the age of 65. Using a Tax Free Investment, you would pay no tax on the growth of your money. That will make a huge impact on your investment over the 20 to 30 years you have been nurturing it! African Bank’s Tax Free Investment account offers an interest rate of 8.67%, which means even more money and a sizeable payout that can only enhance your golden retirement years. There’s a handy savings interest calculator on their website to help you to calculate your returns.

When would I use a savings account vs a Tax Free Investment?

A savings account is for the short-term, where you would need the money in a few months or in a year’s time. You can deposit and withdraw your money at any time without hassle and use it as and when needed.

A Tax Free Savings account however, is an investment for the future. This is for the long-term and even though you can withdraw the money, it makes more sense to leave it where it is. In this way, you can really take advantage of compound interest.

Compound interest basically means interest on interest. By leaving your investment to gather interest and grow, you will then start to earn even more interest as a result. This effect will gather momentum the longer you leave your investment to mature, leaving you in a stronger financial position when you do eventually decide to withdraw your funds.

Empower yourself

Financial concepts don’t need to leave you feeling overwhelmed and confused. There’s a wealth of online knowledge and resources to help you gain a better understanding of the financial world.

Open yourself to learning and question things that you don’t understand!

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