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Basics of Personal Finance Behind the Power of Saving

Let’s quickly talk about salary / earnings to see what we need to earn extra to cover extra costs.

For the purposes of explanation we’ve endeavored to keep the example below as simplistic as possible, but it is very important to understand.

Basics of Personal Finance

For example (South African example, but the principals is applicable Universally):

Background

Working with the 2019 / 2019 tax year.

Say a person earning R 6,000 per month wants / needs to earn another R 400 net to pay for something (It does not matter what the extra money is for).

Together with the annual bonus, etc this person will fall in the 25% tax category. Remember that this does not mean that the person will be paying 25% tax on their whole salary because of the sliding scales of tax.

It does however mean that the person will be paying 25% tax on each extra Rand that is earned.

Plus remember a portion (say 7,5%) of the extra earnings most likely goes to towards some sort of retirement fund.

Plus another 1% goes towards the Unemployment Fund (UIF).

And a portion may go towards a Medical Aid fund (if contributions are calculated on a person’s earning), but as we said let’s keep it simple, working just with tax, retirement and UIF.

The Request

If you should go to your employer requesting a R 400 increase in salary, it will effective mean that you’ll only get R 266 in your pocket.

Calculation: R 400 less 25% tax and 7,5% retirement and 1% UIF.

The R 400 increase in salary that you are requesting from your employer is a 6,67% increase in percentage terms. With the CPIX being at 4% and lower, this 6,67% is already a stretch.

(We will not go into the dynamics of CPIX; sufficient is to know that most of employers base their salary negotiations on this indicator).

Objective not achieved

And then you must find out that after deductions you only get R 266 in your pocket, thus not achieving your objective of R 400.

Can the objective be achieved?

For achieving your target you would actually need to ask your employer for an increase of R 600 or 10%, thus 1,5 times more than what you actually want. With the CPIX at 4% and less, you’ll be very lucky should your employer give you the increase (your chances will be very slim to say the least).

And the higher your salary is, the bigger the gap and thus the increase needed.

What exactly are we trying to say?

Getting to the point it means that the power of saving is exactly this: For every R 1 that you need / want you either need to save an R 1 or earn R 1,50 extra.

The advantage of this is that savings is fully under YOUR own control whereas extra earnings / salary is mostly up to your employer.
 

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