Personal Finances

AS 12.1.3 12.1.2 12.1.1

Would you like to Control your Finances?

Make sure you understand

Issues that affect personal finances such as taxation, retirement planning, changing interest rates on credit, investment and the ability to not be in debt.

Tax
To pay for services like education, health, roads etc., the Government raises money through various taxes e.g.
Income tax: It is paid by all individuals that earn more than a certain amount. This amount is determined in the National Budget each year. VAT: It is an indirect tax and is levied at 14% on the value of all goods and services. Some goods are exempt from VAT e.g. brown bread. Other taxes: This includes small business & company tax, rates & taxes on home, fuel tax, custom & excise duties, property transfer fees etc.

1.

An extract from the 2007/2008 tax rates for individuals in S.A. reads:

If the taxable income exceeds R112 550 but not R180 000, the tax is R20 250 plus 25 % of the amount over R112 500.

Shariff s taxable income is R125 000 p.a. The primary tax rebate applicable is R7 740. The employer deducts R2 180 p.m. for PAYE. How much tax is due to him or still owed by him? tax = R20250 + 25/100 x (180000-125500) A Tax Rebate is a fixed amount = R33 875 tax = R26 135 deducted from Tax payable = 33875the7740 payable. Deduction = 12 x R2 180 = R26 160 Due to him = R26 160 R26 135 = R25

2. Shariff drives a tourist bus each Saturday and gets

R315 for this. SARS instructs the Tourist Company to take off 25% for tax as it is extra income. What is the net income that Shariff receives each Saturday? Income =
75/ 100

x 315

= R240

The Company gives Shariff an increase to compensate for the tax that has to be paid. What is the total cost to the company per week? New cost =
315/ 75

x 100

= R420

3. Shariff buys a flat for R300 000 (the market value).

What will the rates and taxes be, per month, if the municipality charges rates at 1,295c in the Rand p.a. on the market value? Rates = 0,01295 x 300000 = R3 085 Rates p.m. = R323,75 What will the insurance be, per month, if the homeowner s insurance p.a. is calculated at R0,55 per R100 on the market value? Insurance p.m. = 0,55 x 300000/100 12 = R137,50

4.

Shariff s Municipality bills him for water (excluding VAT) as follows: First 6 kl Free 6 10 kl R3,99 per kl 10 25 kl R5,25 per kl 25+ kl R8,15 per kl

How much VAT does he pay if he uses 29 kl of water? Costs = 6x0 + 4x3,99 + 15x5,25 + 4x8,15 = R127,31 VAT = 14/100 x 127,31 R17,82

5.

Shariff has to buy a stove. He sees two adverts for similar stoves. PE Co store Price (including VAT): R2 159,00

El Co store Price (excluding VAT): R1 899,00

Where must Shariff buy the stove? Explain. EL Cost with VAT = Buy at PE-Co
114/ 100 x

R1899

= R2 164,86 cheaper

Saving Options
Instead of a single lump sum investment you can invest in an annuity. An annuity is a number of equal payments made at regular intervals (monthly, quarterly etc.) subject to a rate of interest for a period of time. Annuity Formula: A = P[(1+i )n

1]i

Another option is to invest in the stock exchange and buy a certain no. of shares e.g. unit trusts. These shares can be sold at any time but you need to be careful as sometimes the shares decrease in value and you may lose money.

1. Thinking of his retirement, Shariff started investing

at the age of 30 in an RA by making regular monthly payments of R250. Calculate the value of the annuity after 35 years if the average interest rate is 6% p.a. compounded monthly.

A = P[(1+i )n 1]i = 250[(1 + 6/1200)35x12 -1] 6/1200 R 356 177,57

Determine the interest earned on this investment. Amount paid = R250x12x35 = R105 000 Interest = R356 177,57 R105 000 = R251 177,57

2. Shariff s friend, Abdul, started investing R250 per

month at a rate of 6% p.a. compounded monthly, when he was 20 years old and stopped contributing when he turned 30. What was the value after 11 years? A = P[(1+i )n 1]i = 250[(1 + 6/1200)12x11 -1] 6/1200 R46 580,66 How much did he contribute? A = R250 x 12 x 11 = R33 000 How much interest was earned? Interest = R46580,66 R33000 = R13 580,66

Abdul decides to leave the money in the account for 35 years at 6% p.a. compounded monthly. What is the accumulated value of his savings? A = P(1 + i )n = R46580,66(1 + 6/1200)12x35 R378 400,39 How much interest was earned on the total This is a lump sum investment for 35 years investment? Interest = R378400,39 R33000 = R345 400,39 Which was the better investment, Shariff s or Abdul s? Discuss the factors that influenced your decision.

Task

3. Abdul bought 2 000 unit trust shares at R1,38 per

share. They are now worth R3,17 per share. He had the shares for 6 months. How much did Abdul pay for the shares? What was the % increase per share? Cost = 2000 x R1,38 = R2 760 Increase = x 100 129,71%
1,38 1,79/

If he chooses to sell the shares now, how much does he get for his shares and what is his profit? Sell = 2000 x R3,17 = R6 340 Profit = R6340 R2760 = R3 580

The Best Rate

Interest can be compounded daily, monthly, quarterly etc. To make a fair comparison when the compounding periods are different we must convert the interest rates to their equivalent effective annual rate using, E = [(1 + i )n 1]. Emily bought a laptop using her credit card. The The effective rate loan is 22% p.a. compounded interest rate for theof an investment will always be higher the the given interest What is when daily on thanfull purchase price.rate p.a.,the effective interest is compounded more than once per year. rate? 22 365

E = (1+

/36500)

-1

0,24599 Rate % 24,6%

Which is the best interest rate for a guaranteed fixed deposit savings offered by U-Bank? Plan A Plan B Plan C 5,50% p.a. compounded annually 5,45% p.a. compounded semi-annually 5,35% p.a. compounded monthly. PLAN A: rate % = 5,5% PLAN B: E = (1+ 5,45/200)2 - 1 0,055242 rate % = 5,52% PLAN C: E = (1+ 5,35/1200)12 - 1 0,054831 Rate % = 5,48%

Plan B is the best

Balancing the numbers

Bank statements or account summaries are written records of what happens to your savings, loan, credit card spending etc. It is important to keep track of the balances in your different accounts. You took a loan from the bank for R4000. Interest is calculated on the outstanding balance at the end of each month. The bank statement shows R38,33 charged for interest after the 1st month.

What is the annual interest that the Bank charges?

38,33/ 4000

x 100 x 12

11,5%

1.
Date

Shariff has a Chargmee credit card. He received this statement.

PurCash Balance Payments advances chases b/f (+) (+) (-) New Interest balance (+)

Jun 24 243,74 50,00 Jul 3 Jul 7 Jul 24

193,74 175,60 150,00 4,13 369,34 519,34 523,47

What do the (+) signs in the columns mean? Is the new balance of R523,47 correct? yes Showamount must be added onto how much The your working. you owe the card company.

Date

Balance PayCash Purb/f ments advances chases

InterNew rest balance

Jun 24 243,74 50,00 Jul 3 Jul 7 Jul 24

175,60 150,00 4,13

193,74 369,34 519,34 525,47

Interest is 18% p.a. compounded daily on the unpaid balance from the previous statement & cash advances. Interest is not charged on purchases made during the current month.

Show how the interest of R4,13 was determined. Interest = 193,74x18/36500 x13 + 343,74x18/36500 x17 R4,13

The minimum payment is 2,5% of the closing balance of R525,47. Shariff only paid the minimum due and spent R120 the next month. What is the closing balance on August 24? Pay = x 525,47 R13,14 Int = 18/36500 x 31 x 512,33 R7,84
100 2,5/

How would you use your credit card, and not pay any interest? Pay off the total debt amount each month.

Closing balance = 525,47 -13,14 +7,84 +120 = R640,17

Don t Fall into the minimum trap !

If you just pay the minimum due on a credit card, you will barely cover the interest you owe, let alone the debt. It will take you years to pay off your balance, and you will end up spending thousands of rands more than the original amount you were charged.

2. Marc and Liesl have rented a 2 bedroom townhouse

for 5 years. They pay rent plus utilities. As they they are expecting their first child, they are considering buying a small house.

of owning a house. Task Discuss the pros & cons House costs: Townhouse costs:
Rent = R3450/month Refuse = R1659/year Electricity=R2700/year Parking = R90/month Bond Loan=R780/week Water= R165/month Electricity=R690/month Rates & taxes = R5940

Should they buy the house? Justify your answer.

Townhouse costs per month: = 3450 + 1659/12 + 2700/12 +90 = R3 903,25 House costs per month: = 780x4 + 165 +690 + 5940/12 = R 4 470,00
Cheaper to carry on renting !