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  • Fulfilling your ‘Black Tax’ Obligation does not have to Lead to Financial Ruin

Fulfilling your ‘Black Tax’ Obligation does not have to Lead to Financial Ruin

06 February 2017

Lesego Mpete, Corporate Benefits Consultant at BDO Employee Benefits and Radhika Daya, Assistant Financial Planner for BDO Wealth Advisers

The phenomenon of ‘black tax’, although necessary and commendable, is also responsible for creating an endless cycle of poverty for many families. According to the FSB, we are seeing a trend emerging that shows that only 6% of SA retirees are financially independent at retirement, while the remaining 94% are dependent on their families, friends, or the government.

“The huge opportunity cost of spending a significant amount of your salary on looking after your extended family is the inability to save for your future. At the moment, in South Africa only a quarter of those between the ages of 18 and 30 are saving for retirement, according to the Old Mutual Savings and Investment Monitor. To a large part, this is caused by having to spend your whole adult working life looking after extended family, instead of saving and preserving some of your hard-earned money,” expands Lesego Mpete, Corporate Benefits Consultant at BDO.

Although ‘black tax’ is so named as a result of originating among the Black (especially rural) community, the practice applies across cultures and races. It came about as a result of young professionals incurring the responsibility of helping to look after the family, particularly younger siblings.

“The practice applies across all cultures. Most of us, irrespective of our race and background, do find ourselves having to help back home after we start gainful employment. However, one can understand why a perception that this only happens in Black families persists – after all, it is called ‘black tax’ and it originated among Black families. But by no means is this phenomenon only restricted to the Black community. Young professionals, from White, Indian, Coloured and other races, also find themselves with the obligation of helping their families once they start earning some money,” elaborates Radhika Daya, Assistant Financial Planner at BDO.

She adds that the rural-to-urban movement of young professionals leaving their families for job opportunities in urban areas, with the family expectation that they will come back to help with household living and subsistence expenses, is the common basic setting for the practice of black tax playing out. However, the practice also takes place among families permanently based in urban areas. “In essence, what happens is that you are expected to give back to the family now that you have some kind of revenue stream. Everyone is looking at you to play your part by assisting, especially with younger siblings that will, typically, still be in school. To some extent, you tend to not feel too much resentment as you know yourself what the situation is at home, and the huge sacrifices your parents had to make to send you to school,” Mpete further explains.

Societal impact

‘Black tax’ is actually an opportunity cost on savings you could be making to ensure you have a brighter, and debt-free, future. The fact that you are spending all this money on taking care of family responsibilities back home means you are not saving, especially for things such as retirement.

“In the larger scheme of things, this means families are not able to get out of the poverty trap. Remember, if you cannot save for a comfortable retirement, it means you will eventually also be dependent on your children for survival. This means they will also be burdened with paying heavy ‘black tax’, which will affect their ability to save for their own future. And so on it goes, with no end in sight. This after your parents could not save as they themselves had to make sacrifices to take you through school. This is not desirable, and we need to change people’s perceptions about budgeting and saving some of your money, instead of spending it, even if you are spending it on noble things,” notes Mpete.

With the increasing number of families struggling to make ends meet, there are more people relying on the State for survival. This increases the financial burden on the State as an increased number of people need social grants. In addition, people’s quality of life also gets affected as they cannot afford important things such as good health care – which most of the time comes at a premium. All this leads to a citizenry that is not self-sufficient, and heavily reliant on the State’s limited resources.

The risk of worsening the already out of control indebtedness problem in the country is also a reality. An increasing number of young people are going into debt every year. Most of the time they cannot avoid this as they have to find the money, to take care of their family obligations, somewhere.

“This is made worse by the fact that credit is widely and easily available in South Africa. We are all constantly bombarded with invites from credit providers with enticing offers for easy credit to solve all our immediate problems. This is not helping as it just creates more indebted people unable to save for their future – especially for retirement,” says Daya.

Mpete adds that another problem that makes the situation worse is that most people do not know how to distinguish between spending on their wants and spending on their needs. “The problem is that, once you start working, you have to show people that your situation has now improved. People go back home and want to show that they have arrived, and start spending on unnecessary items such as clothes and expensive toys for children; the need to show that, even though you grew up poor, you are now able to have something and enjoy an improved standard of living – however, people forget that the impact is that, over the long-term, you are not able to save.”

Nevertheless, this does not mean young professionals must not fulfil their family obligation of assisting back home. They need to understand that, ultimately, it is not about how much you earn, but about how much you spend. “You need to tamper your spend on black tax. You can be earning a meagre salary, but if you do proper budgeting and planning you can find something to save. Saving is a long-term project, therefore you can start with an amount that you can afford, no matter how little you think it is. This can always be improved upon as your financial situation improves,” points out Daya.

What also helps is to manage family expectations. Having a frank conversation about what you can afford to spend on family financial obligations will also help them gain an understanding of what your financial situation is. “Show them that, instead of spending R1 000 on something, you can spend R800 and save the R200 so that it can accumulate interest in the long-term. Have a conversation with them about budgeting. Your family needs to understand that you are not walking away from your responsibilities. Making them understand this will help to put a stop to the cycle of debt, as better money-management will lead to a curb in irresponsible spending,” says Daya.

Dealing properly with the issue of paying ‘black tax’ can go a long way into alleviating the emotional stress of not having enough money to survive. If young professionals receive proper advice on how to deal with this, they can help with breaking the cycle of poverty in many poor families. The proper advice will also empower them with knowing how to broach the issue of budgeting and saving and living within your means with their families. This will enable everyone to be on the same page about what is realistically possible to spend without making the situation worse and perpetuating it for the next generations.

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