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It’s not enough to save, if you want to be wealthy. What you do with your money is just as important. In this excellent piece on financial planning, investor Enrico Liebenberg shares his personal insights on how you can transform that R500 you squirrel away each month into a sum of R3m and more.
Don’t keep your savings in cash, is his message. Your lump sum isn’t going to look anything like it will if you invest your money. Enrico advocates using unit trust funds that diversify your cash across several asset classes, like the shares of companies listed on the Johannesburg stock exchange and bonds (which are debt instruments that are publicly traded like shares).
He emphasises the importance of limiting costs associated with investing because these erode your returns. It is also important to look at the riskiness of an investment, and to bear in mind that higher returns are associated with investments that carry higher risk. – JC
By Enrico Liebenberg*
So you’ve been there, done that and got the papers. Moved into your own place, got the first pay cheque and living the dream. Welcome to the rat race of the corporate jungle!
The guys with the receding hairlines all recommend that you should start putting away for retirement as soon as your first pay cheque is banked. That sounds pretty easy, okay, so you pay all that needs to be paid, take your girlfriend out for a few cold ones and now need to put away that monthly saving, but alas there is nothing to put away. That is where the ever so important principle comes into play; the rich man saves first and spends what is left and the poor man spends and saves what is left.
So now you’re thinking, it can’t be that difficult, I’ll just stick to my budget and keep what is left in my bank account. If you can manage to do that, I guarantee you; you are one of very few! The best would be to use a separate savings vehicle, this can take the form of many. The idea is that you should not be able to access it very easy, but to keep it liquid –ie. It can be converted to cash with reasonable ease. Some forms of very liquid savings vehicles are,
- Savings account
- Unit trust
All of these are quite easy to access, but you will need some cash to benefit from it. Taking into account that you just started your first job and you most probably can only afford to save R500 per month. Before you decide which vehicle to use, you need to understand the two most important principles of any investment. Firstly you want to preserve capital, in other words you don’t want to make use of a vehicle which costs you a fortune before your money can start growing. Secondly you want to beat inflation, in other words you want your hard earned cash to at least maintain its purchasing power over the investment period. Remember your goal here is long term, so those are the two main criteria you need to keep in mind.
Right, now we know what to consider, the next thing is to decide how much risk you are prepared to take. To keep it simple we will class it in three categories, a cautious investor (I really do not want to lose anything), an assertive investor (I am okay with losing some value), an aggressive investor (I want to risk it all to gain it all). The return you can expect is proportionate to the risk exposure of your investment. The lower the risk, the lower the growth you can expect. To get an idea of your risk profile take a look at this tool, http://www.hesta.com.au/Calculators/Risk-Profiler/Risk-Profiler.aspx, remember this is only a guide. I found it with a basic google search.
You are likely to find an awesome tool on the more well-known fund managers’ websites that can compare funds and they rate the risk on a scale of 1 to 10, 10 being the riskiest.
Right, so now you have decided on a fund and want to start the monthly payments into the fund, all you need to do is to fill out the application forms and submit your FInancial Intelligence Centre Act (FICA) documents or contact you nearest financial adviser.
Now you can sit back and track the growth of your fund. For argument’s sake, we assume that you decide to pay R500 per month into a Balanced Plus Unit trust, these monthly investments are not increased annually and no lump sum deposits made. The performance of a similar fund over the last 10 year was 16.37% and the market benchmarks for these funds are 14.97%. So to be conservative we assume that over the next 10 years an average of 14.5% will be achieved annually on the investment. The picture will look a bit like this if you keep up with the payments:
|After year||Total investment made||Value of the fund||Return in a normal savings account|
From this it is clear that the unit trust investment vehicle out performs the usual savings account at your local bank.
Now that you know all this, the most important thing is to start saving as soon as possible, and remember, the rich man saves and spends what is left and the poor man spends and saves what is left.
* Enrico Liebenberg is Financial Manager at one of the country’s largest sporting and hunting goods retailers and is based at their head office in Stellenbosch. Apart from his passion for investments and wine-making and -appreciation, Enrico takes a very keen interest in picking winning investment portfolios. To keep body and soul balanced, Enrico loves a round of golf, follows professional cycling and relaxing with his wife, but not necessarily in that order of importance. When not in the office you will most likely find him at his favourite local pizza spot enjoying the odd pizza and an ice cold brew or two.
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