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By Gielie Fourie*
INTRODUCTION: You have just made your first million Rand, in cash. Congratulations! What now? The best thing to do is to keep a cool head – to preserve your wealth. Keep a simple lifestyle – avoid luxury accessories like Rolex, Gucci, etc. – the trick is to be rich, not to look rich. Your first million may have taken many years to accumulate. Your next million will not take that long. Just like a snowball rolling downhill grows bigger and bigger, your wealth will increase over time if you invest wisely. When you invest, you are buying a day, or days, that you do not have to work.
You must look further than cash. Cash may feel like a riskless option when markets are declining. However, you are limiting your opportunities for building wealth, if you consider that the average South African savings account only allows for an annual interest rate of 5.45% amongst the top performing institutions in 2022 (source: rateweb.co.za). To generate capital growth higher than inflation, you need to consider alternative investment options. A financial advisor can advise you on the benefits of buying shares, taking out a Retirement Annuity, Tax-Free Savings Accounts, etc.
THE RULE OF 72: Thanks to inflation and the devaluation of the Rand over time, R1 million is not the fortune it used to be many years ago. But if you have a million Rand and no debt, you can use the Rule of 72 to double your money. The Rule of 72 estimates the number of years it takes to double your money at a specified rate of return. It is remarkably simple – you do not even need a calculator. You simply take 72 and divide it by the annual interest rate. If the annual interest rate is 12%, it will take you six years to double your R1 million to R2 million. Now you are a multimillionaire. The first million may have been 20 years in the making, but the second million takes only six years. In another six years you can double your R2 million to R4 million. You can repeat the process indefinitely. You are on your way to become a US Dollar millionaire (R16 million). This is the snowball effect in action.
FINANCIAL ADVISORS: Becoming a multimillionaire overnight can be difficult to cope with mentally. That is why the operators of big lotteries offer psychological services to their winners. As a self-made millionaire, you may not need a psychologist, but you may need a financial advisor. A good financial advisor can help you on your investment journey. They cannot make you wealthy – but they can help you to preserve your wealth. They can protect you from making silly mistakes – they can protect you from yourself. They can assist you to create budgets and stick to it. They can help you to get better returns than the 12% return in the example above, reduce your income tax and help you to create long term financial goals. They can help you to diversify your investments and give you exposure to offshore markets.
MILLIONAIRES IN AFRICA: Being a US Dollar millionaire is still special. There are approximately 125,000 millionaires in Africa, each with net assets of US$1 million (R16 million) or more. They are referred to as HNWIs (High Net Worth Individuals). Being a billionaire is very special. There are 22 people in Africa with net assets of US$1 billion or more. South Africa has 36,500 Dollar millionaires, the most in Africa. Egypt is second with 15,500 Dollar millionaires and Nigeria is third with 9,100 Dollar millionaires. Most of South Africa’s HNWIs live in Johannesburg (15,100), Cape Town (6,500), Durban and Umhlanga (3,400) and the Stellenbosch, Paarl and Franschhoek area (2,800). If you want to rub shoulders with HNWIs, that is where you will find them. South Africa’s wealth is affected by ongoing migration of wealthy people out of the country. Around 4,200 HNWIs have left South Africa over the past decade (2010 – 2020) – in 3,650 days 4,200 HNWIs emigrated – more than one every single day. Most of these individuals have emigrated to the UK, Australia, and the USA. (Source: AfrAsia Africa Wealth Report 2021).
BOTTOM LINE: It is essential to preserve your wealth. Inflation and taxes are wealth destructors. To protect you from your own emotions, like impatience and greed, get a good financial advisor to manage your money. Warren Buffett once said that it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.” If you are concerned about investing in these times of high inflation and high interest rates, contact one of our highly qualified consultants. They will take the “sting” out of investing.
*Gielie Fourie, Research and Analysis, Director, Overberg Asset Management.
- All writers’ opinions are their own and do not constitute investment recommendations or financial advice. Speaking to a qualified wealth and investment professional is crucial before making financial decisions.
- ‘Overberg Asset Management (Pty) Ltd. is an authorised financial services provider: 783’
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