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We all want to be wealthy. But with the rising cost of living and salaries that barely seem to keep up with inflation, finding some cash to save monthly seems impossible for many.
This week we look at some ways in which people can start building wealth with contributions as small as R250 per month. Experts advise that each person would need to invest their money under the guidance of a certified financial planner or a financial adviser.
Sydney Sekese, certified financial planner (CFP) at Old Mutual, defines your wealth as your net worth, or all your assets minus your liabilities.
A person needs to determine how much net worth they want to build through the assets they hold (for example policies, investments, property, etc.) and their liabilities, such as personal loans, home and vehicle loans and credit cards.
“You get people with a large bank balance, for instance R500 000, and they would think they are wealthy, but if you look at their liabilities it might reduce that R500 000,” says Sekese.
Before investing, you need to determine what you are saving for – be it a car, house or something else in the short term, or something for the long term.
“The first consideration is whatever investment vehicle you utilise needs to keep pace with inflation or at best outperform inflation,” Sekese says.
For short-term savings towards a specific goal, Sekese recommends a 32-day notice account and/or money-market accounts.
Mark Lapedus, head of product development at Liberty Investments, says indebted people would be better placed to use any extra money from their disposable income to settle debt they may have.
Another alternative is to invest in a tax-free savings account, which allows you to save up to ?R30 000 tax-free on an annual basis.
Other options include unit trusts and money-market accounts. However, the yield on money-market accounts is typically much lower than what you would expect from a unit trust.
“The benefit of a unit trust is they are actively managed by a portfolio manager, so you don’t need too much investment knowledge,” says Marise Nel, junior financial planner at Brenthurst Wealth Management. “You just need to talk to a financial adviser to make sure you are choosing the ?correct fund.”
For long-term savings, retirement annuities are a good idea “because the fact that you can’t withdraw the money ensures discipline”, Lapedus says.
Beating inflation
Sekese says to reach inflation-beating returns, an investor would need to take on risk. “If you invested R1?000 in the JSE 10 years ago, it would amount to R3?400 today.”
But during that period there were market fluctuations where the market underperformed in the short term.
“Cash is king over the short-term, but over the long-term cash is trash because in relation to inflation you will not be able to purchase the same amount of goods with the initial investment,” says Sekese.
If one were to have invested R1 000 in a basic savings account 10 years ago, it would be worth R1 500 today.“Your capital would be safe, but you would have not done well,” he explains.
Therefore a long-term perspective is important, says Sekese. “Shares tend to be volatile and risky in the short term, but in the long term they are a good inflation-beater.”
Saving R250 to R500 per month
If you can put away R250 a month, you can opt for a savings account, while some unit trusts also take a minimum monthly saving of R250 a month.
“Unit trusts provide investors with an opportunity to access the market at a competitive cost. However, you should not be tempted to withdraw the funds prematurely; you can opt for an investment term of five, 10 or 15 years,” says Sekese.
Unit trust investments can be made on a lump-sum or monthly basis.
R500 to R1?000 per month
Sekese says that with between R500 and R1?000 per month, you can invest in a number of different products, including money-market accounts, exchange-traded funds (ETFs), such as Satrix, and unit trusts.
“If you don’t want to rely on a professional fund manager through a unit trust or endowment or tax-free savings account, and you believe you can select the stock yourself, then you can open a stockbroker account,” says Lapedus, with R1?000 generally the minimum monthly investment required for an online share-trading account.
This article originally appeared in the 9 June 2016 edition of finweek. Buy and download the magazine here.
