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Mapping your savings journey

Jul 10 2018 14:52
Schalk Louw

We’re halfway through the month of July, as well as the South African Savings Institute’s (SASI’s) National Savings Month campaign and I’m sure that by now most readers are well aware of any shortcomings in terms of their personal savings. 

Let’s hope they decided to address these shortcomings by compiling a proper budget, decide to make monthly contributions and are now ready to move ahead. 

An acquaintance of mine decided to start a business a few years ago. He rented a beautiful office in the heart of the V&A Waterfront, furnished it with modern furniture and fancy art, set up a website and contact details, and appointed a very competent secretary. 

On his first day at his new office, he greeted his secretary, stepped into his office, and as he moved into position in front of his desk in his leather chair, he thought aloud, “So what will this business do?” 

This is exactly the kind of behaviour I want to caution investors (old and new) against. 

Stephen R. Covey said that you should “begin with the end in mind” in his book The 7 Habits of Highly Effective People. 

The problem with the word “save” in this context, is that everyone’s end is likely to be different. Of course, we all want to own the proverbial successful business, but what exactly will that business be doing? 

The following pointers may make your savings process slightly easier:

In what time zone do you find yourself?

I’m not referring to where you find yourself on this planet, but rather your personal savings time horizon. 

The person saving for an island holiday at the end of the year, and the person saving for retirement in 25 years’ time, both have saving as a goal in common, but the ways in which they will go about it will differ greatly. 

The person saving for a holiday may decide to use local shares as their savings vehicle, simply because it has delivered much better returns than the other asset classes over the last 20 years. 

They may also end up extremely disappointed if something happens that may influence the market negatively. Always remember that shares should be evaluated over the long term (seven years or longer).

The same goes for the person saving for retirement. Let’s suggest that this person decides to allocate all their savings to local money market investments, because local shares and listed properties haven’t been able to perform anywhere close to money market levels for the last three years. 

They’ll be equally disappointed once they realises that their retirement could have been much more comfortable had they invested his 25 years’ worth of savings in a more diversified portfolio. The point is, you need to be sure about your savings time horizon. 

Then you should structure your diversified savings plan accordingly. 

A little bit of self-control

We have all come across that once-in-a-lifetime deal. Perhaps a new mountain bike at a never-to-be-repeated price. Just like that your savings plan turns into a spending plan. 

I can start again tomorrow, right? Wrong.

Not without dire consequences. If you don’t have the self-control to see your savings plan through its full term without withdrawing capital, consider using investment vehicles that make it as difficult as possible for you to withdraw. 

A vehicle is much more than the car you drive

There are many more investment vehicles available than just your savings account at the bank. Just to be 100% clear – the coffee tin full of money hidden under your bed or your piggy bank doesn’t count as one of them.

Investors looking to save for retirement should consider investing in a retirement annuity. 

It’s tax-efficient, nearly impossible to withdraw from before it’s maturity date, and extremely flexible in terms of savings options.

Someone looking to save for their child’s tertiary education in 12 years’ time, can (with certain limitations in terms of how much can be invested) consider a tax-free savings plan, in which all interest, dividends and returns earned are completely tax free. 

For those who don’t have the self-control not to withdraw from their investments, an endowment may be considered, which makes it more difficult (but not impossible) to withdraw funds for a fixed period.

Each of these vehicles have their own unique benefits, but they should be considered for the right reasons – and you should do your homework properly. 

How much difference can an extra rand or two really make in terms of costs?

This is where you as an investor can probably exercise the most control: the fees you pay. Consult different service and product providers and compare the results. 

Many investors believe that a 1% initial advice fee charged on their monthly contribution of R1 000 amounts to only R10 per month and that’s it. Do these extra fees really make such a big difference in the end? Of course they do!

Persons A and B both start saving an amount of R1 000 per month at an annual growth rate of 10% after administration costs and advisory fees. 

Person A didn’t do their homework and pays a 1% initial fee on top of an annual fee of 0.5% more than Person B. On paper it’s a mere R10 more in monthly initial charges for each R1 000 invested, as well as R5 more per year in terms of advisory fees for each R1 000 invested. 

After 25 years, Person B’s capital would have grown to R1 337 890, while Person A’s capital would total over R100 000 less than person B’s capital at R1 216 430, all thanks to those extra costs. 

There’s a saying that goes that even a thousand-mile journey begins with the first step.

But it’s important to know where you’re going. Plan your journey, know when you want to arrive at your destination and don’t get side-tracked.

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retirement savings  |  personal finance  |  saving
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