Many people were not lucky enough to be taught how to handle their finances well from childhood.
Now, as adults, many of us are bumbling about with no idea how to develop and maintain healthy financial habits such as long-term investing, creating multiple revenue streams or passive income, or saving.
Drum separates fact from fiction when it comes to saving.
1) I HAVE TO WAIT FOR THE ECONOMY TO IMPROVE
If someone doesn’t really want to invest, they’ll collect all the information that supports their belief and ignore all positive signs.
If this is your attitude, there’ll never be a good time to invest. There isn’t a major connection between a country’s economic growth and the return on investment you can earn, says Mthobisi Mthimkhulu of Allan Gray.
A financial adviser can explain how to structure your investment to give the best return in various economic growth environments. If you’re worried about the economy, remember many local unit trust funds have offshore exposure, which means they invest in overseas companies.
Financial planners (see Get help here) can point you in the right direction.
2) I CAN’T AFFORD TO SAVE
Saving doesn’t come naturally to many people – it’s a habit that needs to be learnt and nurtured.
Commercial banks offer savings accounts that don’t require a minimum investment amount.
You also don’t need thousands of rands to invest through an investment firm that offers you exposure to shares.
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3) THERE’S PLENTY OF TIME TO SAVE
Did your mother ever tell you not to put off until tomorrow what you can do today?
It applies to saving too.
Start now – you won’t be sorry. A relatively short period of five years can make a big difference to an investment.
Say you decide you want to retire at 65, and at 25 you start investing R500 a month in a fund with an annual interest of 10%.
By the time you retire, your investment will be worth about R3,2 million*.
If you start saving R500 a month at the age of 30 at the same interest rate, you’ll have saved only about R1,9 million* by the time you’re 65. That’s a difference of more than R1 million.
4) COMPOUND INTEREST ONLY WORKS IF I INVEST A LARGE AMOUNT
Not true. Compound interest works for any amount and the longer the period of investment, the more powerful the compound interest.
For example, you save R100 a month at an annual interest rate of 6%. In one year you will have saved R1 200, but with the compound interest added it becomes R1 234*.
That might not seem like much, but after three years you will have paid R3 600 into your investment, which will be worth R3 934* thanks to compound interest.
The growth continues. After 10 years you will have put away R 12 000, but thanks to compound interest your investment will be worth R16 388*.
So if you manage to save just R100 a month over 20 years, you’ll have paid R24 000 into your investment – but your total investment will be worth R 46 204*
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5) CASH IS KING
Cash investments (such as money markets and fixed deposit accounts) have done well in the recent past, leading many people to believe they’ll be better off keeping their money in cash investments.
But in the longer term, cash investments fare significantly worse in terms of returns than shares and unit trusts.
A financial adviser can help you choose the best investment for you – things to consider are your investment goals and planned period of investment.
For example, your emergency fund will have a shorter investment period, so cash investments are better suited to this.
But your retirement investment stretches over a longer period, so you can afford to take more of a risk by investing in shares.
- General money tips: fscaconsumered.co.za
- Find a financial planner: fpi.co.za or fia.org.za
*Correct at the time of going to press.
