n a recent interview on Bruce Whitfield’s Money Show on 702 and CapeTalk, supersaver Julia and her financial adviser, Warren Ingram, shared the story of how, by committing to saving a third of her salary from the age of 26, Julia has managed to save more than three times her annual salary in just eight years. Julia invested in an exchange-traded fund starting with R8 000 a month, increasing each year in line with her annual salary increases. Eight years later, at the age of 34, not only is she a millionaire, she recently bought a house and has had a child. She has enjoyed her life and hasn’t lived frugally, but she has lived within her means, paying a third of her income into savings and avoiding expensive car debt.
Christine wrote in to ask us how best to manage her finances, and we suggested that, with the right attitude, she could find herself in the same position as Julia in just eight years.
“I am 26 years old and I don’t have any retirement or savings, and have not invested a cent. I am renting and am happy to continue doing so as buying a house to live in will cost me more than my rental,” wrote Christine, who has R6 000 a month to contribute towards investments. She has no debt or dependants, and her car is paid off.
“My question is: where do I start? I have thought of splitting the R6 000 into buying a property to rent out, an emergency fund, investment and retirement. I am not sure if this is best as it is not much and I fear I will end up with bits and bobs that won’t be worth it.” Christine added that she did not learn about money management from her parents.
“My goals are to build up a portfolio that will ensure a comfortable retirement, provide possible extra income as I hope to become less dependent on my teaching career and also save for a rainy day.”
Boitumelo Mothoagae, financial adviser and head of customer relationship management at Liberty, has this advice for Christine:
The first thing you will need to do is consult an accredited financial adviser about helping you do a full financial needs analysis (FNA). The FNA will help to crystallise: What your financial needs are How much you should be contributing to each need Your financial plan – what do you need to maintain your lifestyle? What your assets and your liabilities are What your income is and what your expenses are What steps you need to take now to ensure you are where you want to be financially in five, 10, 15, 20 years
Your financial goals/objectives. For example, you want to buy a house in five years, you want to retire at 55
The FNA is a plan that gives you a detailed view of exactly how much you need to be saving, where your shortfalls are (for example, retirement) and how much money you will have at a specific life stage. It will be important when determining how much of your R6 000 you should be allocating towards: Your savings plan Your retirement plan Your lifestyle protection plan (income disability, retrenchment cover, etc) Your emergency fund It is never too late to start saving. The only difference with starting late is that it will cost you more to get to your financial goals than it would have if you had started earlier. However, you still have 29 years before the legal age of retirement (55), and this qualifies for long-term planning, which maximises the effect of compound interest. So the sooner you start with your retirement plan, the better.
You and your financial adviser can decide what your best vehicles for saving would be. If your employer does not provide a retirement fund, then you would need to consider a retirement annuity. This is usually the preferred plan for retirement because they are tax efficient and protect your money from creditors.
Depending on your current lifestyle, when you do retire, you will need about 70% of your last pay cheque to sustain you for the rest of your life, depending on you not having any debt. If you want to travel the world when you retire, you will need to put aside a bit more. The FNA will work out how much you need to put aside each month to achieve this.
I know that you have indicated that you do not want to buy a house. However, a house is an asset. By renting, you are helping someone else pay off their asset. After 20 years, you will have paid a lot of money with nothing to show for it. Yes, buying a house comes with a lot of responsibility (rates and taxes, maintenance, insurance), but you can buy a house that is within your budget. Take your time and shop around, and you may find something that you can afford. Remember that when you buy in a good area, this asset tends to appreciate with time, which means later in life it will sell for more than you bought it for, strengthening your financial independence.