7 investing tips to make life GOOD!
These great savings and investment pointers will have you playing the money game like a pro in no time.
LESSON 1 Don’t rely on anyone else to take responsibility for saving on your behalf
Many women rely on the men in their lives to take care of their finances. And yet, when you look at the divorce statistics, it’s clear that’s unwise.
Even if your marriage goes the distance, there’s something else to consider: women live longer than men, and often partner with men older than themselves. So many women are widowed when they still have many years of good life ahead. Don’t allow your lack of experience to make you vulnerable. You need to empower yourself to look after yourself – because you can always rely on life to throw you a curveball or two.
LESSON 2 Arm yourself with knowledge before you do anything else
The first step to financial independence is to learn how to budget properly. Take a look at how much you earn, or if you share your life with someone, how much the family earns every month. Figure out how much you spend on non-negotiables such as housing, education, transport, healthcare, insurances and food. Then look at the ‘nice-to-haves’, such as entertainment and holidays. You’ll need all the household’s active bank account statements for this information. Capture these in a spreadsheet for at least three months to start understanding the patterns.
Once you have a grasp of how you spend, and where and how much you could potentially cut back, it’s time to think about saving. Google terms that would usually make you do an eyeroll, such as equities, bonds, tax-free savings, retirement annuities, living annuities, unit trusts etc – as hard as it sounds, the financial services industry has a very limited lexicon. Buy a book on investing, or take an online personal finance course. Hire an independent financial advisor (IFA) on an hourly basis to take you through the basics. Engage your partner in conversations about finance and investing. Things will get simpler very quickly.
The goal of all this is to figure out how much you need to save every month to be able to retire comfortably at the age of 65. Your IFA will be useful for this, or you can use free digital financial planning tools such as Sygnia’s Robo-advisor (www.sygnia.co.za/roboadvisor/ sygnia-roboadvisor).
LESSON 3 We are all going to live longer than our parents
Many of the new technologies being developed are to find ways to fight disease and prolong life. Stem cells, genome mapping, DNA splicing and other experimental treatments, supported by the greater processing power unleashed by artificial intelligence and machine learning, are already leading to great successes in diagnostic medicine and in quicker and more effective treatment of conditions such as cancer, cardiac diseases, paralysis, blindness and many others. At the extreme, diseases as we know them today could be eradicated within the next 20 years.
Now, imagine a lifespan that is 30% longer; instead of an average life expectancy of 78, you could easily live to 100 and beyond. We need to start rethinking 65 as being the standard retirement age. On one hand, people will need to work longer to be able to support themselves financially for longer. On the other hand, improvements in healthcare and cognitive reasoning mean that these people are more than capable and willing to do so. Second careers after the age of 65 will become more common. But at the very least, you need to start saving more today, as your wealth on retirement will have to last a great deal longer.
LESSON 4 Fees are the enemy of savings
There are three factors that determine how much your savings will grow: • the amounts you regularly save • the returns you earn, and • the time period over which you save You can improve the first by budgeting carefully and prioritising saving.
You can control the second by choosing sensible investment strategies and by being careful about how much you pay away in fees.
And you can make a difference in the third by starting to save as early in life as possible.
The National Treasury, in a 2013 paper titled Charges in South African Retirement Funds, puts it best in this simple example: ‘A regular saver who reduces the charges in his retirement account from 2.5% of assets each year to 0.5% of assets would receive a benefit 60% greater at retirement after 40 years, all else being equal.’ In other words, instead of
‘Imagine a lifespan that is 30% longer; instead of an average life expectancy of 78, you could easily live to 100 and beyond. We need to start rethinking 65 as being the standard retirement age.’
retiring with, say, R1 million, you’ll retire with R1.6 million.
Scrutinise all fees carefully, particularly the more obscure performance fees charged by asset managers. Investments are not like fashion; with investments, the cheaper the better.
LESSON 5 Save for life’s milestone events; it makes saving easier
Saving requires budgeting, costcutting and discipline. It feels easier if you have shorter-term saving goals, such as the birth of a child, a career break, an education fund or a holiday. In this case the best product to use is a tax-free savings account. You can save up to R33000 per annum in a tax-free savings account: all your returns are tax-free. Save in ‘pockets’, with specific objectives attached to each pocket. Do not ever be tempted to touch the money for any other purpose.
LESSON 6 Harness new technologies
Many people believe investing is expensive, and it is, but technology is rapidly reducing those costs. We’ve talked about free apps, but technology is also disrupting the field of financial advice. Starting in the US, spreading to Europe and now in South Africa, robo-advisors are becoming increasingly popular.
Robo-advisors are internet-based financial planning tools that are powered by complex financial models. By taking into account relevant information about you, these models can project how much money you will need to retire, what your shortfall is and how you need to invest to maximise the probability of retiring comfortably. Although all robo-advisors guide you towards an investment product or strategy, they can also be used free to guide your thinking. If you then need a human advisor, at least you enter into that relationship with knowledge.
Technology has also dramatically reduced the cost of managing money. Index-tracking funds have taken the US by storm; renowned investor Warren Buffett has repeatedly recommended them. These funds do not require portfolio managers who command multimillion-rand bonuses, but are managed by statisticians aided by financial models. This means you can buy investment products such as a unit trust tracking the MSCI World Index or the FTSE/JSE All Share Index for as little as 0.40% per annum, compared to the 1.2% you would typically pay for an actively managed fund. That is a massive saving, especially when compounded over many years.
Clever use of technology is also making administration more costeffective. This means that savings products such as retirement annuities and living annuities can now be offered free.
LESSON 7 Physical assets are not an investment
As much as you enjoy that new painting or car, know that most likely they are consumption items. It takes a very keen eye, good research and a hefty dose of luck to make money out of art. It is almost impossible to make money out of a car purchase, though there are some exceptions.
Buying a property is an important milestone. More importantly, although it is not the best investment you will make, it does force you to save. It is also one of the very few assets banks will finance.
Investments and savings can be a fun journey, but only if you arm yourself with knowledge and plan well ahead. Follow these simple rules and you will be fine.
‘Index-tracking funds do not require portfolio managers who command multimillion-rand bonuses, but are managed by statisticians aided by financial models.’