How to create wealth
THE ART OF SAVING: FOLLOW THESE TIPS AND RULES
Make consistent, regular contributions for as long as you can; ensure they keep track with inflation.
Most of us will create our wealth through saving our money month after month, year after year and “doubling down” over the long term.
Let’s brush up on some rules about saving.
Compound returns
You can achieve astounding results through regular savings if time’s on your side. Compounding kicks in when your investment returns are being re-invested to generate more returns.
Start saving ASAP
The longer you wait, the more of your income you’ll need to save to achieve meaningful results. Investments don’t grow any faster in the last couple of years of wealth accumulation.
Consistency is key
Make consistent, regular contributions for as long as you can; ensure your contributions keep track with inflation.
Look for inflation-beating returns
If you have time on your side, there are two asset classes with the potential to achieve significant real returns long term: shares on the stock exchange and listed property, locally and offshore.
Patience can bring results
A client always bought shares on the JSE with his bonuses. Little did he know it would become one of the world’s best-performing markets. These investments turned into a small fortune.
Don’t over think your investments
There’s no need to be concerned about the level of markets or exchange rates. Investing regularly will see you buy during both market highs and lows, resulting in an average price being paid for those assets over time.
Add more when opportunity knocks
When stock markets fall and present themselves on a “fire sale”, invest a bit more than usual. Returns are normally better when starting from a low base.
Look for tax advantages
Use all available tax-friendly products to gain ground in regular savings. A tax-free savings account is a good start, while retirement funds offer the biggest benefit in tax savings.
Open a tax-free saving plan
You can invest up to R33 000 annually, with a R500 000 lifetime limit, in approved unit trusts, fixed deposits or real estate investment trusts (Reits). All returns – including interest, dividends and capital gains – on the disposal of these investments, are tax free.
Retirement funds
You can make tax-free contributions of up to 27.5% of your taxable income to retirement funds (up to R350 000/year).
Pay off your bond (compounding in reverse)
When the real interest rate on your bond leans towards the potential real returns possible on equity markets, paying off your bond faster than required should generate substantial wealth in the form of your residential property. Once your bond’s paid off, commit your savings to growth assets.
Beware of pitfalls
You’ll go through disappointing periods. Don’t give up when returns aren’t coming your way. It might require 20 years, or it could happen in year 11.
Time and patience
Be consistent, add as much as you can as early as you can and see your wealth being created without adding personal energy.
Riaan Campbell is a Citadel Advisory Partner