Updated: May 10
“Save to invest, don’t save to save.”
The title for this post is so befitting for the conversation we’re about to have. Saving is a great financial tool that we should all have under our sleeve. But what good is it to save and earn no return. Every year prices go up due to inflation. The purchasing power of your R100 note today will greatly decrease next year, especially with the technical recession we’re in, it’s safe to say that you should have an incentive to invest your money and earn a rate of return that ranks fairly.
The great thing about investing your money lies in the power of compounding. Albert Einstein even went on to say that “compound interest is the eighth wonder of the world”. Compound interest allows you to earn interest on interest. For example, after computing your budget and see a surplus of R1000, you could at an investment such as a fixed deposit account that generates a return of, let’s say 10% per annum. In the next year, you would’ve earned interest of R100 and in the second year, you could interest of R110. The 10% return was applied, not to the initial R1000 invested, but rather to the interest that you would have already earned in year 1. And so the process continues for however long you choose to save your money.
Say you’re a student and you know that after you graduate, it’ll be quite a challenge to pay for your living and transport expenses to go to work. And unfortunately, as is the situation for a myriad of young black graduates, there is no mom or dad to sponsor you with a Mercedes Benz fresh from the garage as a graduation gift. Instead of string from scratch, you could put a portion of your allowance in something like an annuity.
I know, the temptation to buy things like clothing every month or a new gadget that you don’t really need will creep in, but stay focused on the long term goal! If you spend 4 years in university and you are receiving an allowance every month of R2000, you could invest R300 every month for those 4 years into an annuity that has an interest rate of 14% per annum. At the end of your 4 years of study, you could have earned in total R10 978,3637. This could be a great kick-starter for paying for your first (and obviously affordable) car installment and even pay for the first month’s rent for at least a modest apartment.
A unit trust is an investment where the designated managers invest in listed shares, bonds and cash instruments that are in line with the mandate of the investment fund. The return on unit trusts is annual dividends. Depending on your investment risk appetite, you could be risk-averse and invest in a safer unit trust, or for more risky unit trusts, there is a great chance of attracting a high rate of return on that investment. Companies such as Allan Gray offer unit trusts that one can investigate.
If you thought that the world of investing was filled with completely incomprehensible jargon and calculations, think again. Earning a “reward” for saving is totally possible, and the methods that we’ve listed above are a few ways in which you could earn some cash in your sleep. Again, the aim is to have a long term perspective of how you want to finance the life you want to live in 5 years from now. That way, you’ll know which option is perfect for you.
Author: Sthandiwe Msomi