Finance Minister Enoch Godongwana has just delivered his 2023 Budget Speech, which tells us what shape South Africa’s public finances are in. It seems an apt time to think about the state of your own personal finances.
Three young professionals from the worlds of finance and IT share their saving and investment tips and insights as part of Investec Private Banking’s In Conversations Series.
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When should you start saving and investing?
Taylor Gibb, an IT developer and entrepreneur, believes there isn’t a perfect time to start.
“I don’t think there’s a one-size-fits-all answer to when you should start your saving and investment journey,” he says. “My first foray into this world was when I was a few years into my career, and it was through relatively simple vehicles like tax-free savings accounts and provident funds.”
A tax-free savings account (TFSA) allows you to save without paying tax on those savings.
A provident fund is now the same as a pension fund, meaning you can take a third of your benefit as a cash lump sum on retirement or when you change jobs, while the remaining two-thirds must be used to purchase a product that pays out a monthly income (or ‘pension’) over the course of your lifetime.
For Tebello Rabele, wealth manager at Investec Wealth & Investment, the sooner you start, the better – even if it’s with small amounts.
“We’ve all got to start somewhere and the earlier you can build the habits and disciplines around saving and investments, the more time you have to compound your returns,” he says.
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What if I have debt?
It’s a good idea to pay any debt off before you start saving and investing. Gibb suggests employing an investment strategy such as the 70/30 rule.
“The 70/30 rule says you should spend 70% of your income on expenses – which could include paying off any debt-related costs – 20% on savings and 10% on investments,” he says.
It’s a simple strategy that can help you to create the right financial balance between living in the now, and saving or investing for the future.
What’s the main difference between saving and investing?
The official way to think about it is like this: saving is putting money away to use in the future. Investing is converting that money into a productive asset that can grow its capital value over time.
To help you think about it more clearly Roy van Eck, financial advisor at Investec Private Banking, shares this analogy:
“Saving is like taking your money and putting it in the ground where no one else can touch it,” he says. “Investing is using your money to buy seeds, planting those in the ground, letting them grow, and then reaping the fruit.”
Learn more about becoming an investor. Listen to the Investec Wealth & Investment Wealth Creation podcast series.
What sort of savings and investment products should you be looking at?
Van Eck believes unit trusts are a good place to start, especially if you’re young.
A unit trust pools investors’ money together and a fund manager uses this money to make investments. Hopefully, the investments grow, and you realise a return on your units, but this is never guaranteed.
He says: “Unit trusts are a great way to get into the investing world, because you effectively hand over your money to an experienced fund manager who handles the investment on your behalf. If you’re new to investing, this can be preferable to doing the research and making the investment decisions on your own.
“Endowment policies can also be a great investment option for a beginner, especially if your tax bracket is over 30%,” he says.
An endowment policy is effectively life insurance. A lump sum will be paid to you after a set number of years, or if you suffer a critical illness, or to your estate or nominated beneficiary on your death.
Rabele’s recommendation is to consider a TFSA. Current regulations mean you can put up to R36 000 a year into a TFSA, with an overall lifetime tax-free contribution limit of R500 000.
“Remember, unlike a regular savings account, the money you put into a tax-free savings account doesn’t attract any tax – no interest, dividend or capital gains tax,” he says.
Get help when you need it
While national budget time is a good time for us to consider our own personal finances, the world of saving and investing can be daunting for newcomers. It can be helpful to speak to a financial advisor.
“Us financial advisors are often referred to as life coaches, because we will look at things holistically to help you determine where you want to go in life and what you need to do to achieve these goals,” says Van Eck.
And remember, it’s never too late to start saving and investing. After all, it’s time in the market – as opposed to timing the market – that really counts.
Brough to you by Investec.
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