If you expect a higher rate of return on your savings then you need to take on more risk. Generally speaking, risk is the potential of your investment to fluctuate in value over a period in time. It is important to realise how risky your investments are relative to their returns. What tends to smooth out the swings in valuations is the time that you invest for. So if you save in risky investments then you need to commit for a longer period. On the other hand saving in less risky investments will not produce the same rates of return.
To help you understand where you should be investing over time relative to the risk, here is a simple investment spectrum which provides a broad brush on where to save:
Up to 5 years – low risk
These investments are very low in risk and provide more certain returns.
Debt – Don’t ignore this opportunity before committing. It is the most certain investment. You know what you are paying off and the exact interest you are saving. The effect rate of return is the interest you are being charged.
Money market accounts
RSA retail bonds
5 years plus – medium risk
These investments need this time period to compensate for the fluctuations and to compound their returns.
Property exchange traded funds
Balanced funds – unit trusts
10 years plus – High risk
These investments have a high probability of big swings in their valuations in the shorter term and therefore need a longer time to smooth out. They tend to provide the higher rates of returns over time so need a longer view.
Equity Unit trust and exchange traded funds
Shares – direct portfolios
Ideally you need to invest over all these time periods to provide for the various savings needs in your life. Your investments should be aligned to your appetite for risk.
You work hard for your money and you know that you should be saving more of it. Developing a determined attitude towards savings is the first step which will get you on the road to financial freedom. So how do you start? Here are some essential questions that you should ask yourself:
How much should I save?
It depends on what you are saving for. It is also relative to how much you earn.
As much as possible is the first answer. However, understanding that the cost of living gets tougher every year, it becomes more and more difficult to keep up with your savings. You need to start out by contracting with yourself to save a percentage every month without compromise. This amount should rather be a percentage of your income instead of an amount. This will keep you honest with your savings drive as you will be increasing your savings as your income increases.
If you are living at home with the folks, then you should be saving a lot more than if you are living on your own. You should work out your actual cost of living, see how you can manage the expenses. Stay away from debt and leave behind as much as possible for savings. Get the cash account for emergencies in place first and then onto the investments for the longer term.
How long do I want to save for?
You should save all the time. Short term savings targets for things like deposits on cars, holidays. Long term savings for your retirement.
Your time horizon determines how much you can afford to invest in more risky assets such as shares. You see, shares tend to outperform other assets over time. They do not perform in straight lines. They are volatile which means that their valuations can move up and down in a very short space of time. This volatility smooths out in the performance of shares over a longer time horizon. So, if you can invest for the long term, then shares become a more appropriate option. Generally speaking this should be a period of 10 years or longer.
Do I have cash for unforeseen expenses?
A sound financial plan has a provision for emergencies. This should be a cash savings account which is easily accessible and earns some interest. Ideally, a money market account with your local bank. The amount saved should cover you for 6 times your monthly income need. Why? Well, if you have need to access cash for an unforeseen expense then this account is available instead of you having to cash in your investments which are set for the longer term. It buys you peace of mind that even if you lose your job you have some time find a new one.
Early to bed and early to rise makes a man healthy, wealthy and wise. A proverb which provides a strategy for the – The perfect retirement plan.
You probably will have to work for the rest of your healthy life. The problem of living too long is increasing exponentially at such a fast rate as we keep on improving health care technologies and focussing more and more on healthy living. This means that we need more money to maintain our lifestyles for longer.
At some stage of your life, sooner than later, you should be working because you want to and not because you have to. There are two areas of your life that need to be in check to support you in maintaining your lifestyle. Health and wealth.
So your investment strategy should take on a two prong approach:
1. Saving as much as possible for as long as possible. The returns on your savings should be re-invested to take full advantage of compound interest. The magical formula for financial success. You want to arrive at a point where your investments can produce enough income for you to live on for the rest of your life. The earlier you start the less it takes, thanks to the magic of compounding.
- Investing in your health. Yes, following a healthy lifestyle of diet and exercise to improve your well being for as long as physically possible. If you maintain a healthy lifestyle you will benefit from being able to enjoy your financial independence. You will be empowered to occupy yourself with things that you really want to do. If what you do is income producing you can continue to save for a longer time being less dependent on your capital and allowing it to grow for longer.
Once your health fails and you cannot carry on any longer you will then need to depend on your investments. The provisions you have then accumulated will be that much more and won’t need to provide for as long.
Filing Season for 2015 has opened so its time to prepare that tax return again.
For the average salary earner in South Africa, there isn’t much left to deduct on your return. Car allowance and retirement annuities are just about all that is left to consider.
The car allowance will only be considered if you have a kept a log book detailing your business and private milage for the year. Remember that travel from your home to your place of work does not qualify for business travel. It is deemed to be private travel by SARS. Only travel from your place of work to clients counts as a deduction.
Most tracking units fitted for insurance purposes have a log book device which details your travel every time you start and stop on your travels. This is well worth the cost taking the schlep out of the keeping records during the year.
Retirement annuities are still deductible from your taxable income and should be maxed out every year as it is one of the best investments you can make towards your retirement. The deduction you get is the same rate as your marginal rate of tax. If you pay 30% tax then your dedication is 30%. So for every rand you save towards a retirement annuity you effectively only pay 70 cents. A 30% return before you start investing. The deduction comes with limits. If you are on a pension fund then you are limited to R1 750 and a provident fund limits you to R3 500 per annum. If you don’t contribute to a retirement fund with your company then you can deduct up to 15% of your taxable income.
The deadlines for submission is 27th November 2015 and 29th January 2016 if you are a provisional tax payer.
July has been declared as National Savings Month. A hard theme to follow in a time of deep global recession and rising costs in our local economy. In spite of these hard times we still need to tackle savings as a “must”.
Saving is an attitude
You decide to save an amount and then commit to it. Save at the beginning of the month and then live on the rest of your income. Your true standard of living should be based on the amount you bring into the household after savings. This ensures that you are providing for your financial freedom into the future. If you are not saving you will never break free from living hand to mouth.