South Africans are notoriously bad savers for a variety of reasons, ranging from low income to lack of financial education. Somewhere in the middle is a group who know they should save and invest their money and want to, but don’t because it seems too complex. It doesn’t have to be, writes Iain Anderson, Head of Investments at Sygnia Asset Management.
South Africans are notoriously bad savers for a variety of reasons, ranging from low income to lack of financial education. Somewhere in the middle is a group who know they should save and invest their money and want to, but don’t because it seems too complex. It doesn’t have to be, writes Iain Anderson, Head of Investments at Sygnia Asset Management.
A recent study conducted by data analytics firm Kantar found that most South Africans do realise the importance of saving and investing but are deterred from doing so by the complexity of formal savings and investment options.
I get it; the way traditional savings and investment options are packaged and presented can be incredibly overwhelming. But it really doesn’t have to be, especially if you break it down into three simple steps:
Step One – Save
The first step on every person’s investment journey is to start saving. It may seem an obvious point to make – silly even – but many people have aspirations to invest without saving first.
Unless you get a windfall, you cannot think about investing until you’ve either saved a sum of money or committed to setting aside a portion of your income each month purely for investment.
Step Two – Open a TFSA
Next up for any new investor, whether you have R1,000 or R100,000 to invest, is to open a tax-free savings account (TFSA). You can invest up to R36,000 per year in a TFSA, so long as it does not exceed the maximum lifetime contribution of R500,000.
R36,000 a year may not seem like a huge amount, but bear in mind it’s 100% tax free. Zero tax means your investment can earn the maximum returns year after year, especially if you invest in a low-fee product. Add-in the effect of compounding to those annual returns and it can add up to be a decent sum.
Step 3 – Go Passive and Low Fee
When it comes to choosing an investment fund, don’t pick your own stocks to try beat the market – it seldom works out well for the average investor. Rather select a good passive investment fund that has wide exposure to the market.
Importantly, passive funds have lower fees than actively managed funds, and low fees really do make all the difference. An extra 1 or 2% in fees every year may not seem significant, but high fees can cannibalise your return on investment over time. A report by Treasury a few years back demonstrated just how much high fees can cost investors: paying 2.5% in fees instead of 0.5% will cost you up to 60% of your retirement savings over a 40-year period. So instead of retiring with, say, R1.6 million, you would receive less than R1 million, and that’s a huge difference.
So the rule of thumb here is: Only invest in passive funds with fees between 0.2% and 0.4% (or slightly higher for more exotic passive funds).
And that’s it; the three simple steps you need to kick-start your investment journey. There really is no need to be intimidated or deterred; it’s a manageable process for anyone, and the best time to start is always right now.