MONEY BASICS WITH MARTIN HESSE
If you’re keen to start saving or investing you need to choose the right vehicle to do so. But first, we need to clear up some confusion surrounding these two terms.
Saving is the act of putting away money – either a lump sum or, more practically, small amounts on a recurring basis – so as to accumulate a large amount to be used in the future.
Investing is "buying into" assets such as companies, bonds or property that you believe have the potential to grow in value, thereby giving you a good return or income.
However, these two terms are often used interchangeably. For example, we talk about retirement savings, when we really mean retirement investments. This is because saving is normally associated with short-term objectives, whereas investing (and this, in turn, should not be confused with trading or speculating) is a long-term endeavour.
The word "investing" is often a little intimidating for people who don't know much about the world of finance or who don't have a financial adviser to guide them. But while it's a good idea to be guided by a professional adviser, you can do it yourself, and it's easier than you think.
First, you need to clarify your financial objectives, which can be divided into short-term and long-term goals.
Short-term goals are things like buying a car, having a deposit to put down on a property, or going on an overseas holiday. Your time horizon should not be more than five years.
Long-term goals are things like having the money to put your child through university and, vitally, having enough money to live on when you are no longer able to work – in other words, your retirement nest egg. Your time horizon should be at least five years, preferably a lot longer.
Short-term saving
For short-term saving you need a product, for want of a better word, that, unless you're putting away a lump sum, allows you to contribute regularly, perhaps monthly via a debit order on your bank account. But it must also be relatively risk-free.
The banks are not very good at offering recurring-saving products, and on products such as notice deposits (you can withdraw your money after giving, for example, a month's notice), the interest rates are typically well below inflation. Capitec offers a multiple-deposit fixed deposit over various time frames, with the interest rate rising according to the amount invested. Once you get above R10 000, you begin to earn a decent, above-inflation interest rate.
Money market unit trust funds generally offer better rates than bank savings and they are far more flexible – you can contribute or withdraw money at your discretion. However, you would typically need a minimum lump-sum investment of R1 000 or a recurring investment of at least R500 a month.
An attractive alternative is National Treasury's recently launched RSA Retail Savings Bond that allows for multiple deposits. You cannot withdraw in the first three years, but in return you get a good interest rate of about inflation plus 2.5%.
Long-term investing
If you are saving specifically for retirement, you need to be in a product specifically designed for retirement savings, because you can claim your contributions as a tax deduction. You can either contribute extra into your employer-linked pension fund or take out a retirement annuity (RA) that lets you invest in a selection of underlying unit trust investments. Unit-trust RAs are preferable to contractual life-insurance RAs because they are far more flexible, allowing you to increase or decrease your contributions at will.
If you are saving for some other goal, you need to consider what are known as discretionary investments. These include unit trusts, exchange traded funds (ETFs), a share portfolio, and physical property. While the short-term risks on these investments can be high owing to market volatility, over the long term you are likely to get higher returns than in a short-term interest-bearing account.
Unit trusts and ETFs are extremely easy to invest in, although, as with the money-market funds mentioned above, there are minimums on lump sums and recurring contributions. The asset management companies offering these products often enable you to invest directly via their websites. You need to choose one depending on your time horizon and appetite for risk, but for beginner investors a so-called "balanced" fund is the best way to go. These funds have a large portion of their portfolios invested in shares (equities), but also diversify into bonds and listed property, so that you get a more even return than the more volatile returns of a pure equity fund.
It's important to note that there are no guaranteed returns in unit trusts and that past performance does not predict future performance. For an idea of the returns on these investments over long periods, see the table below (returns to the end of March 2022).
Tax-free investments lie somewhere between retirement and discretionary investments. They are designed for long-term saving to supplement your retirement nest egg, but can be used for other purposes. Both banks and asset managers offer them, and their underlying investments can range from bank deposits to unit trusts and ETFs. Currently you are allowed to invest a maximum of R36 000 a year, to a maximum lifetime contribution of R500 000. Within the investment, you are not taxed on interest, capital gains or dividends, as with a retirement-fund investment. Discretionary investments are subject to these taxes.
This article first appeared in the July 2022 issue of our free digital magazine IOL MONEY.
PERSONAL FINANCE