The economy isn’t pulling any punches. Rapid inflation, volatile markets, you name it—our financial futures are seemingly hitched to a rampaging beast. But even in the midst of these tough times, there are still ways to build up the wealth you need to thrive at every stage. The secret: there is no secret. It’s about developing good, unshakeable habits around your investments and savings to generate real money momentum.
“On average people are living longer,” says Keith McLachlan, an investment officer. “As a result, our retirement savings need to last longer, too.” However, stretching that fabled fund to go even further isn’t rocket science, he argues. “All you need to do is make sure you earn to your maximum potential, live below your means and save the difference between the two.”
Easier said than done… sure. But coupled with the right investments, this golden rule is crucial to staying rich at every age. Let’s dive in.
Early Days
Start investing early for the greatest returns.
“Save before you learn to spend,” says Petri Redelinghuys, the founder of Herenya Capital Advisors. For someone fresh out of school or university, sitting in their first job, this is the best time to invest. “You’ve never earned a salary until now and you haven’t gotten used to a particular lifestyle—you don’t know any better!” Starting early—real early—will let you tap into the magic of compound gains. While you might only be able to tuck away R500 into investments every month, even these smaller contributions will (hopefully) be multiplied for every year they sit in a certain fund. Remember, interest builds on interest: “Many guys can easily put 20% of their salaries away,” says Redelinghuys. “Just pretend it doesn’t exist.”
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McLachlan says young investors should look towards putting their money into long-term growth assets such as stocks and shares. “In the short-term, stocks can be volatile, but in the long-term, highly profitable businesses are wonderfully compounding investments that tend to outperform inflation,” he adds. Sites such as Easy Equities (easyequaties.co.za) have made it easier than ever to dabble in the market, so there’s really no excuse not to. Plus, you should be taking advantage of your tax-free savings: R36 000 you can toss into Exchange Traded Funds, baskets and bundles annually that won’t be taxed (and that includes any interest, capital gains and dividends).
Just make sure you’ve got a diverse portfolio because a concentrated approach—putting all your eggs in one basket—could leave your financial future scrambled when things go wrong. “But try not to tinker,” cautions Redelinghuys. Ultimately, the value of your investments will have its dips, and it’s tempting to sell in a panic to mitigate your losses. However, you have to think long-term; most diverse funds will level out across the course of your career. The proof: Fidelity analysed the performance of their investors and found that their inactive clients (and dead ones) made the biggest strides. Yeah, seriously try not tinker.
“The financial decisions you make in your 20s are arguably more impactful than any other time in your life because your decisions compound,” says Geo Botha, a financial advisor at BOVEST. “The highest risk you can take is not starting at all. Even if you invest in the wrong funds, you’re learning valuable lessons—and that’s what your 20s are all about: learning.”
Midpoint
“Avoid debt like the plague,” warns Redelinghuys. While this is true for every stage of life, it’s this midpoint of your career where the temptation to rack up purchases on your credit card is at its highest. With your income scaling up, banks will be nipping at your heels, hoping you’ll start borrowing money. While this sudden cash injection can net you your dream car, imported threads or perfect home cinema set up, extending yourself beyond your means could leave you at risk of financial turmoil. It’s just not worth it.
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Debt is the opposite of an investment, compounding your losses rather than your gains, adds McLachlan. While some forms of debt are inevitable (think: mortgage), these types are netting you real assets that, with the right choices, can help you turn a significant profit. “What you want to do is stay clear of high interest rate debt such as credit cards, clothing accounts or student loans,” says Botha. “If you have debt, put strategies in place and see how quickly you can pay it off.”
Reducing what you owe isn’t just important to your finances. Some studies have found that getting back into the green can actually improve your decision-making skills and psychological functioning. But what about your investments? In truth, your approach remains largely unchanged from your early 20s. “Think about it: you probably still have another 30 to 50 years of life to live,” says McLachlan. “Thus, the only risk here is not taking enough risk.”—AKA having too little equity in your portfolio and leaving your capital to be eaten up by inflation.
If you have the funds, buying a property is always an option. However, investment properties often generate sub-par returns, cautions McLachlan. “Many of these returns can be replicated at a lower risk with no debt in your personal name and much better liquidity in public markets.” However, there are opportunities to make your fortune with real estate. The trick: think smaller. Jacques van Embden is the managing director at Blok, a property developer that gives buyers an opportunity to lock in modern apartments in high-value neighbourhoods.
“Brick and mortar is pretty hard to shift,” he argues. “Property is often more resilient than the financial market, holding a consistent value.” But buying up a slice of suburbia in this day and age is prohibitively expensive, notes Van Embden, so it’s worth considering smaller spaces in the right areas. “You need to look where there will be a consistent demand,” he says.
Final Leg
Approaching retirement? Here’s how to balance the books.
As you’re approaching retirement, the steps you took in the early days of your career are hopefully paying dividends. Tradition dictates that now is the time to consolidate your investments to ensure that you’re not taking a big loss just as you clock in for the final time. But Botha says this perception is flat-out wrong: “You’ve still, ideally, got another 20, 25 or even 30 years of life left,” he says. “So you still need to make sure your money, at the very least, keeps up with inflation and isn’t eroded over time.”
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The solution? Peter Lazaroff’s bucket approach. First, you divide your retirement savings into three buckets. The first is your conservative bucket. Calculate the amount of income you need to withdraw from the investment for the first two years. This amount should be invested in a conservative fund with minimal risk and volatility. Your second bucket is your moderate container. Calculate the income you’ll need from years three to five and invest these in a moderate fund. This is money that will grow above inflation for a period of three or more years. “So it’ll have a bit of short-term volatility,” he says. Your third bucket is all-out aggression. The rest of your investments go in here and will only be accessed in five years (or longer if you can afford it). These funds go into riskier asset classes such as local and international shares.
However, what if your retirement falls short? McLachlan says it’s a bleak outlook. “Unfortunately, at this stage, the major mistake most people make is not having saved enough while they were younger. You cannot turn the clock back and, face it, you won’t be winning the lottery.” Bit grim, right? But it should be your wake-up call to start making smart moves, right now. The money habits you form when you’re young will carry through in form of major savings when you’re older, setting you up for everlasting wealth. “The best rule of thumb is to simply save as much as humanly possible,” says McLachlan. “At the end of the day, the more savings you have, the more options you have. It’s that simple.”
