Investments fit for purpose

Jul 31, 2022 | Articles, Stock Market 101

Demystifying savings and how to start your financial journey

ESTER OCHSE

THE WORLD of saving and investing can be daunting—and if one looks at the current savings rate in South Africa, the perceived complexity may prevent people from starting this vital part of their financial wellness journey as early as they need to.

The focus of this article is ensuring that you have the right savings and investments for the right purposes.  Here’s some of the most common types of vehicles that will help you begin your journey to financial wellness.

Cash investments

These are normally savings accounts that are available via your bank.  With a cash investment, the money grows by earning interest on the amount saved.  This is a safe type of savings, as there is no exposure to the market and no volatility to your investment.

The downside is that the returns tend to be lower over the longer term as there is no exposure to growth type assets, so the risk is under performing inflation in the long run.

This is a great option for short-term saving and for an emergency fund.  You can save from as little as R1 per month—and, in most instances, the capital is guaranteed.

 

Unit trusts

This product provides you with easy access to financial markets.   Each unit trust is split into equal portions called units.  For the monthly contribution or the lump sum contribution, the investor gets a certain number of units.   Your money is combined with that of other investors who have bought units.

This investment allows you access to a wider range of asset classes such as bonds, property, shares, money markets or a combination of those asset classes.  As the underlying investments go up or down, so does the unit price.  There is risk attached—but with exposure to the growth assets the chance of out-performing inflation is better.

These types of investments are great for medium- to long-term investing.  Contributions start from R300 per month.

 

Share investing

With share investing, one invests directly into a company that is listed (be it locally or internationally), or via an Exchange Traded Fund (ETF) which can provide a diversified approach to a broad spectrum of asset classes and industries.  This is a great way to start your share investing journey.

Investing in the stock market is best suited for longer term investment goals and not for short term goals as one can experience high volatility in returns in the short run which is not ideal for the short-term investor.  The old adage of “time in the market, not timing the market” is important to keep in mind.

The returns are made up of capital growth (the share price goes up), as well as dividend payments.  Starting your share investing journey is easy with FNB Shares Zero, and you can start from R10 with no monthly account fee.

 

Ester Ochse is the product head at FNB Money Management.

 

Starting the journey to saving and investing

 

  1. Look at your budget. This will be the first step to see where you can free up cash that can be directed to saving for an emergency or a longer-term investment.  Use tools such as FNB Smart Budget on App to see where your money is going, and what you can do to free up cash.  Be deliberate about savings; include them as part of your budget.  Prioritise saving and investing before the ‘nice-to-haves’ like eating out and treats.
  2. Redirect the freed-up cash flow. Use the cashflow that you have freed up towards an account for emergency savings.  Look specifically for an account that you can access the funds quickly or within 7 days.  You can automate these savings by adding a scheduled transfer from your bank account into the savings account every month.  A nifty feature to save regularly is Bank Your Change where you can select an amount to round up after every transaction and direct this to your savings account, helping you save easily.
  3. Think long-term. It is important that you match your investment horison to the type of fund or solution that you are choosing.  In the short-term, the biggest threat to your investment is volatility, in the long term the biggest threat to your wealth creation journey is inflation.  For the longer term, you want to ensure that your investments aim to outperform inflation, and exposure to growth assets is the way to do it.
  4. Categorise your investments into timelines.
    • 0-2 years: Mainly consider cash and money market investments and include your emergency savings here. You can also use this in for goals such as saving for stationery and school fees for next year or a holiday.
    • 2-7 years: Have exposure to some growth assets such as shares and property as well as some defensive assets like cash and bonds. A good option here will be a unit trust that has exposure to these types of assets.  Typical goals include education or saving for a house deposit.
    • 7+ years: This is truly long-term investing and exposure to proper growth assets is important, so shares and property. Unit trusts is an option as well as direct share investing. This would ideally be for retirement and long-term wealth creation.
  5. Avoid the ‘too good to be true’ investment scheme. If a solution promises you returns that are beyond reasonable, it is best to stay clear of them.  Consistent saving and investing is what will pay off in the long run.  Rather stick to authorised Financial Service Providers.
  6. Start early. When starting your investment and wealth creation journey, the earlier you start the better—even if it is just with small amounts.  By starting earlier, you will get the benefits of compounding interest and returns, which could add up to significant amounts in the long run.