If you invest your Christmas Bonus of say R20 000 in a 12-month fixed deposit with a great rate of 8.83% in December this year, by this time next year you would have added an additional R1 766 to your capital amount.
Back in the day, your bonus probably landed in your account and seemed to disappear into the ether. Remember the years when it made complete sense to get up from the desk, walk out the office and head straight to the nearest car dealership to buy the best car you could afford within your pay bracket? These years can be forgiven because, as poet Maya Angelou once said: “When you know better, you do better”. Even though it’s really tempting to use that bonus as a deposit for that new shiny coupé, resist the urge. John Taylor, Investment Marketing Actuary at Liberty Corporate says, “We all know the feeling of recently received money burning a hole in our pockets. As humans we want to spend what we can to boost our own lifestyle and the lives of our family. The best idea is to consider the long-term impact of what we are spending our money on. Will we still be benefiting from that new car, holiday, pair of shoes or electronic gadget in two or five years? If not, we have to reconsider its importance relative to saving for education, medical emergencies or retirement.”
In addition to living comfortably today, the long-term goal should be to leave a healthy money legacy coupled with a very nice inheritance for future generations. One way to ensure this is to invest early, invest smart and keep finding innovative investments which yield great returns.
Take your cue from celebrities and business moguls like Oprah Winfrey, Bill Gates and Warren Buffet who’ve mastered the art of making money and smart investing. The magic in investing lies in the power of compound interest, which refers to the interest earned both on the original amount of money invested and on interest it’s already earned. As Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it”. Ladies and gentlemen, no truer words have ever been spoken.
Buffet, who has one of the VIP seats in the section of the world’s population who understands and earns compound interest, firmly believes that in order to master money people should learn more about it.
“Invest in yourself as much as you can. Part of that is learning as much as possible about money. This limits risk and minimises exposure. And minimising risk comes from knowing what you’re doing. So, read a lot. That’s how knowledge builds up like compound interest.”
For the many black professionals from South Africa who find themselves more often than not being the first generation in their family to operate within this investing space, this advice is key. “It’s extremely important to question and understand what your money is being invested into and how it’s performing. By working hard to understand how money works, black professionals can protect their wealth and learn the know-how of creating value and earnings over time,” stresses Taylor.
Follow in the footsteps of the Gates and Buffets of this world by making that 2016 bonus work for you. Considering the fact that these two officially hold number one and three spots of the richest people in the world, they’re the ideal examples to use as inspiration. According to Forbes 2016 billionaire rankings, Gates is at number one with a net worth of $75 billion while Gates claims the third spot with his net worth of $60.8 billion.
Of course, you can pay yourself first – with a much-deserved holiday, for example – but invest a large portion then use the little left over to spoil yourself. “Sure, some of the money can and should be used for enjoyment. But you can make your money work harder by investing as much of any windfall, such as a bonus, as you can. This creates future wealth as it grows and allows future opportunities down the line,” explains Taylor.
Here how to use the December bonus to grow your investment portfolio even further:
Start with solid investments
In uncertain times like the current tough economic climate, solid reliable investments make complete sense. “Property remains a popular choice and certainly it does make sense to try to own your property instead of renting if possible,” says Taylor. If the thought of buying property and dealing with tenants gives you grey hairs, worry not, technology has also opened up various innovative ways to operate in the rental space. Look into taking advantage of property innovators like Airbnb (AirBed & Breakfast) who are a peer to peer website/online marketspace and homestay network enabling people to list or rent short-term lodging in residential properties. As a landlord, you set the price and Airbnb charges a service fee from matching the landlord and guest. In this way, you’re guaranteed to be tenant drama-free.
This San Franscisco-based company has really taken off since it started in 2008. It had served nine million guests by 2013 and added six million to that by the end of the same year. Luckily, the company has also grown internationally and, having recently appointed a general manager for the Middle East and Africa, is also growing a solid footprint in SA. The company reports that the number of listings in South Africa are increasing by 138% a year.
Dabble in the stock markets
Gone are the days when the stock market seemed like an option only open to a small circle. These days with information at your fingertips and solid advice you can earn great returns on the stock markets. Taylor says, “There are many share-trading platforms which are increasingly popular. The big thing is to find investments with lower costs and good transparency into how your investments are doing.” If you’re a bit hesitant because, like the rest of the world, you watched the rand plummet and rise during the astonishing – and not in a good way – Nene/Van Rooyen and Gordhan Finance Ministry mortifying musical chairs, Taylor says, relax! “If it’s a long-term investment, don’t panic if you lose money from time to time. The markets do recover over time and if you have a diverse mix of assets you have no need to worry about short-term movements – given how panicky markets can be from time and time and especially at the moment.”
Insulate yourself from tough conditions and risk by diversifying your portfolio. Experts suggest spreading your investments across a range of asset types. Taylor explains, “In recent times there has been an explosion of Exchange-Traded Funds (ETFs), which are index-tracking investments, on the JSE. These are generally low-cost investments which track various market indices over time and have been shown time and time again to provide a good return over the long term with lower costs than most investments.”
Add tax-free savings
Since the legislation that brought them into existence, tax-free savings were introduced to encourage people to save. These savings, like the Satrix tax-free unit trust or the Absa tax-free savings account, have been very popular amongst savvy investors – and for good reason – because the interest earned on these investments isn’t taxed. The other attractive features of these is that they’re flexible and one is able to choose whether to make one lump sum contribution or regular payments into them.
Taylor says, “Regulation is actually pushing all investors to consider these passive investments for the majority of their savings instead of more expensive unit trust companies”.
“These ETFs have been popular with the new Tax-Free Savings Accounts (TFSAs) which the National Treasury introduced in 2015 to encourage savings outside of just retirement funds,” adds Taylor.
Consider pooled investing
Taylor advises to, “Start with a group of friends and colleagues to pool your ideas and resources. You never know what exciting developments can come from a group of energetic people who want to share their learning and interests”. The saying goes that ‘your vibe attracts your tribe’, so if there are close friends in your circle who are as passionate about investing, consider pulling your resources together to invest so you can all benefit from the investment.
Have a long-term view
Once you start to see the great results of compound interest, the temptation may be to spend it but refrain. “Try not to dip into savings for tempting purchases or for non-emergencies. Savings can only compound and create wealth if you leave them invested to let time do its magic. Continually drawing on or dipping into savings decreases the power of compound interest,” says Taylor.
Beyond the festive season though, the best piece of advice for anyone thinking of investing is to find and keep a relationship with an excellent financial advisor. A good financial advisor is perhaps just as important as your family GP or gynaecologist because they’re in a sense ‘a doctor for your finances’. Taylor heeds, “Treat finding your financial adviser like finding a doctor or a school for your child. Ask questions and ensure you’re completely comfortable with them before committing to anything. Don’t be afraid to ask for proof of experience, knowledge and qualifications from professionals who’re assisting you in financial decisions”.
Four investment must do’s:
- Unit trusts
- Retirement funds
- The new tax-free savings account
- Saving into bank accounts