“I save money, but what now?” – That’s pretty much exactly what I was asked today by a friend who reads my blog. She’s good at saving money but she was asking what to actually do with it. You know, what’s the point?
Let me start by saying that there is no right or wrong answer. It’s your life, your dreams, your money and your plans. Some plans may work better than others and having knowledge and experience will certainly assist you in making a great plan. So read as much as you can about the subject!
Having some money saved is a great place to be at, and hopefully you have no debt. If you have debt (home loan, car finance, credit card, store card, etc) then I would strongly consider first getting rid of your debt before deciding on investments. If not all your debt certainly your short-term high-interest debt (credit cards, store cards, personal loans, etc). Imagine having R20,000 in your bank account and earning 3% interest whilst having R20,000 debt on your credit card and paying 20% interest. That really makes no sense at all!
So firstly decide on a strategy of paying off debt. It can sometimes make sense to pay debt whilst investing at the same time; it depends on how much debt you have, the period, interest rates and obviously your ability to pay it.
Why are you saving?
Next up, think of the reasons why you saved money in the first place. You probably have many things you want to do with your money so perhaps you’re saving for some of these items and others that are not listed:
- Buying a house
- Buying a car
- Overseas holiday
- Money to start a business
- New fridge / appliances
- Children’s education
- Emergency Fund
- Parents medical bills
Each “reason” for saving requires it’s own strategy. The money that you’re saving for a new fridge can just be saved in your bank account whereas your Retirement Fund should be invested in a long-term investment. An emergency fund needs to be accessible at any time whereas it is okay to wait a few days before accessing other savings.
Maybe you haven’t got specific reasons, you just save because that’s what you were taught to do. Now is your chance to think about it. Decide on your reasons and write down some key words regarding the strategy:
- Is it important to be able to access the money quickly?
- How long do you need to save the money?
- How much do you need?
- Is it okay if the economy slides for a few years?
It is important to have a purpose for every rand. It doesn’t matter if various savings are lumped together in one investment, but you need to know why you’re saving and what the money is for. See my blog on Savings Pockets for an idea of how to keep track your savings.
Investing : The basics
There are many investment products available so this is simply a summary of types of products and things to consider. If you decide to use a Financial Advisor, remember that no-one really cares about your money as much as you do! You need to take responsibility for your hard-earned money, read, research and make informed decisions!
You may not make the right decision, but at least you will understand and be able to learn going forward.
Investment Term & Risk
I hate risk (the possibility of losing my money) so I am generally risk-averse. When investing though, one can opt for slightly higher risk products for longer-term investments. If you are saving for a deposit on a new house then you will probably only be saving for 2-3 years and you really can’t afford to lose any money (in investment world this is called Capital). Thus, a short-term investment should be invested in a low-risk portfolio.
If you are saving for retirement and have 40-years to go then you could opt for a more aggressive investment (aggressive investment generally means higher risk). If the markets are bad one year, you have enough time to wait until the markets recover again.
Types of products
Short-term investments (Low Risk)
If you need to access your money in the next 3 years then you should opt for a short-term and low risk investment. You need an account with low fees where you will earn the maximum interest that you can. Your options include:
- Interest-bearing Bank Account
- Using you Home Loan account as a Savings Account
- Call accounts (eg 32-day notice)
- Fixed-period accounts (e.g. 1 year fixed savings account)
- Unit Trusts
- Mutual Funds
- ETF’s (What are ETF’s?)
Medium-term investments (Medium Risk)
If you need to access your money in say 3 – 10 years time you can opt for a medium-term investment. These include:
- Unit Trusts
- Mutual Funds
Long-term investments (Medium-High Risk)
If you’re saving for more than 10 years and really don’t need to access your money, you can select slightly higher risk long-term investments such as:
- Unit Trusts
- Mutual Funds
- Pension Fund
- Providend Fund
- Alternative investments such as Gold Coins
If you’re feeling unsure of what to do, start by looking at how much you currently have saved and decide what the purpose of the savings is. Then categorize your savings to short, medium and long term. That will be a good start and you can then keep reading up and researching various products and options.
My top 3 investment tips:
TIP #1 : If you’re offered an amazing investment opportunity that just seems too good to be true; then it probably is just that! Be skeptical! There are so many scams out there! There are no “get rich quickly” investments!
TIP #2 : When looking at fact-sheets for investment products or bank accounts, look for the fees! It’s easy to get excited about the great returns that are promised, but compare fees as they are equally as important as the earnings potential!
TIP #3 : Don’t trust people simply because they have a financial planning qualification. Really spend the time & effort to understand the advice you’re given and don’t be pressured into parting with your money!