N Kaunda asks: I have about R6000 extra at the end of each month, I would like advice on what I should invest in. I am prepared to put money away for at least 10 years (I am now 28) – is that long enough?
I do not have any debts save for R3000 on my credit card. I plan to start a family in the next two years.
Maya responds:
It is always such a pleasure to hear from a reader who is starting a financial strategy early in life. A good financial advisor would assist you in putting together a holistic financial plan that caters for your shorter term needs — like buying a home and having a child — and your longer term retirement planning. However here are some basic rules that you can apply:
Pay off debt: You do mention that you have R3000 on your credit card. It is always best to pay off high interest debt so consider using half your first month of savings to be debt free. If you want to use your credit card for convenience set up a debit order so that it is paid in full at the end of every month.
Emergency fund: Everyone should have an emergency fund, save some of this money into a bank account until you have at least two months of salary put aside. This can be kept in a fixed deposit which offers a better interest rate. Nedbank has an excellent new product called Easy Access Deposit which is a fixed deposit but allows you to access 50% of your money within 24 hours.
Goals for saving: You asked if saving for ten years is long enough — it all depends on what you need this money for. Part of forming a financial plan is setting out your goals and what you need to achieve them. The rule of thumb is that for savings of less than 2 years invest in cash in the form of a fixed deposit.
When investing for between three and five years you can consider high income funds which invest in government bonds and property, and finally for investments of longer than 5 years you can invest in equities which are effectively companies listed on the stock exchange (JSE).
Pension: Make sure you are investing in a pension fund and if not, consider a retirement annuity. These products offer excellent tax benefits. However these are for retirement so would not form part of your 10 year savings plan.
Insurance: Make sure you have appropriate risk cover like disability and income protection that will pay out if you can’t work. This will be become even more important when you have a child.
Value for money: Costs are extremely important part of your final return on your investment so make sure you understand the costs of both the product and the financial advisor. Good advice is worth paying for but the advisor must continuously work with you to ensure you meet your goals and not just disappear once the commission has been paid.
Investment options: The Satrix range of investments is a good beginning as it is very low costs and you can invest directly. These track the major South African companies and details can be found on www.satrix.co.za. Most investment managers recommend the Satrix RAFI, saying that there are some good unit trusts which have performed well, but again check what their upfront fee is and their annual costs. Unlike Satrix a unit trust can provide exposure to different investments. So if you are going that route consider one unit trust that provides exposure to offshore investments, property and equities. Look at long term performance and whether the unit trust has consistently outperformed. If you identify a unit trust company that you are comfortable dealing with and which has low costs, you can speak to them to get advice on the best fund for your needs.