Reward yourself

Henry

You have been hearing for a long time now in this column: you must save like the ant for one day, not like the grasshopper who eats everything at once and starves in the winter of your old age.

But maybe your 20th wedding anniversary is coming up, and you want to go and drink mixed drinks made from coconuts in Mauritius rather than Margate.

Or maybe your home’s previous owners covered every surface that stood still long enough with a different type of tile, and you prefer simplicity, but new floors don’t come for nothing.

Maybe someone close to you has a birthday and you want to spoil them with a big gift.

How do you reconcile these needs with the long-term perspective? Let me answer my own question right away: no, you don’t always have to put everything away for one day. If you still want to do it responsibly, it’s just going to take a little planning.

And if you’re still wondering, see your realtor. Here we go.

Where do I start?

It absolutely depends on where you want to get out, how long you have time and what you expect your return to be – but more on that later.

There is a huge difference between saving for R10 000 within three years and saving for R250 000 within the same time.

In the broadest of terms: the more you want to get out, the longer you have to save, or the bigger the monthly amount you have to put away.

Let’s forget for a moment about the growth that your money will hopefully generate, or that inflation eats away at it. As an example: if you put away R1 000 a month and your target is R100 000, it will take you 100 months or around eight years.

Assuming you put away R5 000 per month, it is much faster, you can reach your goal in 20 months, or just under two years.

So the factors you start with are this: what do I need, and how much time do I have. And then you add – how much can I afford to put away.

Where do I save?

This is also a question that has much more to it than simply what a person is prima facie would think Think of it this way: there is a huge difference between a Hilux and MetroRail’s trains, although both will (in theory) take you to the same place.

If you have time on your side, for example, you can take more risk than if you only have 12 months time. In the latter case, the bank or your home’s “flexi bond” a better call than the JSE’s top 10 index.

If you don’t need access to the money, you can also invest it fixed. However, should you need it in an emergency, it makes sense to have something reasonably liquid. Think of a unit trust or the bank above rather than investing in your cousin Johagim’s sculpture, which is going to attract the attention of the art world any day. Also, endowment policies tend to be more fixed.

Looking for guarantees? Then certain places are better than others, but remember – guarantees cost money.

Finally, take costs into account. Costs are not everything – there is a reason why your Hilux’s monthly premium is more than a monthly MetroRail ticket, for example. Although you don’t have control over your yield, you do have control over your costs. Not to be mean to annuities – they certainly have their place, but they tend to be more expensive than other types of investments.

Pay the emperor (or suppliers) his due, but not a cent more. And let your broker, if you have one, explain to you what the costs mean and how they compare to other options.

Ask the bank the same – exactly what you get and what you pay for it.

What about yield?

Returns are mostly not guaranteed. There are exceptions, as mentioned above, but usually this requires you to invest your money fixed for an extended period of time. Think fixed term investments, bank investments and so on.

Things like unit trust investments and endowment policies mostly invest in unit trust funds. The funds have mandates – some aim for above-inflationary growth, others aim for capital protection, while others aim to achieve above-average growth.

Your investment portfolio, which can consist of different funds, must match your objective as an investor and take into account your risk appetite. It should also take into account the purpose of the investment itself. If that sounds complex, well, it can be. I will elaborate more on that next month.

For our purposes here: as a very rough rule of thumb, the riskier your investment, the greater the chances for fluctuations in your value in the short term. It is mostly not suitable for shorter term investments (under three years, certainly not under 12 months) to invest too aggressively.

However, yield, and especially compound interest, makes a huge difference to how long (or rather how much shorter) you need to save to reach your goal.

This gets as technical as scrummaging rules, so I would very, very strongly suggest you go see someone to help you make sense of this. You don’t have to do everything yourself.

What about debt and my other savings?

First of all: please don’t bend your credit card to buy Carel-Johan a convertible for his 40th. Preferably don’t have a credit card with such a large limit either!

Second – credit cards and debt have their place. I have written about it several times in this space. That said: it’s rarely a good idea to take on expensive debt – such as credit card debt – for short-term things like going sunbathing in Mykonos. Then go to Langebaan instead.

Thirdly – ​​build this plan into your existing budget, but perhaps segment it. Investment A in company B is my money for goal C. Meaning – keep paying off your debts, and paying off your house, and saving for retirement.

Does that sound heavy? Yes, and one also wants to live while one is young. However, it is also the case that you can make that sacrifice today so that one day you will have food to eat, or you can suffer in the future.

No one says you must always be responsible – but know that every decision comes with a cost (also to save meaningfully for one day). Only try to be responsible if you want to be irresponsible.

So: save for that second ring for your wife, but don’t stop paying off your car.

And go see someone to help you make sense of everything.

  • Leon-Ben is a financial advisor, writer and musician of Wellington.
  • This series of columns follows from the community research of Solidarity Helping Hand. Visit Helping Hand’s website to download the full research reports.
  • Also read “Most SA’ers use a third of salary for debt” on RNews.