Saving Money

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Insurance companies would have us know that we need to save 15% of our gross income every month. The cynics among us would say it’s purely because they will make more money off me. And they’re right, but it isn’t a bad idea to save 15% of you money anyway. The trick is to make sure that you’re paying as little as possible in fees. Through normal insurance-type investments – that is, unit trusts through a retirement annuity, an endowment or straight into unit trusts – you pay fees on three levels. First, you pay for the services of the financial adviser or broker. Then you pay for the services of the insurance company and finally, you pay the unit trust fund to have your money invested. Unit trust fees are like taxes and there’s not much you can do about that. You pay more, for instance 2%, for a unit trust that has a lot of activity, like an equity fund and a lot less for a money market fund, about 0.5%. For the insurance company and the broker or advisor, you can pay anything from 1% to 4%. This fee is negotiable and should be haggled with vigour. If you pay 6% all-in-all you are being smoked. The fees have to be revealed and discussed by the intermediary. Money can be invested aggressively, moderately or cautiously and everything in between. There are five asset classes: Property, Equity, Cash (Money Market), Bonds and Off-shore. Aggressive unit trusts deal mainly with equities traded on the JSE. A team of investors make the difficult decisions on your behalf (but take a fee for it of course). Equity Funds, historically, yield more, but is riskier. Cautious investing would be in the money market, bonds and income funds where the returns are lower and the risk too. The issue here is that you have to beat inflation. This means your investment should yield more than 6% after fees and tax, and with cautious investing you will struggle to get to 6%. A moderate portfolio is when you have a mixture of aggressive and cautious, or if you invest in a balanced fund. Here, your money is spread over the asset classes. Property is moderately aggressive and has been a solid performer over the years. Cash or money market funds perform close to inflation and should really only be considered for short-term investments or ultra-conservative investors (like if you are 102 years old and in the final stages of an aggressive bout of Plasmodium falciparum ). Traditionally, property has been the best performer with close to 20% per annum growth over 10 years. Equities are volatile, but in the long term usually tops 15% p.a. Balanced funds hover around 10% and the others are close to or below inflation. Investment equals risk, so if you are tentative with your money, leave it in the bank, pay the fees and score a whopping 4% if you are lucky. The braver among us venture their money in the stock exchange. It is a bit tricky and quite risky and unless you have a good grasp of what’s going on in the market, you should probably leave it to a professional (whom you have to pay in fees again). An easy way to get your money in the stock market is the Satrix 40 investment vehicle. You have access to the top 40 best shares and if a company underperforms, it is replaced by one that’s doing well. The fees are also really low – around 1%. Ultimately, to earn passive money on the market, you have to expose yourself financially. It’s crucial to remember that the longer you are in the market, the better. Compound interest accumulates over time and when you start to earn compound interest on dividends your money really starts to grow, especially after 10 years. Example: If a 30-year-old person invests R1000 per month he/she will have around R2.2 Million at age 60. Not bad considering that only R360,000 was put in. Not to mention the huge tax advantages if it’s put in a retirement vehicle. In a retirement annuity one doesn’t pay interest tax or dividend tax, plus you can claim a portion back from SARS every year.