Great ways to save and invest
Consider saving options
We all know we should save money every month. As hard as it is to find the spare cash to put away, simply put - it is the path to financial security.
So, assuming you’ve found a way to spend less than you earn every month, or you’ve received a financial windfall, what should you do with this money? There are a bewildering number of options out there, with very different characteristics. Here is a very quick and simple overview of some of the main products you can use to grow your money.
Savings Accounts & Fixed Deposits
These are products offered by your bank. They pay interest to you which grows your money, and normally the longer your lock the cash away for, the higher the interest rate you will earn. This is a low risk, easy way to save - you can’t lose any of what you put in, but nor will your savings grow at a high rate. Keeping your money in a simple savings or cheque account is not the answer though, you will be losing out on interest.
If you buy a company’s shares, you are buying a small stake in that company. The value of those shares will go up and down depending on how well that company is doing. You might also get dividends, which are a share of the profits the company makes. Buying shares is a high risk / high reward way of saving. You can grow your money a lot, but if you choose the wrong company, you might even lose it all.
Unit Trusts are generally a safer way for you to invest in equities and similar assets. Your money is combined with other investors and is used to buy shares or other financial assets. This pooled investment is split into units, and the value of the units goes up and down depending on the value of the shares held. The main difference with investing directly is that a) you have an expert deciding which shares to buy on your behalf and b) your money will be split between a lot of different company’s shares – so there is less risk of picking the wrong company. On the downside, the costs of investing in Unit Trusts might be higher. Unit Trusts might also invest in international shares or other assets such as cash.
Exchange Traded Funds (ETF’s)
ETF’s are quite similar to Unit Trusts, in that they are a bundle of shares that you buy into through a single investment. There are a few key differences. a) ETF’s normally follow a very simple investment strategy (called a passive strategy) - so there is no expert deciding which shares are likely to perform best, they will just include everything in a fixed ratio (most often in proportion to the size of the company). As an example, SATRIX 40 is a well known ETF which includes all the largest 40 shares in South Africa, weighted by their size. b) Because of this simple strategy, the costs of investing in an ETF are lower than in a Unit Trust.
Tax free Savings Accounts
This is a new way of investing in South Africa introduced in 2015. The main advantage of these accounts is that the growth in these investments is not taxed. The underlying investments can be fixed deposits, unit trusts or ETF’s, so they work the same way as those, except that the growth and/or interest you earn isn’t taxed, which it might be if you invest directly. There are limits on how much you can put into a tax free savings account.
Retirement Annuities, Pensions & Insurance policies.
These are all other ways to invest that might save you some tax. The negative is that you won’t be able to access the money whenever you want. For example, with Retirement Annuities and Pension Funds, your money is locked up until you turn 55. The underlying investments within these products are pretty much the same as Unit Trusts.
Stokvels are a big part of the South African savings landscape. They are great for getting people together to save as a group, introducing a sense of community and greater savings discipline. In the past stokvels were mainly used for short term savings (paying out small benefits every year) or to support members for unexpected costs like funerals. The money is kept in the bank earning low returns. However, they are starting to move more towards longer term investment and wealth creation. By pooling resources, stokvel members may be able to access the products described above more easily and at a lower cost (or afford to get advice from an expert on the best solution to meet the goals of the group as a whole).
So, what is right for you?
That is a question that requires a lot of thought, and you’ll need to decide for yourself, or get some professional advice that takes into account your personal situation.
See here for some more information on what you should be thinking about.