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30 Apr 2021
investing and why it matters
investing and why it matters

Investing and why it Matters

Investing is for rich people ,that is what I thought when I was at school. Although, if I’m honest with myself I was actually facing two barriers but only acknowledged one to myself - that I couldn’t afford to invest because I didn’t have any money. The second barrier, that I wasn’t willing to admit, is that I didn’t know how to invest.

I finally got round to understanding how to invest in my mid-30s (better late than never) and built and launched MoneysaverSA to help other people overcome the same challenge that I faced by making investing easy. No minimums. No complicated choices. And everything managed through an easy-to-use moneysaverSA WEB.

That said, the first challenge remains perhaps the most important barrier, because if you think you don’t have any money to invest, you won’t even begin to ask yourself the second question of how to invest.

That’s why in this post I want to discuss the importance of investing and why it’s so important to start when you’re young. I want to encourage you to start investing, even if it’s only a small amount of money.

Investing small amounts of money regularly is often called “micro-investing” but I don’t like that term, because money is money and using your hard earned money to invest is distinctly different from spending that money, it doesn’t matter if it’s R10, R100 or R10,000.

So why is investing so important, even if you’re only investing R50 per month?Well, it’s important for three simple reasons:

1. Unlock compound growth

The first reason is also the most obvious one - by investing you start putting your money to work, by enabling real growth of your money. People often confuse saving and investing. In my mind they are very different. Saving means you’re not spending but sadly most people save in a bank account that typically offers 0-1% interest. This means that most people are in fact losing the value of their money when they save because of South Africa’s 3% inflation. Investing means your money has real growth opportunity and therefore unlocking the potential of compound growth. However, in order to maximise your growth potential it’s important to start investing as early as possible (to understand why it’s so important to start as soon as possible .

2. Make a habit of investing

The second reason is more subtle and has to do with setting up the habit of investing. More importantly, making a habit of paying yourself first. The best way to do this is to set up a regular stop order such that when you first get paid your salary, one of the first things you do is contribute to your investment account. Once you have established a habit, you’ll be surprised how easy it is to manage your ongoing monthly expenses. And the best part, you don’t need to wait until the end of the month to see if you have money left over to invest, instead any extra cash you have at the end of the month you can use to top-up your investment.

3. It’ll change the way you think about money

The last reason is arguably the most important because once you see the power of investing and experience first-hand how your money can work for you, instead of you working for money, it will change the way you think about and manage your money. I had this change of mindset when I started investing and it radically changed my life - I started investing more which allowed me to expand my future plans and dreams. It’s a positive feedback loop that will change your life.

So to conclude, no matter where you are in your life, you can and should start investing today (or invest more, if you’re investing already). And hopefully you’ll agree with me that it doesn’t matter how much you invest, the important thing is TO invest.

Charlton Cloete
Please Send me application forms and contact numbers of advisors. Thanks
My cell 0811227317
Namibia
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30 Apr 2021

RETIREMENT FUND EXPLAINED

 These can either be pension or provident funds where you and your employer contribute or a retirement annuity which is separate from any employment and is up to you to contribute towards.
What for?
If it wasn’t already obvious, the point of these investments is to allow you to have money to live off once you have stopped working and to supplement any passive income you may be earning in retirement. If you invest through Easyequities for example, our products are discretionary (non retirement investments) which will help you grow your wealth and allow you to potentially earn a passive income.
OK, what are my options?
With pension and provident funds, where you can invest your money will be limited to the options your employer can provide you. With a retirement annuity you can choose which fund/funds to invest in as long as they are within the rules (for example you can’t have more than 75% in shares or 30% offshore).
If you leave your employer you can either move your pension or provident fund to your new employer’s fund, a retirement annuity or to what is called a preservation fund (where the investment can continue to grow but you don’t contribute any more to it). As always, make sure you check out the fees! And also, please try resist the urge to cash out your investment, you will be taxed and it will probably have a big impact on what you have left to live on in retirement.
Sounds taxing
Contributions to all 3 of these funds (in aggregate per year) are tax deductible in an amount up to 27.5% of your gross remuneration or taxable income (whichever is the higher) and with an overall limit of R350,000. This is a great incentive and was done to encourage people to invest towards retirement. Unfortunately less than 10% of South Africans can retire comfortably because they have invested too little. Investment returns earned on retirement investments are also tax free but SARS will get you eventually as we see later.
New rules
The main difference between pension and provident funds used to be what you could do with your money once you are retired. You used to be able to cash out your whole provident fund on retirement (not any more). Now pension and provident funds are effectively the same in that you can take a maximum of 1/3rd of your investment as a cash lump sum and you HAVE to use the remaining portion (“Balance”) to buy an annuity type product. If however your retirement benefit is R247,500 or less then you can take it all in cash. The same applies to a retirement annuity.
The rules were changed to stop people from cashing out all their retirement savings, blowing it and then having nothing to live off. If you had contributed to a provident fund before 1 March 2021 and you are 55 or older on that date (and stay in the same fund) the new rules effectively don’t apply to you. But if you are younger than 55 and have contributed to a provident fund, your retirement benefit will be split into 2 pots - one pot being the investment pre 1 March 2021 (including subsequent growth) where the old rules apply and the other pot being investments made after 1 March 2021 where the new rules apply and you HAVE to buy an annuity type product.
Annuity what?
Once you retire, you need to effectively exchange your balance for a future income or annuity (eg. you give a life insurance company R1m and they promise to pay you R6,000 a month increasing at 5% pa till you die, even if that is when you are 120) or you could take your chances with a living annuity where you can invest the Balance and then draw down on it (within certain limits) but then when it is finished, it’s finished. In the latter scenario though, if you die and there are still funds in the living annuity, it will go to whoever you have nominated as your beneficiary. In the first scenario, if you die after a few months, tough luck (unless you have bought a product that transfers to your spouse/family or is guaranteed for a certain period).
Scary reality
Obviously the higher your Balance the more you can get as a monthly pension (FYI the R6,000 a month per R1m is not that far off reality for a 60 year old male - also as a male you will generally get more than a female per month assuming the same Balance, as your life expectancy is less). Also if you decide to retire at 55 and not 60 you will get less per month as you will have longer to live (and your Balance will most likely be less than if you retired at 60). So if you as a 60 year old male wants to draw R30,000 a month (increasing at 5% pa) pre tax from your annuity you need around a R5m Balance at retirement. The income that you draw will be taxed as though you were working (over 65s and 75s do pay less tax though).
Now that you understand how all these things work, make sure you aren’t one of those South Africans who don’t have enough at retirement, start investing today!

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