Financial wellness is a journey that requires taking one step at a time. Starting the journey is the most vital step to take. In many regards, an investment can be compared to growing a tree. It may begin as a small seed, but with some good soil, strong roots, regular watering, additional fertilizer and time – a seed can go a very long way. Ultimately, we want our investments to grow, bear fruit, stand the test of time, weather market conditions and help us leave a legacy. The world of finance can be an overload of information that needs to be held in tension and navigated. The best place to begin navigating our Financial Forest is with the basics.
Financial Blueprint
Setting up a monthly financial blueprint (budget) helps you track your monthly income, expenses and savings. For some, doing this for the first time is insightful because it brings awareness of how much money is going to different categories like; groceries, personal care, miscellaneous spending and entertainment each month. We often hear this statement, “I would love to starting saving and investing, but I simply cannot afford it”. At times this may be the case. However, it is often solely a misallocation or misuse of capital.
Laying out your monthly financial blueprint makes it very easy to see where overspending in certain categories may be taking place. This allows you to quickly and easily adjust those areas, freeing up some additional monies to contribute toward saving and investing. Monthly contributions to investing can start small; R500 or R1,000. Every bit counts and because of compound growth, the investment will grow over time if left to do so.
Setting up an emergency fund
Often we see individuals with the best intention when they decide to ‘invest’ because they know it is beneficial. However, the most common mistake made is believing that saving and investing is the same thing. There is a difference between saving and investing.
“Savings protects you and protects your investments.”
Saving is more for short-term access to money in the case of an emergency. Life can throw unexpected curve balls at our finances. Whether it be a job loss, burst car tires, the fridge/microwave packed up, our whole family got the flu and needed medication that medical aid did not cover for, a vet bill, an emergency flight and so on. These financial surprises usually do not form part of your monthly financial blueprint (budget). However, they often need immediate attention in the form of money. Where do you turn? Ideally, you should not turn to your credit cards OR your investments for aid. You need to turn to your ’emergency fund’. Remember that “Savings/emergency funds protects you and protects your investments.”
Protecting You and Your Investments
Turning to the credit card for monthly spending is like sowing weeds into a beautiful garden. It will strangle the life out of that garden. Bad debt, like credit card debt, is a weed to your investments and a danger to your financial wellness. The more debt that is accumulated, the more that has to be paid off monthly, the less you have available to save and invest. At times some people even need to tap into investments to settle their debts. This is a vicious cycle that many get stuck in.
Investments are time-sensitive; they are goal-based and as with any goal in life, it takes a certain amount of time to achieve a goal. It takes commitment and endurance. Without an emergency fund, your investments are exposed to whatever financial surprises may come along in a given month. When you prematurely withdraw from your investments because of ‘financial surprises’ it damages your investment growth.
Power of Time and Compound Growth
Let us examine the power of compound growth using an example of saving toward retirement. Here, the power of time will be illustrated by allowing an investment to grow, uninterrupted.
Person A They contribute from age 21 for only 9 years, R6,000 per year (R500 per month) and then stops contributing and just allows the money to grow until they reach retirement age (65).
Person BThey start contributing at 30, also R6,000 per year (R500 per month) and continues for 36 years until they reach retirement age (65).
Person CThey contribute from age 21, R6,000 per year (R500 per month) and continues for 36 years and stops at 56. They then allow the money to grow until they reach retirement age (65).
RESULTS:
Person A They only contributed for 9 years, R500 each month. When they reached retirement (65), that investment had become about R2,7 million. This is the power of a small seed given enough time to grow in the right soil. Even though they only contributed up until the age of 29, they started young (21) and so there was more time for compound growth to take effect.
Person B They started contributing at 30, also with R500 each month. They did this for 36 years until they retired at 65. Their investment amount was about R1,9 million. They started a bit later and so time was not given full chance to grow as much. However, those R500 seeds ended up becoming R1,9 million.
Person C They started young too. They contributed from age 21 for 36 years, R500 per month, until age 56. They contributed for a longer period and remained consistent in their contributions until the end. The result was mind-blowing, those R500 seeds became about R4,6 million. Seems too good to be true, right? It’s not. That is compound growth.
For more on setting up an emergency fund, retirement planning and setting investment goals please contact us directly on clientservices@fairtreeinvest.com.
PERSON A
PERSON B
PERSON C
– Cephas Dube, Selma Kruger & Kheara Lugg
