Time, value of money, budgeting, and priorities

Small changes to your budget and approach to long-term investing can significantly improve the circumstances under which you retire.

As an advisor, one thing that surprises me is the number of people who still think investing is exclusively for the wealthy. I have been in numerous client engagements with young people who are either just starting their careers or only two to three years in. Understandably, disposable income is not always available at this career level. However, even a small monthly contribution towards an investment can grow significantly over a 20- to 30-year period.

When starting your career, time is on your side when it comes to implementing an investment strategy. Time in the market is your friend. Most people understand the impact that compound interest can have over a long period (e.g. 45 years). For example, suppose you start investing R1 500 per month from the age of 22 and stop contributing at age 67 when you retire. After 45 years of saving (assuming a 9% return in an equity-oriented portfolio), you would have accumulated R11 107 318.

Going one step further, let’s use the same period and contribution level but instead invest in a money market account. The call rate in South Africa in the last 10 years has flirted between 3.5% and 7.0%. We will use a call rate of 5% for this example. If you invested R1 500 per month for 45 years at 5%, you would only have R3 039 656 at the end of the term – a whole R8 067 662 less than if you invested in an equity-oriented portfolio!

Statistics like this are not surprising for many people. Most people understand the effects of compounding but underestimate its impact and how it can change your financial situation over the long term. Many young people fail to see the bigger picture and don’t believe that a R1 500 monthly debit order can make a material difference.

I believe this issue is (for the most part) an issue of priorities. South Africa is facing an employment crisis, and millions of people are struggling to afford food, let alone save. My issue is that many people who can save, don’t. South Africa has, historically, had a poor savings culture.

I was reminded of this a few days ago when I met with one of my younger clients. He makes a monthly contribution of around R2 000 per month into a retirement annuity fund, and has been making the same contribution for three years. Now that he is earning more, I suggested that he increase his contribution by R1 000. He was moderately apprehensive about this as it would leave him with less money for travel, social activities and general leisure. The ironic thing about this engagement was that he was smoking a cigarette while telling me this.

Therefore, I decided to do a little exercise with him: suppose (like him) you smoke a box of cigarettes per day. That will cost you roughly R1 500 per month. For someone who starts smoking at age 18, passes away at 80, and never stops smoking during their life – that is a lot of money spent on cigarettes. Now, instead of buying cigarettes, you invest R1 500 per month for 62 years (assuming you start investing at 18 and pass away at 80 – the comparable smoking period). Based on a 9% annual return, the investment would grow to R51 721 924.

The above is just an example I used with this client. I have nothing against smokers. What I’m trying to illustrate is that these savings goals, which seem unattainable to young people, can be achieved. It is also not an all-or-nothing game. Instead of eating out twice a week, eat out once a week. Instead of going on an overseas trip, travel locally. Instead of going out drinking at a bar, have a braai at your house with your mates. By all means, enjoy life, but ensure you have a long-term savings plan in mind so that you can also enjoy a relatively stress-free retirement.

It’s the start of a new year and the perfect time to ensure that your long-term savings goals are on track. A financial advisor can help you in this process by drawing up a budget and separating the necessities from the luxuries in terms of your expenditure. Treat savings and investments as a priority. You will thank yourself down the road.

Only 10% of South Africans can afford to retire. By adopting an affordable and flexible investment approach, you can go a long way to ensuring you are one of these individuals.

I encourage you to approach a professional for advice and adopt a savings plan as soon as possible. While the amounts that can be saved will vary from person to person, the outcomes can change lives.

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Jonathan Braans

NFB Private Wealth Management


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