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Wealth creation: The art of saving

How you can get your money to work for you.

There are some who believe that wealth creation is different from “old style” savings. However, most of us will in fact, create our wealth through saving our money month after month, year after year and “doubling down” over the long term.

Let’s brush up on some rules about saving.

Remember compound returns: the most powerful man-made phenomenon on Earth

You can achieve astounding results through regular savings if time is on your side. The effect of compounding kicks in when your investment returns are being re-invested to generate even more returns.  

Start early

Start saving as soon as you can. The longer you wait, the more of your income you will need to save to achieve meaningful results. And remember, investments don’t grow any faster in the last couple of years of wealth accumulation.

Consistency is key

If there is only one take-away from this article let it be: make consistent regular contributions for as long as you can, and ensure your contributions keep track with inflation.

Look for inflation-beating returns

If you have time on your side, there are only two asset classes with the potential to achieve significant real returns over the long term: shares on the stock exchange and listed property, in both local and offshore markets.

Patience can bring impressive results

A client once shared his story with me: he always bought shares on the JSE with the bonuses he received over the years. Little did he know it would become one of the best-performing markets in the world. These investments turned into a small fortune.

Don’t overthink your investments – cost averaging always wins

When investing remember there is no need to be concerned about the level of markets or exchange rates. Investing on a regular basis will see you buy during both market highs and lows, resulting in an average price being paid for those assets over time.

Add more when opportunity knocks

When stock markets fall and present themselves on a “fire sale”, invest a bit more than usual. Returns are normally better when starting from a low base.

Look for tax advantages

Use all available tax friendly products to gain ground in the game of regular savings. A tax-free savings account is a good start, while retirement funds offer the biggest benefit in terms of tax savings.

Open a tax-free saving plan

You can invest up to R33 000 annually, with a lifetime limit of R500 000, in approved unit trusts, fixed deposits or real estate investment trusts, commonly known as REITs. All returns, including interest, dividends and capital gains on the disposal of these investments, are tax-free. 

Retirement funds

The opportunity to make tax-free contributions of up to 27.5% of your taxable income to retirement funds (limited to R350 000 per annum), especially as it can be part of your regular savings contributions, is an attractive way of saving over the long term.

Pay off your bond (compounding in reverse)

When the real interest rate on your bond leans towards the potential real returns possible on equity markets, paying off your bond at a faster rate than required should generate substantial wealth in the form of your residential property. Once your bond is paid off, commit whatever savings you have to growth assets.

Beware of the pitfalls

Returns don’t come in a straight line. You will go through disappointing periods over the duration of your investment. Don’t give up when returns are not coming your way. The long term is not necessarily a 10-year period, it might require 20 years, or it could all happen in year 11.

The test of time

Be consistent, add as much as you can as early as you can, and see your wealth being created without adding any personal energy. This how you get your money to work for you. It just requires time and patience.

Riaan Campbell is an advisory partner at Citadel.

This article was first published on Citadel and is republished with permission. To access the original, please click here.

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