In order to effectively save money, you have to set short, medium and long term savings goals. Short term goals would include saving for a weekend away or a new lounge suite. Your saving or investment period would range from one month to three years. Medium term savings goal typically have an investment period of three to five years and include larger projects such as saving for a deposit on a house or a car. Finally, long term savings would include your retirement savings which could have a timeline from ten to 40 years. We break down the most suitable investment choices for a medium term goal or a three to five year saving term:
These are also known as collective investment schemes where you pool your money with other investors and the underlying investments are shares, cash, property and bonds.
Benefits: You can skip a month or stop investing if your circumstances change. You can also access your money at any time with no penalties. However, investors are usually advised to leave their money invested for at least three to five years to recoup the investment costs and earn a good return. There are no minimum investment periods.
When you invest in unit trusts, you should try to invest according to your risk profile. For example, someone in their 20s, who has more time to recoup their costs and ride out market movements, will be able to invest more aggressively than someone who has only five years left till retirement and needs to invest cautiously to preserve their capital.
Unit trust funds have minimum investment amounts that start from as little as R500 a month.
Introduced by government to encourage saving, this investment vehicle is guaranteed by the government and so is the interest that the bonds pay. You can invest in a fixed-rate retail bond over two, three or five years or an inflation-linked retail bond over three, five or ten years. Although you can make a withdrawal after the first year, there are terms and conditions, which include a penalty.
Benefits: It carries no charges, commissions or fees and your capital and returns are guaranteed by the government so this is a low-risk investment. It is best suited to investors who will not need to access their funds before the investment term has expired. The minimum investment amount is R1 000.
ETFs trade on the stock market like an ordinary share but consist of a basket of investments. Most ETFs are index trackers, such as the Satrix Top 40.
Benefits: This is a passive investment, which means you save money on manager fees. This makes ETFs cheaper than most unit trust investments. You only need to buy one share (an ETF) to gain exposure to some of the country’s top companies.
If you don’t want the hassle of trading in shares via unit trusts or ETFs, then you could opt to invest via your bank. All the major banks offer the share trading option.
Benefits: There is a high convenience factor tied in to investing via your own bank. You should compare fees and weigh the cost against the convenience factor. Ask your bank if they offer educational seminars on share trading, which can help get you started.
When you choose an investment vehicle, you should be comparing admin costs charged by financial service providers (asset managers, financial advisers and banks) as this will eat into the returns you earn on your money. You should also compare the returns you will earn on the various products available. If you are under the age of 65, you do not pay any tax on the first R23 800 you earn in interest. If you are over 65, the first R34 500 you earn in interest is tax-free.
Choose your savings vehicle wisely and reap the rewards!
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