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Investment Strategy
Tuesday, July 7, 2015 - 02:16
Old but true…

Experts tell us we should save 15%-20% of our salaries every month. But few people manage this, and even if they do, they often spend accumulated savings when an emergency presents itself.

“Building wealth is not just about saving and investing in the right products or services, nor is it only about getting good returns,” says Krisen Rabindra National Sales Manager at Standard Bank Financial Consultancy. “The biggest factor determining wealth is the length of time you are invested.”
Below is a story about two people who had the same opportunities, but chose different paths and had different outcomes.
Laura and Bronwyn met on the first day of high school. As they went through school together, very different personalities emerged: Laura was a saver and Bronwyn a spender. At 16 they got part-time jobs. Every time Laura was paid for her work, she put half her money into her bank account that her parents had set up for her and spent the remainder. Bronwyn, however, spent every cent. By the time they started college together, Laura had saved R5 000 and Bronwyn had spent all and then was able to convince her parents to help her financially.
Both continued to work while studying. When Laura graduated, she was driving a car that was paid for in cash. Bronwyn used public transport. They landed good jobs and earned approximately the same amount of money. Their after-tax income was R8 000 per month.
Laura continued with her savings plan, paying 15% of her income (R1 200 per month) into a unit trust-linked retirement annuity. Bronwyn realised she needed a car and borrowed the deposit from her dad. She took out a four-year loan and her repayment was R2 500 per month. In addition, she opened a number of clothing accounts and indulged in purchasing a new wardrobe. As the months passed by, her income was almost consumed by debt repayments.
Four years later, Laura’s investments were worth R73 467. Bronwyn had just finished paying off her car. Realising that she had to become more responsible, Bronwyn decided to start a savings plan. By this time she had an after-tax income of R11 000, so she could afford to save R1 000 per month. Laura decided to keep investing R1 200 in her retirement plan and start an after-tax savings programme of R800 per month in a money market account for the deposit on a home.
By the time they were 30 (five years later), Laura’s retirement investment had grown to R231 471 (a 12% net return per year) and Bronwyn’s R1 000 per month was worth R81 669. When Laura bought a townhouse, she put down a R100 000 deposit (the proceeds from her money market account) and took a loan for R850 000 over ten years. Her repayment was R11 000 per month - quite a large amount of her now R40 000 salary, but she could afford it as she had no other debt. Bronwyn, however, could not afford to buy her own property.

“When we look at Laura and Bronwyn’s financial behaviour, the point of departure was when Laura decided to save towards her retirement and Bronwyn chose to buy a new car and rack up other debts,” says Mr Rabindra. “This decision cost Bronwyn R149 800 in retirement savings and put her in a position of not being able to afford her own property.”
The head start Laura had in her retirement portfolio will translate to an approximate R2.8 million at age 55. The calculations did not take into account that you should increase your savings by at least the rate of inflation each year, so your retirement funds have the same buying power when you retire.
“Financial security is within everyone’s grasp,” assures Mr Rabindra. “As the example illustrates, it takes forward planning and commitment, but it is achievable if started early.”

Copyright © Insurance Times and Investments® Vol:28.7 1st July, 2015
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