April is holiday time. It is also that time of year when images of rabbits carrying baskets appear everywhere. What’s that got to do with personal finance? Well, it’s a reminder that having all your assets and savings in a single basket and having one of those ‘whoops’ moments if the basket gives way could lead to financial losses.
In these tough times, having all your ‘money eggs’ in a single place should be avoided, says Old Mutual. In fact, with interest rates rising, the time is right to begin spreading your savings and investments around and thinking about ways of getting the best returns on your hard-earned money.
Old Mutual head of financial education John Manyike says “There are many ways of saving your money. They vary from time deposits that allow you to invest and cash in when you need funds to having insurance policies to ensure that money is available when your children need to study. Choosing what is right for you means scanning the market and spreading your cash across different products. What should never be forgotten when saving or investing is that life is unpredictable. You should always have savings available to cope with emergencies or to handle financial shocks as they say.”
Not all investment vehicles are the same. Some investments may be impacted by external forces, and their value can change. The most common of these investments are shares listed on the stock exchange and property.”
These investments have advantages and risks:
- Buying equities (shares):
Buying shares means owning part of a major company. If the company performs well, the value of the shares increases, and the shares can be sold at a profit. In addition, for using your money, the company pays dividends, sometimes twice a year, for each share you own.
But, when times get tough, share values can drop. Over the long-term, however, shares usually offer better returns than typical savings accounts.
Investing in property and using rental income to pay the bond sounds great. However, you still have to carry maintenance costs and pay tax on the income.
“Over the years, buying shares and investing in property has been simplified by the introduction of unit trusts that specialize in property and other types of investments. These schemes pool investors’ money and have experts buying shares on behalf of the unit trust holder.”
“The advantages of unit trusts are that they have no, or low, minimum investment requirements and allow short-term or long-term investments with unlimited withdrawals,” says Manyike.
Other investments that are often considered include:
When you buy a bond, you are lending money to a business or government and helping them raise money for a project. You receive interest, and your original investment is returned when the bond matures by reaching its defined date, which could be up to five years after the investment.
In South Africa, probably the best-known bond is the RSA Government Retail Bond. The most popular is the five-year fixed-rate retail bond, which benefits people who want regular interest payments to be part of their incomes.
This traditional way of saving has assisted millions of South Africans in reaching short-term and long-term financial goals. As many are community-based schemes, they have the advantage of knowing your fellow investors and sharing outlooks regarding money.
Other stokvels offer the benefit of having , regulation through a constitution and people appointed to account for day-to-day investments. Some stokvels have reinvented themselves and partner with formal financial instruments and use formal instruments such as the ones mentioned above to grow their wealth.
“The longer the investment period, the better the returns. Compound interest means that you earn interest on your interest, and the point can be reached when your original investment doubles itself and then grows more.”
“Getting the right combination of dynamic investments that grow with you and your changing lifestyle can be tricky. Having a personal financial adviser you can trust should, therefore, be part of your diversification planning.”
“What is most important is that you get saving and investing as soon as possible. The younger you are when you start, the better the short and long-term benefits,” says Manyike.
Whatever you do, speak to your financial advisor to help you identify the right financial instrument which suits your needs, preferences, risk appetite and personal circumstances.