You are doing well. You are earning enough money to cover your monthly expenses, and have some extra cash remaining at the end of each month. You could keep that money in the bank for a rainy day, or you could invest it, with the hopes of growing your savings significantly. This guide aims to help you understand why investing is important, how investments differ and what options are available to you in South Africa.
Your money does not keep it's value over time. Unfortunately. You may have heard your elders say once or twice "Back in my day, food cost x." where x is typically a lot less than food costs today. The reason for this is called inflation: the value of goods and services that your currency (our Rand) can buy us today, gets weaker over time. Due to inflation, you will be able to buy less loaves of bread (for example) next year, than you can buy today, for the exact same cost in Rands. Luckily people's salaries also go up in line with inflation, but its not always one to one.
For this reason, if you saved R100,000 in your bank account, and expected to spend it in 20 years time, you will unfortunately find that your R100,000 buys you a lot less than what it could buy you today. So for this reason we look to invest our money, so that it grows over time, and hopefully it grows FASTER than inflation grows, making your R100k saving into R300k or more!
There are many different types of investment available, but all of them can be compared by the below three factors they have in common:
This is basically how much you can expect your investment to grow by over time. For example, if you invested your money into a fixed deposit in the bank at 8% per annum, a R100k saving would earn R8k over the course of a year. Some investments have a high rate of return (usually the risky ones), and some have a low rate of return (usually the safe ones).
Some investments can also decrease in value. This is important to note. Depending on what kind of things you invest in, the money you put in can decrease and even disappear completely, returning much later, or perhaps never. But that is the worst case scenario, and there are plenty of options for investing that are completely safe and will bring you a nice, steady return to get excited about.
The date upon which you earn a return on your investment differs for each type of investment. For example some fixed deposits earn interest that is aggregated daily, and some monthly. Interest that accumulates and grows over time is called compound interest because the interest usually adds to your initial invested amount, meaning your return doesn't stay the same - it grows!
Some investment types only realise a return, gain or profit upon selling. Examples of these are property, gold, crypto assets or stocks. They don't produce interest at regular intervals, they only produce a Rand value when they are sold or traded. The trick to maximising your return with these asset types is to know WHEN to sell, and this is usually informed by reading the news and knowing what's happening in the market.
Not all investments are "liquid" - being able to be sold or cancelled instantly. Most require some kind of notice period, where the length of the notice period often directly relates to the rate of return. For example a 32 day notice fixed deposit can earn interest at 4%, but a 1 year notice fixed deposit earns at 6%. These institutions are saying "give your money to me, let me do things with it, and I will return your original money, and more, after this period of time." Other asset types involve some kind of market response - i.e. people are required to like your price and pay what you are expecting - examples are selling property, stocks, crypto or gold. Trying to sell a property for example can take months as property prices often fluctuate over a long time scale of years.
Each investment type has a different level of risk attached. That risk means "how likely you are to get your money back". The more risk, the higher chance of positive gains, but also the higher chance of significant losses. For risky asset types you want to know the market intimately and monitor daily (or in the case of crypto, hourly) any small changes that can affect your investments.
There are many options to invest your money. Whichever investment type you choose, be careful to investigate all aspects of your decision. Don't be emotional and make rapid decisions that could have a negative effect. That being said, it helps to choose a type of investment which actually interests you because you will need to stay on top of any changes in the market for some of them, and it's easier to read about what you love vs something dry and boring.
FIXED DEPOSIT:
This is a bank account offered by banks, usually with an interest rate connected to "prime" (the interest rate all banks and the SA Reserve Bank use). The interest is either paid into a separate bank account, or can be compounded, earning more returns faster. Fixed deposits are very low risk, and have the added benefit of bringing you more returns when interest rates go up.
Check out fixed deposits at: FNB, ABSA, Nedbank, Standard Bank, Capitec, TYME Bank
UNIT TRUSTS:
Unit trusts are financial products purchased from a bank or investment firm which contain a mixture of various types of asset e.g. shares, property, cash, bonds. The composition of assets and their ratio is selected and managed by professional portfolio managers whose whole job it is to get you the best growth rate for your investment. You benefit from somebody else worrying about your investments, and your overall risk is lower too because there are different types of asset in the mix - when property is doing badly, perhaps stocks and shares are on the rise. You can buy unit trusts via your financial advisor or via some online banking portals. Make sure you know what you are buying into and always read the fact sheet provided, looking at historical past performance.
Check out unit trusts at: FNB, ABSA, Nedbank, Stanlib, Investec, Sanlam, 10x
STOCKS:
Thanks to easy-to-use mobile phone apps and online banking offered by some of the banks, you can now buy stock in companies you know and love. These can be companies in South Africa, or big overseas companies like Coca-Cola, Netflix, Tesla and Google. When you buy stock in these companies, you are buying a share of their company value, and thus your investment grows and shrinks over time as the company does well or does badly. Look out for news relating to the company itself or the company sector, applicable regulation changes or laws, or competitors appearing on the market - all of these can affect your share value. Typically you can sell stocks quite easily at market prices if you used an app to buy them, so can exit your investment quickly if need be.
Check out easy stocks from Easy Equities.
TAX FREE SAVINGS ACCOUNTS:
A tax-free savings account (TFSA) is a special type of savings account provided by financial institutions that invests your money in various financial products like unit trusts, bank savings accounts, fixed deposits, bonds and more.
What sets a TFSA apart from other accounts is that all the returns you earn, such as interest, dividends, or capital gains, are completely tax-free. This means you won't have to pay taxes on the growth of your investment or on any withdrawals you make from the account. It's a great way to save and invest while enjoying the benefits of tax-free earnings. These accounts are subject to annual contribution limits, as well as lifetime contribution limits and it's important to note that SARS imposes hefty penalties if these limits are exceeded. Read here for further details.
Check out tax free savings accounts at: FNB, Old Mutual, Sanlam, 10x
PROPERTY:
Buying physical property - a house, apartment, business premises, empty land, even a parking lot - are all options with potentially high return. The downside is that buying these assets take a lot of paperwork typically and thus they are not quick to buy or quick to sell. Property prices also fluctuate significantly based on prevailing interest rates, the season, value of the Rand, market demand, crime levels etc. An upside is that you can actually live inside your investment, and ideally when you move on many years later, your property has retained its true value or gone up significantly. You can also buy property to rent, so you get the benefit of capital appreciation plus monthly income.
Check out easy property buying from Easy Properties, Property24, LeadHome.
GOLD:
When international markets are in chaos, a safe haven for investors is usually gold. This precious metal (along with silver and platinum) is a very tangible store of wealth - not affected too much by market sentiments, supply or demand. Gold can be purchased and stored in your own home (ideally in a very secure safety deposit box), or it can be stored at the place where you purchased it, in their safety deposit box, under their insurance. It is important to consider your security seriously if you intend to store gold at home - I wouldn't advise it! Gold can be purchased in the shape of bars or ingots, or it can be purchased at tradeable coins, uniquely minted for special occasions. These limited edition collectable coins can appreciate in value far more than plain gold.
Check out local gold sales at Scoin, SA Bullion, African Bullion
CRYPTOCURRENCY:
If you have heard about Bitcoin, Ethereum, Dogecoin or others, you have heard about cryptocurrency, also known as crypto. Some consider cryptocurrency to be the future of money, a utopian system that solves all our problems relating to inflation, centralised banking and man-made financial crises. Others see crypto as a complete scam and won't touch it. The truth is probably a mixture of both. There have been massive scams involving crypto on the web, although too, the topic is being taken very seriously by regulators internationally and it looks like crypto is here to stay. Crypto is thus an extremely risky asset class, and one that can make rocket-ship gains in a matter of hours - growth that no other asset class can match. It is important to start reading about crypto if you are interested, get to know the various coins, their use cases and the companies and laws enabling/restricting them. Crypto is easily purchased via websites, mobile apps, browser extensions and even some physical ATMs.
Check out crypto options at Valr, Luno
IMPACT INVESTING:
Want to make a difference in the world? Niche institutions allow you to do good and earn a healthy return from it. Examples include buying solar panels that earn you income over time, buying berry bushes for small farmers, buying actual livestock on a remote farm, investing in hemp farming, beehives, small businesses you name it! This can be a very exciting and rewarding asset class to invest in, but it is still very new, so make sure you are 100% clear on the terms of repayment, what restrictions are involved and the legalities around your purchase.
Checkout alternative investments at Fedgroup, Livestock Wealth
STARTING OR RUNNING A BUSINESS:
This is the most active type of investment - an investment in a growing business. You can either start a business yourself, buy into an existing business, or buy a franchise. The latter is easier to start and run because the brand has a track record, the financials are easier to predict and they often provide templates for marketing and running the business, with centralised services at low cost. If you are willing to get your hands dirty and put your heart and soul into creating something new, owning a business can be very much more rewarding than the other investment types - because you were directly involved. The return is often more than strictly financial - the friendships made, battles fought and won, emotional development, massive wins and the opportunity to be creative are all part of the journey.
Buy a business from Aldes
The above does not constitute financial advice. Please see a qualified financial advisor to assist with planning and making your decisions.
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