Jobs and careers generate an income but investing this income is what ultimately determines our future financial success. Hence the need to learn some basic investment skills and become investors.
We are often urged to become “savers” through various media initiatives, there is even a month dedicated to “savings”, but I hardly ever see messages in the media encouraging us to become investors.
“I grow my money in a bank account” is not investing it is saving, in my opinion. Saving generally does not create significant long-term wealth or financial security over time. Saving at best keeps up with inflation and the cost of living and hardly ever gets your finances ahead of the game.
Investing on the other hand tends to beat inflation over time and creates real financial wealth and security, something we all need to work towards to secure a stable retirement. Investing typically requires a greater element of risk, time and diversification but along with these comes a potential greater return and outcome in time.
As an example: A saver vs an investor
A saver would invest in a cash-type structure (like money market investments, fixed deposits etc) whereas an investor would chose a more diversified (spread) option that would typically include cash, bonds, equities and property.
As an example, if a saver and an investor (as per my definition) were to each put aside R 500 pm escalating annually by 6 % over a 30 year time period, and the saver made use of a cash unit trust while the investor put their money into an aggressive diversified unit trust the estimated results would be as follows after 30 years:
The investor made nearly twice as much as the saver over the 30 year term and hence became much wealthier!
In the past people hardly knew who to approach and how to go about setting up a simple investment. These day’s advances in technology and innovation have made it so much easier to become an investor than in years gone by. Online digital investment platforms are convenient, easy to access and simple to understand making investing effortless.
More good news is that becoming an investor is actually a lot simpler than one might think. You don’t need to study for years or learn complicated financial analysis techniques or complex actuarial terms.
Becoming an investor in essence starts with the following four easy steps:
Get into a Habit
Decide how much of your income you can or want to invest each month 5, 10 or 20 percent (it’s really up to you or you can get some assistance from a financial advisor) - the more the better. Then make it a habit!
A great way to kick start this habit is to set up a regular monthly debit order. In this way you remain disciplined and your investments stay on track. Debit orders removes temptation to spend money elsewhere - out of sight out of mind is a good approach to investing, so let your debit order keep you invested.
Put in the Time
In a previous article I highlighted some advantages of starting to invest early in life and how this improves your chances of creating future wealth. If you started investing in your 20’s as opposed to your 40’s you would need to contribute roughly eight times more to get to the same result.
To become an investor you need some time in your corner, typically 8 years or longer is a good start.
Diversify your money
An investor diversifies! In other words they take on more risk and spread their money widely in hope of better returns. Investors don’t just back one horse so to speak. Typically an investor has a smaller portion of their money in cash or savings with the majority in more risky assets like equities (shares in companies), that tend to generate greater returns over the longer term.
Unit trusts are great investment products that can help an investor diversify their money to build long term wealth.
Make annual inflationary adjustments
Once a year investors increase their monthly contributions to their investments by at least the rate of inflation. The even smarter investor increases their investment contributions by inflation plus any annual income increases they might receive, particularly in cases of salary earners.
No matter what job you do or how you earn your income becoming an investor is a “profession” that can serve you well by setting up a financially free future.
OUTvest is an authorised FSP and is powered by OUTsurance. Views expressed in this article are that of the financial adviser and not a full representation of OUTvest’s stance. All investments are exposed to risk, not guaranteed and dependent on the performance of the underlying assets. Past performance is not indicative of future performance. Ts and Cs apply.