Growing Your Junior

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26 September 2018
Wouldn't it be nice not to work? Or at least, not to have to work? Imagine getting paid every month, but not having to do anything for your income. Of course, you could still work if you wanted to, but you wouldn't have to. Believe it or not, this is actually possible - but you need to know exactly what you want and when you want it by, and you have to have a detailed plan on how to get there.
And the sooner you get going on your plan, the better.

Think about it like this: When you start off in your career, you tend to see your money as belonging to you. Now imagine you have a little "Money-Mini-Me" to feed and grow.

Your Money-Mini-Me represents the value of your investments at any one time (excluding your house). 

The objective of your Money-Mini-Me is eventually to earn your income for you. And as you feed your imaginary friend, he or she keeps growing – until one day you reach a point where your Money-Mini-Me is bigger than you!

This is the day on which your investments start earning more income than you do through your salary. And this is the time when you should be able to attain financial independence… that magical state of not having to work for a living. 

Feeding your Money-Mini-Me is a long-term project and requires strict discipline. The sooner you start, the better.

Obviously, the power of compound interest plays a major role in the growth of your investments. But there is also a lot to be said for developing good investment habits: most importantly, putting away a percentage of your income each month.

For example, if you start your first job on a net salary of R10 000, put R1 000 away and live on the R9 000. The R1 000 won't make a big difference in your life at that stage because you never had it to begin with. And that R1 000 will feed your Money-Mini-Me each month until your salary goes up, say to R10 500. Then you should increase your monthly investment to R1 050, i.e. 10% of your earnings.

This percentage should extend across all your income, not just your salary. So if you get a bonus, or a tax refund, or whatever, put away 10% of it. Or 12%, or 15%, or whatever you need to put away to achieve your financial goals.

With each deposit you make, your capital grows. And as your capital grows, so does your income.

Remember, capital and income are two separate things. Capital is the amount of money you have, and income is the earnings you make off that money. 

Never touch your capital!

The biggest investment rule is not to touch your capital. Ever.

Think about it in terms of farming. Every time a farmer harvests a crop of mielies, he has to hold some of the harvest back.

This reserve is called plantmielies, and you can't eat any of your plantmielies, ever, no matter how hungry you get. You need to keep these mielies so you can plant them for next year's crop.

In investment terms, the plantmielies represent your capital, while next year's crop represents your income. So if you deplete your capital, you'll have no way of earning an income from it, and you could end up working for the rest of your life. 

Now think about this in terms of your investment plan. Think about how much you need in order to be financially independent.

A good rule of thumb is that your capital should equal 100 times your monthly income. So if you earn R10 000, you should have a million rand's worth of capital invested to support your current lifestyle off the Mini-Money-Me income.

You might decide you want a different lifestyle, which would require 150 or even 200 times your monthly salary. Pick the number that works best for you, then decide when you want to reach this goal. 

The OUTvest platform has a clever way of helping you to determine what you need to do in order to achieve your financial goals. (And one of the things might actually be to tweak your goals!) But, as I said before, it's vital that you have a goal and that you're specific about it. 

Your number might seem scary at first, but once you break it down you'll be surprised how achievable it can be. Just remember, the later you start, the harder you'll need to work to achieve your goals.

For sophisticated and affordable investment advice, make use of our financial advisory services and speak to our financial advisors today.

All investment are exposed to risk.  For advice please visit our website or contact our call centre.

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