Investing may seem difficult, if not impossible, if you have only a little money saved. However, there are significant advantages nonetheless.
We examine why it’s worth investing even small amounts of money, and explain how you can go about it.
Tip: Inform yourself about the difference between saving and investing.
What is the value of investing?
The primary objective of investing is to grow your wealth over the long term, says Johann Rossouw, a certified financial planner at Fiscal Private Client Services.
“Investors aim to generate income by purchasing assets that have the potential to increase in value, such as shares, bonds, or property,” he explains.
Selma Kruger, an investment consultant at Fairtree, adds that investing allows you to achieve specific goals in the future. “This could include buying a new home in a few years, sending your child to university in 15 years, or retiring comfortably at age 65,” she says.
“The value of investing is making your money work for you over time.”
Why you should save, as well as invest
Ideally, you should save and invest at the same time.
It’s essential to have savings to cover unexpected expenses or provide a financial buffer in emergencies. However, cash saved in the bank won’t keep up with inflation - that is, the rate at which prices of goods and services rise over time - and this is where investing in assets can be helpful.
“Assets outperform inflation in the long run, which means you should be able to afford what you want in the future,” says Ryan Winter, a wealth manager at Netto Invest.
Although investing a small amount of money may seem pointless, compound interest, which accrues on the principal amount and earned interest, will ensure your funds accumulate over time. It’s advisable to start investing as soon as possible, so you can maximise this effect.
“There is no such thing as having too little money to invest,” says Rossouw. “Some investment platforms allow you to invest as little as R100.”
Kruger agrees, and adds, “Don’t think of the amount invested as ‘too little’ but rather as an opportunity to take small steps in the right direction.”
She gives an example. “If you receive 10% interest on R1,000, you’ll have R1,100. If you earn 10% interest the following year, it’s calculated on the R1,100, which means you’ll receive R110 in interest and have a total investment value of R1,210.
“If this principle is applied over a long period, the effect is nothing short of miraculous,” she concludes.
Where should you invest?
You can invest directly online, but first consult a financial planner who can advise you based on your needs and risk appetite, says Winter.
“For example, exchange-traded funds are low-cost products but may be high risk in a long-term portfolio, so this may not be the best investment strategy for you,” he says.
Rossouw notes that financial planners charge a once-off consulting fee, or a percentage of your investments up to a capped amount. “It’s important to shop around and find a financial planner with a remuneration model you’re comfortable with,” he notes.