According to Anil Jugmohan, Investment Analyst at Nedgroup Investments, most people don't realise how much they need to save in order to meet their future objectives - and this usually ends up in them not having saved enough. "It is important to understand your financial objectives, the time horizon that you have and, importantly, the investment products that you should use in order to achieve them."
Jugmohan advises that different products are meant for different objectives. "For example, a low equity fund (less than 50% equities) is probably the best product solution if your goal is to save money for a trip to the 2014 FIFA World Cup." According to Jugmohan, this fund should be well diversified with a high level of offshore exposure to provide protection against the weakening of the rand.
"If, however you are saving for retirement which has a much longer time horizon, you can probably invest in a high equity fund that is sufficiently diversified with a suitable level of offshore investments," he says.
A bank account should be used to efficiently manage everyday transactions i.e. weekly grocery shopping, or monthly debit orders. "Bank accounts do not pay high interest rates as banks instead help to subsidise your fees. As a result, you will almost certainly achieve better returns elsewhere if you are investing for longer term goals."
In all cases, you need to choose products that have suitably low costs, minimise your tax liability, have sufficiently high expected returns, and minimal risk of capital losses over the appropriate time frame. "Nothing is certain when it comes to investing and the best you can do is to define your time horizon and ensure that this matches with the amount of risk you are taking," says Jugmohan.
He advises that an investment strategy for any time horizon should start with drawing up a comprehensive monthly budget outlining all current income and expenses. "It is important to be completely honest with your spending habits when listing your expenses."
"Following this, group related items together, such as car, home and medical insurances and from there you will be able to assess where your largest expense areas lie, both on a broad level and individually. The ideal scenario is that your net, after-tax income exceeds your expenditure each month. Of course, the greater the degree to which your income exceeds expenses, the better. If this isn't the case, all is not lost. Just start working on a viable plan to maximise your income and minimise your expenses."
The next step is to carefully prioritise current expenses as well as things you would like to save for - such as a holiday in Brazil in four years time. Being able to prioritise these objectives, and strike a balance between current expenditure and saving for the future is the key to success. Based on this, choose investment products that have the appropriate profiles for your goals.
"Unfortunately, investing is a slow process so you will have to be very patient in order to reap the large long term rewards. Historically, investments that have provided the best returns have delivered spectacular shorter term capital losses. To alleviate these sorts of risks it is recommended that you speak to a qualified financial advisor who can tailor a personalised strategy to meet your needs," says Jugmohan.