Calling yourself a millionaire has such a nice ring to it, or so most of us have imagined to be the case. But what if this wasn’t such a far removed notion? What if saving R1 million was something so doable that you’d kick yourself for not having thought of it sooner? Danielle Van Wyk chats to experts about how to save R1 million and the time it can take to reach this amount, realistically.
“The average South African doesn't earn a million over 10 years, and that's before paying all the bills. Even the average person in the top decile (top 10%) has to work for four years to make a million after tax again, before deducting the cost of living. If you're in the ninth decile (i.e., better off than 80% of South Africans but not in the top 10%) it will typically take you over 10 years to earn a million rand after deductions,” states Share Magic, a provider of stock data services and software products.
Still, some investors believe saving a million Rand is a doable venture.
Many economists and seasoned investors alike believe in investing and thus compounding growth to be the way to go.
“Compounding simply means making money on your original investment as well as on the gains made in following years (i.e. growth on growth over time). In short, as your money makes money, so it should make more, a relatively simple concept that, over time, is hugely beneficial.
If you leave your investment for a long period of time, the investment not only grows each year, but grows exponentially. This interest is called compound interest, and is the key to long-term growth and wealth,” explains Old Mutual.
Compared to conventional saving, if all you achieve is the average market return, investing in shares is likely to halve the time it takes you to achieve your financial objectives, stated Sharemagic.
Unit trusts are one such way to capitalise on compound growth. A unit trust is formed to manage a portfolio of stock exchange securities, in which small investors can buy units.
Financial product providers are also enabling investors to invest in unit trusts, exchange traded products and other investment funds through tax free savings accounts.
Tax-free savings accounts are in essence accounts where you pay no tax on any interest income or dividends earned by the investment. This is regardless of the length of investment. You are in addition not expected to pay any capital gains tax (CGT) when you withdraw your investment.
Unit trusts also provide you with the flexibility to change your monthly investment as your circumstances change, without you incurring penalties, highlighted Old Mutual.
Ultimately, you could save in conventional banking products but you may not make much in the way of returns with some of the more basic products. “Savings offer you a reasonable income yield, usually a few percentage points below the prime interest rate. Interest is fairly assured if one is invested in a major bank. However, after tax, the yield will not be much above the inflation rate. Unlike shares or property, there is no risk that your capital will be eroded by negative returns,” adds PSG Wealth (PSG).
How long will it take to save a million?
Attaching a timeline to saving a million is difficult because financial situations differ from person to person.
“There are too many variables involved to predict a reasonable time, ranging from the inflation rate, the rapidly changing tax regime and the investor’s appetite to risk which influences their investment choice in terms of a preferred asset class over others.
However, there are people that have managed to achieve this goal. In 2015 ‘Julia’, shared her story on radio station 702, on how she managed to make herself a multi-millionaire by saving a third of her R1.1 million salary every year. She did garner much criticism too for her efforts as many pointed out that it would be easy to achieve this too if they earned this amount of money. However, it has been pointed out that regardless of what you earn, you can still follow her formula, to save more money than you’d ever dream of earning.
In 2010 the Mail & Guardian relayed how a reader managed to save R1 million by the time he was 30. This person had a normal job but his tactic was simple, just to pay himself a ‘salary’ for his monthly expenses and save the rest.
In the same year, Warren Ingram a director at Galileo Capital relayed how you can make your first million Rand on Moneyweb through saving R5000 a month for a period of nine years. This is not an easy strategy to follow as not everyone has R5000 to put aside. But once the first million is made, it becomes easier to make your next million, “If you keep investing R5 000 and add it to the first R1m, you should have another R1m within four years. By sticking to the plan, you should have your R3m in total within 16 years,” Ingram tells Moneyweb.
Ingram relayed a similar recipe to Destiny Man, in February this year, telling the publication: “If you’re prepared to be disciplined and avoid spending your money on things like expensive cars, clothes and entertainment, you can make your first million quite quickly. The fastest I’ve ever seen was a young lady who saved her first million in five years and her second million three years later. After 10 years, she has more than R3,5 million and is creating a million every 14 months.”
Share Magic relays that it’s possible to achieve the million with less money. But then you’d need more time: “If you put away R4 000 a month and achieve 10% annual compound growth, it takes over 11 years of disciplined saving to end up with a million. And where are the savings accounts offering 10%? A rate of half that would be more realistic, especially after tax. At a net 5% per annum it takes over 14 years. And how many people can afford to save R4 000 a month anyway? If you save R2 000 a month it's going to take you 23 years, and R1 000 a month… more than three decades,” it explains on its website.
Of course, the vehicle in which you save your money can influence the timeline to saving your million. The key is finding the right rate of return. “The choice of investment partner is also critical because asset managers might have their respective investment strategy and principles. It is not a bad idea to scrutinise the previous investment performance of your investment partner,” says John Manyike head of financial education at Old Mutual. .
There are many factors that could play a role in how long it could take you to save a million. It is always advisable to, for this reason, consult an accredited financial advisor to assist in formulating a proper financial plan. This plan in turn needs to be reviewed and updated from time to time as personal circumstances and economic conditions changed, Old Mutual says.
“Gone are the days when one can formulate a financial strategy and forget about it as markets change almost daily. Successful money management and saving needs continues updating. Financial planning is going to require an almost fanatical obsession with financial, economic and political news,” PSG adds.
Tips to save
PSG further provides additional tips for wealth creation:
-Set goals: “Specific and measurable goals are much easier to break down into smaller, achievable components so that you can monitor your success. Goals should be challenging, but not unbelievable, just out of reach but not out of sight. For example, if you are currently 40 years of age and you want to save R1-million by the time you reach age 65, you can work out exactly how much money you need to save each month in order to reach that goal on time,” stated PSG.
-Decide to be financially successful: This is different than wishing, hoping, wanting or even desiring to be rich. Making a commitment that this is going to happen, is necessary. Financial freedom is not an accident or matter of luck, and it usually requires some inconvenience.
-Start early: “The important thing is getting started right now. Whether you start off with R50 a month or R100 a month or R500 per month, for every month you delay, you are losing thousands of Rands,” added PSG.
Old Mutual agrees,“The earlier [you save] the better, especially given the fact that life expectancy in South Africa has improved. Women generally live longer than men and generally earn less than their male counter-parts. It is better to start as early as a possible to avoid the risk of outliving your retirement provision.”
-Understand how money works: It starts with you mastering your relationship with money. “Some of us spend for excitement, to show off, to prove we can. Some of us are addicted to spending, and some of us are just careless about it. Whatever your relationship with money, understand it and develop a relationship of respect, appreciation and gratitude. Use your money, rather than allowing it to run your life,” said PSG.
Handy tip: If you want to start saving today, why not apply for a unit trust, through Justmoney.