When it comes to saving and investing, people are obsessed with the returns they’re going to get on their money! Two factors that determine how much money we end up with are - the amount we put into our savings and investments in the first place and the amount of time we have it there.
For instance, let’s suppose that you need to cobble together R10 crore over 40 years and you reckon on getting an investment return of 12% per year. If you pop the numbers into excel, you’ll see that you have to save a paltry looking Rs 7,960 per month.
If you start 10 years later, at the same 12% per year investment return, you’ll now have to save a difficult R28,000 per month. What if we did fancy to get higher investment return, which would surely get us to our R10 crore over 20 years? Well at R88,000 this is not easy. What about getting to R10 crore in 20 years with a smaller amount and a higher rate or return?
Well, of course anything is possible, but to make up for the missed time, you’d have to almost double your investment returns. In fact, you’d need to get a return of 21% per year to turn R28,000 into R10 crore in 20 years!
Have a play on excel calculators with your own numbers.
With so little to play with, it’s no accident that Equities are considered better long-term investments than other asset classes.
So, plug everything in......and repeat the process regularly.
Let’s go back to the original example where we were expecting a return of 12% per annum and aiming to cobble together R10 crore over 40 years.
To do that we set about saving R7,960 p.m. Now let’s fast-forward to five years from the start and look at two possible scenarios - one good and one not so good.
Scenario 1 - Things go fine!
In the first scenario, we’ve got a great return of 22% per year. That gives us a pot of investments worth R900,000.
Plugging the numbers in, we find we need to save R7,000 per month to get us there! That’s a fall of R960 per month!
Scenario 2 - Things go, not so well
Here, we’ve got a return of 10% per year. Plugging in the numbers for this scenario, we find that we need to put in R9,600, again just a little more than what we have been investing so far.
Either way, it’s better than doing nothing
So, by repeating the sums on a regular basis, you can adjust your rate of investing to account for changing circumstances. Ideally, you should probably refresh the rate at which you’re adding to your savings and investments on about a once yearly basis.
Where things had worked well for the first five years, you’d be left looking to invest R7000 per month. Where things had gone badly, you’d be left investing R9,600. If you hadn’t started saving at all, though, you’d be left requiring to save an unlikely looking R15,300 per month. So, get investing now!