South Africans should evaluate their finances and plan for the year ahead.
When planning their finances for 2017, people need to pay close attention to how their money is being used and, more importantly, whether or not they are getting the best return for what they are paying. Apart from the more obvious areas, such as household and travel expenses, those planning for the year ahead need to also sit down and evaluate any investments that they may have – particularly their long-term savings.
More often than not, South African investors are generally none-the-wiser as to how much they are paying in fees for their investment, what type of portfolio they have, or even if they are getting the maximum return they can for the amount of money that they are putting away for their future.
But, all is not lost. It is possible to make the most of their current retirement savings by re-evaluating their investments.
Below are tips and insights into what South Africans can do to keep their financial New Year’s resolutions:
1. Save your increase! Save your above-inflation increase. If your annual increase is above inflation, direct some, or all of the difference to your retirement fund. You lose nothing of your current lifestyle, but your retirement income will improve significantly (and even more so if you keep it up year after year). You should prudently consider not just your immediate requirements, but also your long-time financial needs, just as you would do with your monthly income. In other words, you should find a fair balance between spending and saving
2. Check your statement! Check out your annual retirement fund benefit statement, to see how much you’ve saved. Link that amount to a reliable retirement fund calculator, to work out how much of your final pension this will fund. If you have been saving for a few years already, you will be amazed at the number!
3. Don’t panic! Don’t check your fund balance every month, or your emotions may tempt you to do something foolish. The markets are choppy right now, so your fund credit will go up and down. If you are prone to financial motion sickness, look away.
4. Check your fees. If you are paying more than 1% pa for your retirement, you are paying too much. It will make a big difference in 20 or 30 years’ time. Over and above any advisory fee, you will also incur administration and investment management charges, platform fees and switching costs.
5. Educate yourself. Learn about index investing, and why it is the way forward. Bottom line: this investment style will most likely give you a better long-term return than your fund manager. Also learn about the relationship between your asset mix and your time horizon – high quality is suited to investment periods for longer than five years.
6. Don’t chase the past. There’s a reason why every fund manager warns that past performance does not guarantee future performance: because it doesn’t. Based on many studies, there is no link between past and future fund rankings, even those based on five and ten-year returns (except for the funds at the very bottom – they tend to stay at the bottom, before they disappear altogether).
7. Don’t get lost in the moment. Stay above short-term economic or political developments. In the context of a 40 or 60-year savings life, it’s all short-term stuff.
8. Ditch the fortune tellers. The predictions of so-called experts may be more scientific than yours, but that does not make them any more reliable or lucrative. If their views had any economic value, they would not share them so freely.
9. Be smart with your bonus. Use some of your bonus to pay down your bond or credit card debt and lower your monthly instalments. Spending your entire bonus may give you a temporary lift, but investing the ‘excess’ to earn future income (or save future expenses) will boost it permanently. You can do this, for example, by paying down on your home loan or credit card debt, thereby reducing your instalments. This will free up your monthly cash flow, and increase your spending power.
10. Beware brokers! You shouldn’t ever use a broker to buy a savings product. By using a broker for your investments, investors lose out on higher investment returns due to their added fees (and, in many cases, investment bias).
The best way to start off your New Year is by ensuring that your finances are in order. By taking note of these tips will make a world of difference in the long run.
Steven Nathan is the CEO of 10X Investments.