Do you need R100,000 in 10 years’ time?

Weath ManagementI guess the question is who doesn’t need R100,000 in ten years’ time? If I think about the cost of tertiary education, R100,000 might not even be enough. According to Allan Gray, you only need to save R500 per month, assuming a 10% growth after costs, to have R100,000 in ten years’ time. If you delay it by two years you need to save R700 per month and, waiting five years, you need to save R1,300 per month. By delaying the start date, you end up needing to save more to achieve the same end goal. By procrastinating, it costs you more in the long run.
If you have been working through my Wealth Management series with me this year you would have written down your goals and budget. You may be tracking your spending habits against your budget using any of the online budget apps I have recommended. You would have hopefully allocated an amount you wish to save every month. By saving you are providing for tomorrow’s needs; you are achieving your financial goals. You are also benefitting from compound interest by saving for them now. The sooner you start, the less you need to save. If however you do not save, you would have to borrow the money to pay for the tertiary education, in which case compound interest would work against you. Instead of paying back the R100,000 you borrowed, you would pay back R100,000 plus the interest, which is between 10 and 22% compounded, and can range between R150,000 and R200,000. That is how compound interest can work either for you or against you.
The other point I can definitely concur with in the article (click here to read the full article) is that of increasing your annual savings. Annually we receive a salary increase and annually costs increase with inflation; why not commit to an annual increase in our savings? That means, each year, increase our savings with inflation. Or even better still, keep our controllable costs (such as food, entertainment, clothing etc.) the same and save or donate the difference. So instead of spending more each year, we can aim to keep our costs the same and, after inflation, end up spending less each year. Food for thought…
So ‘where does one save?’ is the next logical question—locally or offshore? The Rand has recently rallied against foreign currencies and many investors are asking if they should still invest abroad. I believe it is good to diversify and, if all your assets (such as your property, savings, retirement annuities, pension and provident funds) are invested in South Africa, then offshore diversification would be recommended.
At the end of May 2014 the Rand was R10,39 to the Dollar, it is currently at R13 to the Dollar and, in January this year, it was R16,39 to the Dollar. If one invested R100,000 in May 2014 and, assuming your investment did not grow in the past two years, you would still have a 30% growth rate to date, just on the Rand Dollar exchange rate. The Rand will continue to weaken against the Dollar as the fundamentals of the South African economy remain the same. These include: a higher interest and inflation rate than developed countries, a high current account deficit, 0-1% growth figures predicted for 2016, and high unemployment and crime rates. Diversification when investing is key.
Whether you choose to invest locally or offshore, and whether you have R500, R5,000 or R50,000 to invest, fortunately the South African unit trust industry has a myriad of options from which to choose in order to achieve your financial goals. I guess the question is rather, when are you going to start? Are you going to let procrastination get the better of you or are you going to provide for tomorrow and let compound interest work in your favour?