The good news is if you understand the basics of how to invest, you will feel more confident taking your first steps to build the future you want. It’s the first step in your wealth creation journey.

Saving versus investing – the difference

Saving is putting money away to use in the future. Investing is converting that money into a productive asset that can grow its capital value over time.

There are several types of savings accounts available in South Africa, including a notice deposit account (usually ranging from 32 to 90 days’ notice.) These accounts often offer higher interest rates compared to regular savings accounts.

With a fixed deposit account, you deposit a predetermined sum of money for a fixed period, usually ranging from three months to five years. These accounts tend to offer higher interest rates, but your money is locked in for the agreed-upon period.

Investing involves putting your money into assets with the expectation of generating a return over time. While it carries more risk than saving, investing offers the potential for higher returns.

Here are some key concepts to understand:

Risk and return: Investments carry varying degrees of risk. Generally, assets with higher potential returns tend to have higher risk levels. Balancing risk and return is essential in building an investment portfolio that aligns with your financial goals.


Diversification: This refers to spreading your investments across different asset classes, such as stocks, bonds and real estate. This reduces risk by avoiding overexposure to any single investment.


Investment period: Your investment period refers to the length of time you intend to invest before needing the funds. Generally, longer investment periods allow for a higher tolerance of short-term fluctuations in value.


Investment vehicles: Investments can be made through various vehicles, including stocks, bonds, mutual funds, exchange-traded funds (ETFs) and real estate. Each investment vehicle has its characteristics and risk profiles.
 

Unit trusts

Unit trusts are a great way to start investing. Collective investment schemes like unit trusts have a dedicated fund manager controlling the investment, and this can provide you a softer landing into the world of investments. Endowment policies can also be a great beginning investment option, especially if your tax bracket is over 30%.

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Is paying off debt better than investing?

Paying off debt or investing depends on your financial position, and whether interest you earn on your investments exceeds the costs of your debt. But when repo rates are low, it might be prudent to cash in and service more of your debt so that you can use that money for investing and saving and growing your wealth.

Ideally, you should structure your finances so you can pay debt, invest and save. This is where the 70/30 rule comes in.
The 70/30 rule is a guideline for how to manage your income, where 70% of it is used to cover expenses, including paying off debt, and the remaining 30% of your income is saved and invested (20% saved, 10% invested).
 

Be tax efficient

Ensuring your investments are as tax-efficient as possible will also help grow your wealth in the long-term, so consider whether investment income in the form of interest or dividends is more efficient for your tax bracket. Your financial adviser can guide you on the best structure for you.

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