How to start investing in South Africa
South Africans often find investing difficult and understanding the difference between short-term and long-term goals is essential.
According to Nedbank, it is difficult to define the difference between saving and investing, as there is no clear dividing line.
Often saving refers to always having money on hand and not worrying about the interest earned, as long as it matches inflation.
Investing, on the other hand, seeks to grow higher than the rate of inflation, so the investment increases in real value. Nedbank said that an investment account is a good way to become a more disciplined saver and achieve better returns.
Investment involves putting a large amount of money away for a specified time. Investments in money market accounts, stocks, property or special savings offer better interest rates than savings accounts that can be accessed immediately.
As these investments keep money growing for longer, they benefit from the power of compound interest, where the interest the money earns each month is added to the invested capital. The longer the compound interest cycle, the faster the money grows.
There are many different ways to invest, and many of them do not require knowledge of the stock market and yields.
Nedbank provided a breakdown of the various types of investments that South Africans can make:
Short-term investment accounts
- 32-Day Notice: An account where you can withdraw your money after giving the bank 32 days’ notice. This means you can’t spend your savings on an impulse: if you’re going to withdraw from this account, it has to be for a purchase important enough to plan more than a month ahead. This helps you keep your investment untouched for longer, increasing the interest you earn. You can choose to have your interest paid out monthly, but the other option – adding it to the amount already invested – brings compound interest into play and grows your investment faster.
- Market-linked: An account that invests your money in the stock market and helps you to mitigate risk as the market changes.
- 24-hour notice: An account where you can withdraw the funds after a 24-hour notice period. As with a 32-day notice account, this added admin step gives you pause, while you consider whether you really need to withdraw money and slow down your investment’s growth. The shorter notice period, however, means you won’t get returns as high as you do on investments that lock your money up for longer.
These short-term investments are hedges against inflation, and won’t lead to serious growth. Serious investments need medium- to long-term investment accounts.
Medium-term investment accounts
- Fixed-deposit account: An account in which you invest a once-off deposit for a fixed period of time.
- Unit trust: This is a collective investment account where small investors can pool their money to be invested, with each investor owning a certain number of units in the trust. The trust aims to grow the value of these units through investments in products that can be intimidating to tackle as a solo investor: shares, bonds and property, for example.
Long-term investment accounts
- Retirement annuity: An investment account to save for retirement that cannot be withdrawn before its maturity date.
- Property investment: A long-term investment in a property or house.
- Held to maturity investment: An investment account in which you decide upfront when you want the money to be paid out at a later date.
“The important lesson about investment is to start now – true wealth creation needs investment over the long term. The sooner you start putting away some money, the better your future financial well-being,” Nedbank said.
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