According to author T Eker of Secrets of the Millionaire Mind, “Poor people see a dollar as a dollar to trade for something they want right now. Rich people see every dollar as a ‘seed’ that can be planted to earn a hundred more dollars … then replanted to earn a thousand more dollars.”
So, does the average South African see themselves as a poor person, as defined by T Eker, or can they aspire to be rich or at least better? African Bank’s Mellony Ramalho, Group Executive: Sales, Branch Network, says building wealth is not as difficult as it sounds. It is, however, easy to confuse saving and investing. While they are definitely related, they are different and understanding that is really the first step. Importantly, they are both crucial to ensure you reach your financial goals in the short, medium and long term.
At its most basic level, saving is the act of putting money away in a safe place with the intention of using the money in the future. It is relatively risk-free and you usually have a chance to earn interest and grow your savings. Savings are accumulated in this way over a given period of time.
“An example of a savings account is a Notice Deposit account. You can deposit a minimum of R500 and then add to it when you have extra cash. It earns interest and is typically used to hold money for future needs, i.e. saving for retirement or saving for children’s education. Methods of saving include putting money aside in for example, a deposit account, a pension account, an investment fund, or as cash.”
Ramalho says the extent to which individuals save is affected by their preferences for future over present consumption; their expectations of future income, and to some extent, by the rate of interest they can receive to grow their savings over time. People save for a variety of different reasons, including retirement, home ownership and travel.
Investing on the other hand is the act of committing a lump sum of money or capital with the expectation of obtaining an additional income or earnings on the investment.
“This is a term commitment for a period of time. The income that results from investing is interest earnings. These earnings can then be reinvested back into the investment to earn compound interest to grow the investment over time, until maturity.” She says it is important to understand that interest earnings can be withdrawn at specific intervals, i.e. monthly, as income earned from the capital, while the capital remains in the investment account until maturity. On maturity, one can choose to re-invest the capital for another term or to withdraw the capital and interest earned. “Obviously if you can leave the interest as long as possible, the higher the ultimate withdrawal.”
An example of an investment account is a 60-month Fixed Deposit account. You deposit a once-off lump sum, which is locked in for the term. You receive fixed interest annually on your investment. However, you only have access to your interest earnings, not the lump sum.
Other more riskier types of investments involve committing money into an investment vehicle in the hopes of making a financial gain. This type of investing is different from saving or traditional investments into a bank because it involves a greater level of risk and there is no guarantee that you will get your money back. Examples include putting your money into stocks, bonds, funds, Exchange Traded Funds, investment trusts and property – with the hope that your money will grow, but with the possibility that your money could shrink or disappear.
This risk is assumed by investors in the hopes that they will not lose money but instead make money on their investments.
Ramalho says ideally one should combine both a savings and investment option which will allow you to both earn money over long periods of time and ensure inflation does not eat into your buying power. It is the ideal combination to save up for your current dreams and also to realise your long-term plans for a happy retirement. “It is never too early to start dreaming and planning #GrowForIt,” she concludes.