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Steadily saving - July Savings Month

28 June 2012 Nico Coetzee, Executive: Business Development at PPS Investments
Nico Coetzee, Executive: Business Development at PPS Investments

Nico Coetzee, Executive: Business Development at PPS Investments

There may be times when you have a large, once-off savings amount available to invest – when selling a property, for example, or when receiving an inheritance. But when you don’t have access to such substantial sums, a regular, disciplined savings plan is

As we enter the month of July, designated by the South African Savings Institute as national Savings Month, why not use the opportunity to see if you can bump up your savings rate and invest more towards a secure financial future? By saving manageable monthly amounts, it’s possible for investors at all income levels to build a substantial investment over time.

Recurring premiums allow you to set up an automatic debit order that adds to your investment on an ongoing basis. This means that you’re bumping saving to the top of your priority list: You remove the temptation to spend this money on anything else or to tweak your monthly savings goal should your budget start tightening before payday. You can keep yourself in the habit of saving an appropriate monthly amount by increasing your debit order when your monthly income grows. By further opting for an automatic annual premium increase, you can ensure that your contributions are keeping pace with inflation.

Recurring premiums therefore provide for discipline. However, new generation, unit trust based products also provide for changes in your personal circumstances. Depending on your product particulars, you can lower recurring premiums to product-specific minimum amounts or, in some cases, cease your premiums altogether. Should you be faced with unexpected additional monthly expenditures, for example, you have the flexibility to structure your investment accordingly. You can also choose to increase your monthly premiums should you find you have more available to save.

Regardless of your premium amount, rand cost averaging will mean that the impacts of market fluctuations are smoothed out over the long term. Although your monthly premium remains constant, the number of units this money is able to buy will vary as the market value of the underlying shares or instruments that comprise a unit trust fluctuate with market movements .Rand cost averaging is the technique of buying a fixed rand amount of a particular investment on a regular basis, regardless of the share price. In this way, more shares are purchased when prices are low, and fewer shares are bought when prices are high.

By investing in regular monthly amounts you get an average cost per unit over time. So not only do you avoid the risk of investing all your money at an inopportune time when units are very expensive, but you also don’t have to worry about keeping abreast of market movements to time your investments tactically.

 

Finally, as your investment grows, you’ll stand to benefit from the impact of compounding. Compounding occurs when investment returns are added to your original investment and these additional amounts then start generating returns as well. Over time, you therefore potentially earn returns on an increasingly larger investment, which will magnify the growth of your savings. In fact, Einstein himself referred to the effect of compounding as the “most powerful force in the universe”!

A regular debit order allows you to start out with a relatively small investment amount, so you can start saving as soon as possible and stay invested for longer. Consider making the most of Savings Month by using the opportunity to consult your financial intermediary, examine your monthly savings habits and evaluate whether you are able to allocate a suitable monthly sum to an appropriate savings vehicle.

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