Money Heroes
Money Heroes is an empowering series that gives you expert advice from our Momentum Dream Team to help you on your road to financial well-being. This season starts by discussing the importance of life insurance and its significance for you.
The importance of saving and investing for your future
Welcome to the fifth episode of Money Heroes, where we’re discussing the importance of savings.
Theo Vorster, CEO of Galileo Capital, kicks things off by explaining how time is a young adult’s biggest asset.
Next, Du Toit Theron, Franchise Principal at Consult by Momentum, unpacks how you can make a tax-free investment work for you.
And finally, Martiens Barnard, Marketing Actuary for Momentum Investments, speaks about how behavioural finance can help you understand your investment type.
Watch Theo Vorster explain how time is a young adult's biggest asset in the video below:
Time is your biggest asset
Have you ever thought about time as an asset? According to Theo Vorster, CEO of Galileo Capital, for people in their 20s, time is their most valuable asset, especially when planning for retirement.
“The earlier you start putting money away, the easier it will be in the long term to reach your goals,” Vorster advises.
The first 10 to 15 years of saving money can have a huge impact on the amount you’ll have when you retire.
“You want compounding growth to be your friend and in your 20s it can be a great friend,” he says.
And don’t underestimate time, warns Vorster.
“Everyone will grow old, and it will happen sooner than you think.”
Use time as an asset while you’re young and let compound growth do the hard work.
Watch Du Toit Theron unpack how you can make tax-free investments work for you in the video below:
Making tax-free investments work for you
While there are many savings options available, Du Toit Theron, Franchise Principal at Consult by Momentum, advises not to overlook the potential of a tax-free savings account (TFSA). In fact, it could be the secret to a tax-free income at retirement.
TFSAs have been available since 2015 and offer the opportunity of not being taxed on any interest earned. You can invest up to R36 000 every year, with a lifetime limit of R500 000.
Keep in mind, though, that if you exceed the annual or lifetime limit, you will be taxed at 40% on the excess amount.
For example, if you saved R40 000 in a year, R36 000 would be tax-free, and the remaining R4 000 would be taxed at 40%, amounting to R1 600.
How it works
While R500 000 might not seem like a substantial amount over your lifetime, Theron believes it could be one of the most pivotal investments you’ll ever make if done correctly. He uses his 20-year-old nephew to illustrate the power of time and compound growth.
When his nephew returned from his first year in the yachting industry, he had a disposable income of R500 000.
“He asked me for advice – I immediately said invest R36 000 in a tax-free investment.”
With youth on his side, he could invest in a diversified offshore portfolio, which historically yielded an excess of 15%. If he left the initial investment of R36 000 until the age of 65, it could potentially grow to more than R19 million in savings.
Even if you don’t have much money to invest and prefer low-risk options, you can still benefit from this strategy to build a tax-free retirement income. Although the availability of funds for an emergency is an advantage, Theron says it’s important to prioritise saving for retirement over building an emergency fund.
Watch Martiens Barnard speaks about how behavioural finance can help you understand your investment type in the video below:
Behavioural finance
Is your behaviour towards money rational? Martiens Barnard, Marketing Actuary for Momentum Investments, says most people tend to make money decisions based on emotion.
The Momentum Behavioural Finance department has studied how people behave in terms of money and investments. Their main finding is that money is driven by emotions, resulting in decisions that are not always rational.
Emotional impact on financial decisions
In one study, Barnard and his team looked at the taxes people paid when switching investments.
“We call this behavioural tax and the amount people have spent over the last few years is staggering,” explains Barnard. “It tells us people are making the wrong decisions.”
In many cases, these decisions are driven by fear and greed.
The data collected revealed various behavioural patterns among investors, which resulted in identifying these investor archetypes:
1Avoiders: They avoid taking risks and typically stick with conservative investments. When they do make a switch, it’s usually from one conservative investment to another.
2Assertive investors: They make decisions when markets are open and in most cases, switch to better-performing investments. However, they don’t always benefit from these switches, as the performance of the new investments might have peaked already.
3Anxious investors: Driven by emotional fear, they tend to switch to more conservative investments when markets fall, often missing out on potential market recoveries.
4 Market timers: They switch when markets are either falling or performing well, often ending up with the worst of both situations.
The Money Fingerprint
Understanding how people handle their money is important when creating personalised financial plans. Another study done in partnership with the University of Pretoria surveyed about 800 clients to learn about their financial situations.
The study helped develop the Money Fingerprint assessment by identifying risk preferences, attitudes, and personality traits that reveal financial behaviours.
This assessment helps financial advisers better understand their clients’ attitudes towards money, develop personalised financial plans and potentially eliminate behavioural tax.
Understanding your money personality and relationship with money can better prepare you for a successful financial future. You can find a financial adviser to help you with your financial journey by visiting Momentum’s website.
Financial success is as unique as a fingerprint. That’s the beauty of defining your own aspirations and ambitions. With two tough years of living through the pandemic and an increasing cost of living, it will take great introspection to be honest about where we find ourselves and seek help when we need it, especially from an expert.
The right advice can propel you forward.
Ready to begin your journey?
Financial success is as unique as a fingerprint. That’s the beauty of defining your own aspirations and ambitions. Getting to where you dream of takes grit, determination and most importantly, honesty.
With two tough years of living through the pandemic and an increasing cost of living, it will take great introspection to be honest about where we find ourselves and seek help when we need it, especially from an expert.
The right advice can propel you forward. Our financial advisers have a vested interest in you: what do you value? What are your goals? This deep discovery sets the foundation for a relationship that will bear fruits of success.
Ready to begin your journey?
Built with Shorthand