Bayport Blog

How to invest in simple terms

Investing is for every one of us.

Let us start at the beginning by making sure we all know what we are talking about. What is investing and how is it different from saving?

Saving is putting money aside every month as part of your monthly budget. You can do this because you spend less than you earn, and you save before you spend money on anything else – including paying your bills.

Investing is the next step where you put money into something that will give you a higher return than the interest you earn in a savings account.

There are three big differences between saving and investing:

1. The risk you take and the return you get. There is very little risk that you can lose any money in a savings account, but you also earn very little interest. As a result, your money doesn’t really grow. In an investment vehicle, such as the stock market, the risk is higher but so are the returns, which means your money can grow faster.

2. The timeframe. We typically save money to spend it within a few months or a year or two. Investment, however, is a long-term process, usually aimed at making sure you are financially prepared for the time when you no longer can (or want to) work and earn a salary.

3. The goal. Saving is to buy something specific, or to have money for emergencies. Investing, on the other hand, is about building long-term wealth so that you can afford to stop working one day. If you stick with your investment plan, you will eventually get to the point where your investments make more than the amount you contribute each month. That’s when your wealth really begins to grow.

How to get started

It can be easy to start investing. Here are two of the simplest ways.

1. Do more of the same. If you work for a large company, chances are that you are already investing by contributing to a pension fund. That’s a good feeling, right! That deduction on your payslip could be upsetting, especially in the months when cash is tight, but you will feel differently about it when you remind yourself that it’s money you will benefit from in the future. One of the easiest ways to become a more serious investor, is to contribute more to your pension fund.

HOW? Simply ask the HR Department to deduct a bigger amount from your salary every month.

TIP: To help keep you motivated, take a good look at your pension fund statement – which you should receive at least once a year – to see how your investment grows.

2. Open a tax-free savings account (TFSA). Mentioning a savings account when talking about investing sounds odd, but a TFSA is a very special savings account in that you only get the full benefit if you leave the money in the account for at least 10 years and the full magic of compound interest kicks in. Compound interest simply means that you earn interest on interest; the longer your money is in the TFSA, the more the interest you earn. And it’s all tax free, which means that when you eventually withdraw your savings, the taxman doesn’t get any of it.

HOW? You can open a TFSA at any bank or many other financial institutions.

TIP: You can put up to R36 000 a year into a TFSA. Set up a monthly debit order or deposit a lumpsum when you get a bonus or salary increase during the year.

Feeling more adventurous?

If you want to look at other investment options, make an appointment with a financial advisor to discuss what is available. But don’t go in blind. Do your own research beforehand by reading or watching YouTube videos about investment vehicles such at retirement annuities, stocks, bonds and property. You may not be ready to invest in some of them just yet, but growing your wealth is all about knowing what the possibilities are.