Understand income vs growth

Which investment is right for me, asks a reader

man putting money into piggy bank“I am 27 years old and currently working as a petrol attendant at a garage. I am interested in investing for income purposes. I saw that Old Mutual has an investment scheme called Income For Life which requires a minimum deposit of R10 000. Can I add more money to this investment while I’m still working and also have them re-invest the money I earn from interest as well?” writes Myeza.

Maya replies: Income for Life is specifically targeted at retirement funds and it is used to purchase an annuity that pays out a set income for the rest of your life. For a 27-year-old this would not be an appropriate product.

Do you need to earn the income immediately or are you able to leave it to grow for some time? If you can leave it to grow then rather consider an investment that is aimed at growth not income as these have different investment strategies. An income investment would not aim to grow the capital above inflation and that is what you need right now.

The best long-term investment strategy is to invest in a fund that has exposure to growth investments such as shares and property and then leave it to grow. Once you stop working you can then draw an income as your original investment would have grown sufficiently.

For example if you had R10 000 and earned 5% income you would get R42 a month. If you left the money to grow – based on historical returns a market related investment doubles every seven years – then in 21 years’ time it would be R80 000 and you would earn R330 per month.

Remember because it doubles every seven years, the longer you leave it, the faster it grows:

Year 1: R10 000

Year 7: R20 000

Year 14: R40 000 (the R20 000 has doubled)

Year 21: R80 000

Year 28: R160 000

You could for example invest in Old Mutual’s flexible unit trust fund where all dividends and interest are re-invested and you can add money to the unit trust whenever you wish. Be very careful of investing through a policy, rather invest directly into a unit trust which is cheaper.

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