Busang wrote to say that he has no debt and R600 extra each month that he wants to start investing for the long term. He wanted to know which unit trust or exchange-traded fund would be the best option.
For anyone who is starting to save or invest, you need to decide how it fits into your overall financial plan.
The first question is always: do you have an emergency fund? Do you have money to access for urgent, unexpected bills or do you rely on credit? Busang admitted that he did not have any cash reserves.
People often make the mistake of investing money into a long-term investment without having some money put aside for short-term needs.
This means that when an unexpected expense arises, they are forced to cash in the investment. Most long-term investments are market linked and can underperform in the short term. If Busang was forced to cash in when the markets were down, he could actually lose money.
Busang also needs to look ahead to expenses he may have to meet in a year or two’s time ‒‒ like next year’s school fees or a major car service. He needs to make sure he has money to meet those bills.
The best strategy for Busang is to put some of that R600 a month aside until he has at least R10 000 in his emergency fund and money to meet those future bills.
A high-interest savings account would be an appropriate product for a shorter-term investment.
Once he knows he can invest the money and will not need to draw on if before five years, then he could use his tax-free savings account (TFSA) allowance to grow his money, tax free.
An appropriate product would be a tax-free savings plan into a low-cost balanced fund that has a spread of underlying assets. This would include local and offshore shares (equities), property, cash and bonds.
It is important to follow a proper plan when investing. Find a balance between having liquidity and investing for the long term.