“I am 23 years old and I earn R7000 a month. I want know where and how much to save so that I can buy a car worth R150 000 by the time I am 30 years old. I am thinking of buying a house too but I am tired of borrowing a car. At least my parents are still providing a roof over my head. I’ll think about a house later or try to save for both,” writes Albert

Maya replies:  This question gave me some food for thought because my first reaction was that Albert’s goal should be to buy a home which is a growth asset rather than a car which depreciates the minute you drive it out the showroom.

Then I thought about what it feels like to be in your 20’s. I am about to turn 40 years old and was thinking about what my 20 year old self would feel about what I have achieved so far. I am very happy about where I am in my life professionally, financially and personally. However when I was in my 20’s I wanted a far more glamorous life and if I remember correctly a flat in New York! I also remember that children were definitely not part of that picture.

Today I could think of nothing worse than living the rat race of New York especially with two young boys. My idea of a holiday is to go the bush with my boys. The reality is that as we get older and experience life, our objectives change. By the time Albert reaches 30 his goals may also have changed. He may find an excellent investment opportunity that he would rather use his money for, or he may want to start a family and move out of home.

However the one thing remains, he will need money – so having a goal of buying a car is important. By visualizing that car – the smell of the new seats, the colour he would choose and the freedom it represents will keep him focused on his goal even if that is not what he ends up using the money for.

Remember that every cent you spend is a missed opportunity for building wealth.

How to save R150 000 over seven years:

• The rule of thumb is that if you are saving for less than two years, stick to cash. Look for the best interest rate like Capitec’s fixed deposit or FNB Flexi-deposit which pay fixed deposit rates even if you add to it each month.
• For an investment between two and five years one can invest in a low risk unit trust that has some equity exposure but which focuses on capital preservation (not risking the money you have saved). These are usually called absolute return funds.
• For a seven year period, especially if one is contributing each month rather than investing with a lump sum, Albert could consider investing in equities (companies listed on the JSE) either through a unit trust with a good fund manager like Coronation, Investec or Allan Gray or through an exchange traded fund like Satrix Rafi. The minimum investment is R300 a month.
• An investment in equities should provide an average return of 12% a year. Based on this return Albert will have to save R1200 a month to reach his goal.

Take note:

Remember returns from the equity market (JSE) are not guaranteed and they also do not increase in a linear manner. One year you may have a return of 20% and the next year – 5% which is why it is a longer-term investment so you have time to get the average return.

In seven years’ time you would not be able to buy the same car with R150 000 as the price of cars would have increased with inflation. If inflation averages 6%, then you would need R230 000 to buy the same car in seven years. In that case Albert would have to save R1800 a month.

This article was first published in City Press