Setting up a debit order so that you put away a small amount every month into an investment, is an extremely powerful tool for wealth creation.

One of the most common reactions I get when it comes to investing, is that it is only for “rich” people. Yet in my many years as a financial educator I have observed people’s behaviours and money attitudes, and what I have seen is that the amount of money that you have to invest has less to do with what you earn, and more to do with how you spend.

There are people with high-paying jobs who still live beyond their means. They squander their income on luxury properties, cars, and clothes, incurring debt to buy expensive stuff.

Then there are people with lower salaries who look after every cent. This allows them to allocate a few hundred rand each month to an investment. It is these people who manage to build up wealth through saving and investing.

The power of the debit order

Setting up a debit order so that you put away a small amount every month into an investment, is an extremely powerful tool for wealth creation.

Not only does it “force” you to prioritise investing over spending, but it also allows you to take advantage of rand cost averaging.

Studies show that rand cost averaging, or “phasing in”, provides better returns than investing a larger lump sum at less regular intervals.

When you invest a steady amount monthly, you get to buy more units or shares when prices are low and fewer when prices are high. This means on average you purchase more shares or units at a lower price, reducing the overall price you paid for the total number of shares or units. This is what we mean by rand cost averaging.

For example, say you invest R1 000 in a product that costs R1 per unit. Your R1 000 will buy you 1 000 units. Then, the next month, the price of that product drops to 50c per unit. You are still investing R1 000, but now you can buy 2 000 units. Then in month 3, say the price increases to R1.25 per unit. Now, your R1 000 buys you 800 units.

After three months, you have 3 800 units of a product where each unit is valued at R1.25, which means the value of your R3 000 investment is now R4 750. That additional R1 750 highlights the effect of rand cost averaging.

It’s important to note that the gain was made due to a weak market. It was made largely because of the price drop in month 2, where the same amount of money bought double the number of units.

We need to overcome our fear when we see markets falling and realise that this is where you can make the most gains if you keep investing.

So if you want to start building wealth, don’t wait until tomorrow. Set yourself up for success by starting a debit order today!