With the general outlook on economic growth looking fairly dim, and the chance of a further interest hike later in the year looking likely, it won’t be getting any easier. This is bad news for the majority of the population, with World Bank data showing that 86% of South Africans are in debt, and around 10.3 million of them are currently classified as “over indebted” – or struggling to meet their monthly debt payments.
During such tough financial times many will feel forced into making decisions that, while perhaps necessary in the short-term, could have catastrophic effects in the long-term.
The apparent debt crisis has a trickledown effect, most felt in the savings spectrum, and retirement savings in particular. According to Finance Minister Pravin Gordhan around 90% of South Africans simply won’t have adequate funds to retire comfortably. As the cost of living rise, this stat has a very real chance of growing in the future.
Long-term savings are often the easiest thing for many people to cut back on as the consequences will only be felt years down the line, while the immediate effects can be the difference between making ends meet and not. Added to this are those who resign from work just to cash out their company pension or provident funds, hoping the cash injection will stem the tide. Unfortunately, this only creates a financial time-bomb waiting to explode in the future.
However, there are better ways you can make a difference to your bank balance without scaling back on your long-term savings.
The simplest way is to review any, and all, of your current investment choices. Many of us are cruising along on autopilot, unaware of the intricacies of our investments. The question to ask yourself is: do you truly know what you are paying for – or how much it is costing overall?
Fees can have a devastating effect on long-term savings – unfortunately, an effect that can only be seen when it’s too late. Here’s a real world example to show you the effect of fees over time:
Imagine that lump sum of R100,000 is yours. It’s been invested with a typical fund manager, who charges you around 2.5% in fees per year, excluding VAT – the green line. The blue line is the same R100,000 invested in a low-cost option with a fee of around 0.9%. At the start, they both look good.
Here’s where it gets interesting: the long-term effect, over 40 years’, of that 2.5% per year really starts to show as the years go by. This is when your money truly starts to feel the impact of compound interest, and dip well below the blue line.
The overall effect of that fee difference ends up costing you more than half your returns. Over R400,000 in this example.
As you can see, the impact of fees over time on any investment can have devastating consequences on the final return. Small changes to an investment portfolio like switching to a lower fee option will allow more of your money to be invested. This means you’re saving more without ever having to increase your contributions.
Simply put: you don’t need to save more, to save more.
If you’re interested in making the switch to 10X, or would simply like a free, no-obligation investment comparison, contact us today.
1) Total investment fees average almost 3% comprising advice fee of 0.75%, administration platform of 0.5% and an investment fund fee of 1.63%, per the Global Fund Investor Experience Study, Morningstar, June 2015. Paying 2% pa less in fees can increase your final investment value by up to 60% over a 40-year working life. This is an illustration of the effect of fees on investment outcome only, and is not a guarantee of future fund performance. The illustration is based on past fund performance and no guarantee is made for future fund performance.
