Financial planning is an all-inclusive approach towards wealth creation. While savings form the foundation to wealth creation, making the right decision on investment enables you consolidate your financial planning where your money works for you for long-term growth.
Analysts from Old Mutual says while saving is important when planning for emergencies, investing wisely is the secret to wealth creation. This is because investments potentially expose your money to higher rates of growth than a savings account.
In addition, long-term investments can absorb the shocks of short-term market fluctuations and have the potential to achieve sustainable growth over time.
When structuring your investment portfolio we encourage you to get advice from an accredited Old Mutual Financial Adviser, the analysts say. However, knowledge is power, so read the tips below to equip yourself with enough information to help you work with your adviser in structuring your portfolio.
Remember, there is no such thing as a “get-rich-quick” scheme and wealth is something that is created through wise investments and a commitment to a good financial plan.
When you buy an investment product from a company like Old Mutual our job is to make your money grow. Your job is to choose the investments that suit you, and to stick with them. This is because, while taking a long-term view requires patience, your investment will not only grow each year, but will benefit from compound interest.
This means that you not only earn interest on your initial investment, but the interest gets added each month or year to the initial amount, and you earn interest on that as well.
Savings and interest
If you saved $1,000 every year for 10 years, and kept your savings under your mattress, your money wouldn’t earn any interest. After 10 years it would be worth: $1,000 x 10 years = $10,000.
If you had saved $1,000 every year in an investment that earned 10 percent interest per year, your money would be worth more than R17,500 after 10 years.
This is because the interest is compounded (you earned interest on your interest), causing the investment to grow much faster.
Threats to financial growth
Inflation can threaten the growth of your investments. That is why you must look at “real growth” – this is the growth of your investment less the current inflation rate.
It is a measure of how much the prices of goods and services fluctuate from year to year. It is calculated by taking an average shopping basket of goods and services that most people would use and comparing the total cost of the basket to what it cost the year before. A typical basket would include: Basic groceries, rent, transport and electricity. From this, the average percentage increase for the year is calculated. This is the inflation rate or consumer price index (CPI). The government publishes this monthly.
This means the buying power of your money decreases by the inflation rate. If inflation is 10 percent, a basket of goods that cost you $100 last year will cost you $110 this year.
So when you are calculating the value of your investment, make sure you take inflation into account. An inflation rate of 5 percent can cut the real value of your investment by half in just over 10 years.
Get the best advice
When it comes to investing there are thousands of products available on the market, making it difficult to choose which one is best for you.
To help you make the right choice we recommend that you make use of the services of a financial adviser. But never just blindly accept advice. It is your money and your future. Make sure you know who you are dealing with. Ensure you are aware of the commission as well as the fees and charges that you will pay.
Protect your assets
You need to consider insurance and risk cover to protect your assets. Certain risk products will help you honour your financial commitments in the case of everyday emergencies or if something happens to temporarily or permanently affect your earning ability.
When you take out an insurance policy read and understand the entire policy – even the fine print. Make sure you meet any conditions you are expected to fulfil, such as medical tests, installing burglar bars on your house, or always parking your car in a locked garage.
If you don’t meet their conditions they could refuse your claim, and you could end up having no cover.