Does starting your own investment journey feel daunting and scary? Maybe you just don’t know where to start? Not to worry, in this article we’ll be unpacking everything you need to know to get started.
Are you wondering how to get started with investing? This article should definitely help you find a way to get started in what seems to be a very daunting world of investing.
Whether you’re unsure of how much to invest, where to invest, or how long you should be investing your money, by the end of this article you should have a great idea on where and how to get started. Let’s dive in!
1. You need a goal
Have you ever heard people say that you need a plan before you start anything? Well, when it comes to investing, this is exactly the same. Without a solid plan in front of you, it’s going to be very difficult to figure out, how much you would like to invest, how long you’d like to invest your money for, and what you would like to invest in. Don’t worry though, creating a plan is actually a lot easier than you think, and even if you’re too scared to create one yourself then we have a free tool that can help.
To start, you need to decide what your goal is going to be. This could be a large capital amount that you would like to have for retirement, or it could simply be a smaller amount that you would like to save towards for a gift, or perhaps something like paying for school. Whatever it may be, figuring out this amount is the very first step into starting your investment journey.
Next, you need to decide how long you have to reach that goal. If you’re saving for a gift, perhaps you only have one or two years, whereas if you are investing towards your retirement you would probably have a lot longer. This is important, because without a time frame it’s going to be very difficult to figure out how much you would need to invest every month in order to reach that goal, and also what risk appetite you’re willing to accept (more on risk later).
If you think about it, this make sense. If you’re looking to invest towards a large capital mount for your retirement, and you know that you have roughly 20 years to reach it, you can then calculate roughly how much you would need to invest every month in order to reach that goal.
This is probably one of the first places people become discouraged, because the thought of trying to figure out how much to invest every month while taking into consideration inflation and compounded interest often seems a too complicated. Click here to have a look at Finn, an AI-based free tool that you can use to help you get to the bottom of all of this very quickly.
(a quick note on funds)
When it comes to the underlying funds that will make up your investment, there are several options to choose from. Although we won’t be going into great detail in this article on what they are and how they work, it’s worth mentioning that each one of them contain their own risk profile, and each one is made up of different underlying assets.
As a quick example, if you’ve ever heard of “equity” investments or “equity” funds, these are typically made up of stocks that are traded on a stock exchange, and tend to carry more risk. Alternatively, something like an ETF (or exchange-traded fund), is a fund that holds many individual investments bundled together, and is managed independently for you, and thus carries a much lower risk profile in general.
We will go into more detail on the different kinds of investment vehicles in a later article.
2. Get a strategy (and know your risk tolerance)
Your risk tolerance tires in very closely to investment strategy. What do we mean by investment strategy? Well, your investment strategy is essentially a strategy that takes your risk tolerance and your investments timeline into consideration together. This might sound a bit crazy, but consider this – if your investment timeline is 20 or 30 years, and you’re looking to invest towards your retirement, you’re able to withstand considerably more risk than the person who only has a few years to reach a much smaller investment goal. That’s why discovering your risk tolerance is so important – generally speaking, the more time you have available, the higher your tolerance for risk can be.
If you have a lot of time to grow your investment, you might consider investing more heavily in a higher risk options such as equities or stocks. If not, something like an ETF or interest-bearing account might be more suitable to you. Just know that with less risk comes less reward, so you might perceive your money as safer in an investment with less risk, but over a longer time period you’ll be losing out on potential growth and returns a lot more.
3. Figure out how much you want to invest each month
It sounds obvious, but how much do you invest? Is there too little or too much? Well, now that you have an investment goal, and you also understand in a general sense what your risk appetite is, figuring out how much you would like to invest every month becomes a lot easier.
To keep things simple, a lot of people recommend investing around 10 to 15% of your monthly income. This can be incredibly helpful to some, but if that doesn’t allow you to reach your goal, you might want to consider updating that amount to something that makes more sense.
If you’re worried that your goal amount seems unreachable, don’t worry. Time is on your side – there really is there to help you – and how does it do it? Simple – with the power of compound interest. The more time you have the more your investments will earn and grow, and by adding those earnings back into itself you’ll accelerate its growth over time. That’s why it’s so important to invest sooner rather than later – a small amount today will be a much larger amount tomorrow.
Compound interest will also bring down the monthly instalments that you’ll need to invest. Think about it this way – if your goal was to save R12,000 in one year, you would need to save R1,000 a month to get there. If you were instead trying to reach that goal by using an interest-bearing account that yields around 7.5% return per year, that monthly amount would be closer to R960. And this is only over one year.
If the calculating of these numbers seems too daunting, head on over to Finn where our AI-driven investment tools will do all of this for you, and for free!
(another note on investment account types)
It’s worth taking a moment to talk about the different investment account types that you can get involved in. In South Africa, there are three main types that you might’ve heard of – traditional (or basic) investments, tax-free investments, and retirement annuity-based investments. Although this is not an exhaustive list, for the purposes of this article we’ll stick to these three main ones.
When looking at traditional investments, these are by far the easiest to understand and the easiest to get started with. You’ll traditionally have more readily access to your funds if ever you need them, and updating them yourself is fairly easy. Some carry a minimum amount that you would need in order to get started, but for the most part these are very straight forward and managing them is also quite simple. You will however pay tax on any income (growth) that is generated from these investments – just something to keep in mind.
Speaking on tax-free investments next, these are a great way for investors to avoid paying tax on any growth or income that is generated from their investments. The downside on these investments is that there is a limit on how much you can invest in them, not only per month but also over their lifetime. At the time of writing, the maximum annual amount you could invest in a tax-free investment is R36,000 per year, with a lifetime total of R500,000. This is inclusive of all of your tax-free investments, not just one, and anything you try to invest over and above this will result in severe penalties. If you’re looking to invest more than R3,000 a month in general, consider diversifying your portfolio to include either a basic investment or a retirement annuity as well.
Finally, retirement annuities – these kinds of Investments offer their own unique tax benefits (which we will go into in a future article), but unlike their basic and tax-free investment counterparts, you will not have access to any of your invested funds until you retire. Only consider this option if your investments horizon is a very long one, for something like your retirement, and if you don’t need access to any money that you invest in it.
4. Open your investment account…or use a broker if you’re lazy!
So this all sounds great in theory, but now that you’ve discovered your goals, your risk appetite, and your monthly contributions, what now? How do you get started, and where? In a general sense, there are two options you can follow – the one is to manage your investments yourself, and the other is to enlist the services of a third-party advisor or broker. Each carries its own pros and cons.
Let’s start with financial advisors and brokers – enlisting the services of a third-party financial advisor or broker takes away the stress of having to manage anything yourself, and having someone to talk to and discuss your various options may be very beneficial for some. It’s important to remember that these services will cost you money, either in up-front fees, or alternatively as ongoing monthly fees as a percentage of your total investment. Finding a financial advisor that you trust can also be very difficult, so doing some due diligence and your own investigation here is critical.
Managing your investments yourself might sound like a big job, but if you have a plan in place it’s actually very simple. Once you have decided on where to invest your money, and what to invest in, your monthly contributions go off quietly by themselves and there’s very little that you would need to do going forward. There are a multitude of investment houses out there that you can choose from, so find one you’re comfortable with and get started.
Whichever option you choose, it’s important to remember your plan – having at least a basic plan in place before exploring either of these options is extremely important, and using a free tool like Finn can give you a very great idea on not only how much you should be contributing every month to reach your goal, but also what to invest in, thereby taking a lot of the effort and headache out of creating an investment plan.
Sooner rather than later, always!
Remember, the sooner you can get started in your own investment journey the better. The amount of returns you will be missing out on by waiting to invest will hurt a lot more than any hesitation you might have. It doesn’t matter if you have a little money to invest, or a lot, simply starting is the most important thing – the potential earnings you will miss out on alone is enough to dive in as soon as you can.
Why is this? In short – the power of compound interest. Whether you’re investing R10 for the next two years, you’ll have more usable capital by the end of that time year compared to not interesting at all.
Conclusion
In closing, here is a summary of the steps you should follow, as well as a quick suggestion to some of the ways to action these steps. Remember, you would need to do your own analysis to figure out what your investment goal is, what your risk appetite is, and how long you have to get there, which will also influence how much risk you are willing to take on.
In terms of figuring all of this out, you could do it yourself (which isn’t too difficult), or you could employ a tool like Finn to help you with that process.
Finn’s automated interface will efficiently guide you through a very simple set of questions, and then present you with a plan on how to achieve your goals. This is not financial advice, but rather factual information, based on the available options to you.
Although your investment decisions are your own, and Finn is not a financial advisor, it is however a very strong AI-based tool that can create a solid foundational plan for you to reach your financial dreams. Click here to give it a go for free, and at the end, you’ll be able to download a PDF which you can use for your own financial decisions, or even present to your financial advisor or broker.
References
[1] McGurran , B. (2023, March 21). How to Start Investing in 2023: A 5-Step Guide for Beginners. NerdWallet. https://www.nerdwallet.com/article/investing/how-to-start-investing
[2] Allan Gray. (2023, July 9). All investment options. https://www.allangray.co.za/what-we-offer/investing-with-us