Saving and investing: The power of starting early

Caylin Conradie

With it being Youth Day in South Africa this week, in our latest podcast Madalet Sessions and Caylin Conradie delve into the importance of starting to save early and the impact it can have on your future. We explain the power of compounding and illustrate how even small contributions can lead to significant wealth over time. If you’d like to understand the concepts of saving and investing better, whether you’re a young adult or further along in life, the principles we discuss should be applicable to you.

Caylin Conradie:

Hi, everyone. I’m Caylin Conradie, and I’m responsible for marketing at Denker Capital. Today, our Head of Multi-asset, Madalet Sessions, and I are having a conversation about saving. With Youth Day coming up this week, Madalet and I thought we’d discuss the importance of starting to save early.

Some of our listeners might think that they are past what they would consider their youth, but a lot of the principles we’ll discuss are applicable to everyone. However, as we’ll point out, the earlier you do start saving, the better.

Welcome, Madalet.

Madalet Sessions:

Thank you.

Caylin Conradie:

Let’s start out with a simple question. What is saving?

Madalet Sessions:

Saving is something that we, individually, have control over. So, we either have pocket money or some sort of income, and saving is how much of that we squirrel away into something that we put towards a financial goal.

So, either we are saving to buy our first car, we’re saving to buy our first home or, if we’re really lucky, we’re starting to save towards our retirement when we turn 65. So, 45/50 years from now for the youth (hopefully). It’s putting aside a little bit to help cover the needs that we won’t be able to meet out of the income we will have in the future, or income we won’t have in the future in the case of retirement. We need to put money away today to make that consumption in the future possible.

Caylin Conradie:

Some of those terms that you’re mentioning are quite long. If you’re saving for a car or a house, it might be a shorter period, but with the retirement point that you mentioned it comes back to the importance of starting early.

Madalet Sessions:

Absolutely.

Caylin Conradie:

No matter what it is you’re saving for, it’s important to start early if you can. I know that you’ve done some research, and this is something you’re quite passionate about, so could you tell us why is it important to start saving early?

Madalet Sessions:

Yes, I thought the best way to explain this would be with a very cool example. Say we save from the time we turn 20 until the day before our 30th birthday, so until we’re 29, and we put R500 a month (or R6,000 a year) into savings – and we save just for those 10 years, and we save it at 5% per annum. By the time we get to 65, having never touched that money, we get to a cool nearly R450,000. That’s one example.

Caylin Conradie:

So, in this example you’re only saving for 10 years?

Madalet Sessions:

Yes, only saving for 10 years. Let’s call it example A.

For example B, we’re taking somebody who, like most of us, didn’t really take life and the future all that seriously at the age of 20 and then wakes up on their 30th birthday and realises they need to start some planning for the future. And so, starting at the age of 30, they now save R500 a month every month until the day they retire at the ripe old age of 65.

The first investor, A, only ever saved R60,000. Investor B saves substantially more. Because they save for 35 years, they save over R200,000. At 5% this investor gets to R600,000 after 35 years vs. investor A getting to R445,000 after just 10 years.

Interestingly, investor B, the guy who starts at 30, only overtakes investor A at the age of 50. So, he needs to save for 20 years to get to the same capital value as investor A. It’s a big difference.

Caylin Conradie:

Yes, that’s massive.

Madalet Sessions:

So, starting early means that compounding works in your favour for much longer. And then, just to round this off, if we start at 20 and we save until we’re 65 (R500 a month at 5%, exactly the same as before), that gets to R1 million.

Caylin Conradie:

Can you just say that again?

Madalet Sessions:

Yes, so we had investor A that starts at 20 until 29. He gets to R445,000. Investor B starts at 30 and continues until they’re 65. That gets to just shy of R605,000. Investor C starts at 20 and saves R500 every month from the age of 20 to the age of 65. All three investors saving at 5%. Investor C, the guy who saves his whole life, gets to R1 million.

So, it makes sense to start early. Compounding works in your favour.

It also makes sense to cultivate the habit. So, if you get to your 20s and you’ve cultivated the habit of first putting a little bit aside, and you can maintain that for your entire life, you get well ahead of the alternatives. Starting later is not as good at starting early. Maintaining the habit is better than just starting early.

Caylin Conradie:

What are some other good financial habits you can suggest to the youth?

Madalet Sessions:

So, there are some good habits. One is to never save last. Put your savings first. It’s a very good habit because it enables you to earn the compound return. So, saving first is a very good habit to cultivate. Saving frequently is another good habit.

My advice to young investors specifically, but actually to all, is to never borrow money or incur debt for anything other than buying an asset. So, if you’re going to borrow money, don’t spend it on clothes or holidays or coffees. If you’re going to borrow money, buy an education, buy a car, buy a house. That’s either investing in your human capital or in your financial capital. Those are really, in my opinion, the only times when it’s a good idea to incur debt.

Then the last thing, which I think it doesn’t get enough airtime, is to match your savings to your financial goals. I’m going to talk a little bit about that in a minute.

I just want to say why it’s important to save first. So, when Caylin and I were discussing this podcast, she said asked me how much a cup of coffee costs these days. And it wasn’t because she wasn’t sure how much coffee costs – but I did an analysis where I take R30 a week. If you spend R30 a week on coffee, and you manage to persuade yourself, instead of going out for coffee, to have coffee at home and save yourself this R30. If you save this R30 per week for 10 years, you would’ve saved R15,000, more or less, in coffee budget over those 10 years. And that monthly saving (R15,000) would’ve grown to R20,000 if invested at 5% per annum.

Now, we’re using very low return rates here. We do actually expect much higher return rates. But just a modest assessment of how much it costs you to have a cup of coffee every week: physically it’s R15,000, and in potential return at very low rates of return it’s R20,000. It’s a big number.

Caylin Conradie:

It’s a big number. So, to round off the question on why it’s important to start saving early – you’ve mentioned two things, essentially. It’s to form a habit of saving, and you also illustrated the importance of compounding (which you’ve done again now with the coffee example).

Madalet Sessions:

So, in this coffee example, we got to roughly R20,000 at the end of 10 years of not buying coffee. If you leave that money to grow for 35 years, which is not unrealistic (if you save your coffees in your 20s, at the age of 30 you’ve got this pot of R20,000). If you leave that R20,000 in the market at, again, a modest 5% return, at the age of 65, that would’ve grown to a little bit more than R110,000. And that’s from not buying coffee every week. That’s the benefit of compounding.

Caylin Conradie:

We’re using examples here. With your investor A and investor B examples, we used R500 a month. But that could be any amount. R50 a month, R100 a month, R1,000 a month… just to illustrate how far saving will get you, especially if you start early.

Madalet Sessions:

That’s right. So, now, the reason I picked R500 is a little bit self-serving. The unit trust industry takes, I think, a monthly debit order minimum, generally of R500. I think there are exceptions. So, R500 is a nice clean number, because it allows you to make investments in unit trusts, where the money can really be put away.

I think with R200 or R300, you need to start looking at potentially a money market type of account, until you get to a lump sum minimum. And again, the numbers or minimum values vary from unit trust to unit trust, but typically I think R5,000 to R10,000 would be the minimums allowed in the unit trust markets.

Caylin Conradie:

I think something that could go through the minds of a lot of the youth is, ‘I don’t need to start saving now. I can use my money, enjoy my youth, and start saving later’ or ‘I can wait till I’m earning more so that I’ve got more to save’. It’s not easy for everyone to put money away, no matter how small it is. But if it is possible, it makes a massive difference.

Madalet Sessions:

It makes a huge difference. So, I’ve worked another example. I’m a sort of spreadsheet junkie. You can illustrate so many things with examples. So, I did this example to show the value of two things. So, when you asked me about good financial habits, the one was saving regularly, and then the last one I mentioned was to save in a way that’s time-horizon appropriate.

So, what I did in this example, and I think it’s a big number, but if you have a child today and you could put R10,000 away for that child and never top that up.

It’s just on the day of their birth, you put that R10,000 away for them, and then every year on their birthday you give them a statement. I’m sure that’d be a fantastic birthday present! Anyway, so you do that for a child. At the age of 65, so now we’ve really stretched this example to give you the maximum horizon, essentially, that R10,000 at 5% would grow to R240,000. It’s a big number. It’s gone up 25-fold at very modest rates of return.

Because we’re actually looking at a really long-term horizon, let’s say you could invest at a much more attractive 10% per annum, do you want to guess what your growth in your asset value is then? It goes from R10,000 to just shy of R5 million. That’s the difference between 5% return and the 10% return.

Now, the additional 5% is not free. You have to take risk for it. But if you’re not going to need the capital for 20 or 30 years, you really should take that risk, because it’s the only way you open your door to really attractive outcomes. If, however, you’re saving for a house or a car, and you need your money next year or maybe the year thereafter, the equity market can fall 50%. You cannot afford to put money away that might be worth 50% less when you need it. That’s a bad idea.

Caylin Conradie:

So, this is getting quite technical for some listeners, maybe, but when you start talking about taking more risk you’re referring to different asset classes.

Madalet Sessions:

That’s right. So, there are different asset classes, and most fund managers of unit trust companies would give you a sense of time horizon on their investment information. There’s a document, called the minimum disclosure document, which will tell you what is the appropriate time horizon for which this money should be considered as, call it in inverted commas, ‘locked up’.

So, a lower risk product would be a type of money market, or an income product, or a low-equity product. And typically, those would be suitable for three-ish, four-ish, five-ish years. Equity, high-equity or flexible products are really much longer-term products. You really need to be looking upwards of seven and 10 years.

Caylin Conradie:

Because it’s more risky.

Madalet Sessions:

It’s more risky. Which means you’re not sure what the capital values will be in the short run.

Caylin Conradie:

Because it’s slightly more volatile.

Madalet Sessions:

It’s more volatile, exactly. But that volatility is what gives you the upside. So, if you don’t need the capital, you don’t care about what it’s worth in two or three years’ time. You want the maximum likelihood of earning really attractive returns over an appropriate investment horizon, which is 10 years plus. You really don’t want to be sitting on conservative products if you’re saving for retirement or saving for some future objective.

Caylin Conradie:

If you’re starting early.

Madalet Sessions:

If you’re starting early. And that’s the beauty. If you start early, you can afford these risks. If you start later, you’ve got to be a little bit more concerned. Otherwise, if you’re starting at 60 to save towards 65, and you need to start drawing an income of living off of a portfolio because you stopped working at 65, you’ve got to be a little bit more concerned about what your capital will be worth, because you might need your capital.

So, again, we’re talking really to the youth today. And so, one of the benefits we want to highlight, or habits, is if you really don’t need your money, don’t put it in a money market. If you need your money, put it in a money market. Money market means lending overnight or in the next month or two to somebody who gives you your money back in the relatively short period, and just earning very modest rates of returns, but consistently. Very little capital volatility or uncertainty about your return.

If you’re saving for your house or a holiday at the end of the year, it’s a very good idea to do that. If you’re not going to touch the money, you want to put it away until you’re 65, do not take such little risk. It’s a bad idea.

Caylin Conradie:

And again here, we’re assuming it’s a unit trust-type product. So, it can be a general unit trust fund, or a tax-free savings option on a unit trust fund, or even a retirement annuity. But this assumes, as you mentioned earlier, generally a minimum investment of R500 a month, or various lump sum options, whether it’s R10,000 once off or R20,000 (various funds are different).

But someone who’s saving less than that a month, they do have the option of, say, saving it in their bank account. If it’s R200 a month, not enough to invest it in a unit trust, those people could wait until that amount has built up to be able to put a lump sum into a unit trust fund.

Madalet Sessions:

That’s right. So, they’re very innovative. Every single bank now will offer a savings or a money market or a higher interest rate facility.

Caylin Conradie:

And we’re really talking unit trusts, because that’s our area of expertise. That’s what we do.

Madalet Sessions:

Exactly. As you say, if you have R200 a month, you could save it in a high interest rate type of account until you have a lump sum to put away. So, even in our example of the coffee, nobody’s going to allow you to put R30 a week into an investment product. It’s just too expensive to administer. So, you would need to have the discipline to put that R30 aside yourself, and then build up until you have sufficient capital to put it into a unit trust or another type of investment vehicle…

Caylin Conradie:

…so that you can earn a return on it because it’s not going to earn much return if you’ve got it in cash.

Madalet Sessions:

Exactly. Bank accounts, where we have most of our income paid into, are not return products. They are transactional products. So, if you want to save, there are two reasons to move it out of that account. One, it’s much harder to spend if it’s not in your bank account.

And two, it means you’ve put it aside and you can earn a return on it. It’s always time dependent. It depends on what the Reserve Bank is doing. But there are always interest rates available for making your money unavailable to yourself for some period of time. So, banks will offer you a seven-day deposit or a 14-day deposit, or a 60-day deposit rate that is much higher than what is available in your transactional bank account. And it means you lock your money up for that period of time. You can’t touch it. That’s another good discipline, tying up your money so you can’t touch it.

And so, again, there are ways of building up lump sums towards a unit trust investment. But also, my understanding is that there are people in this market, financial advisors, who can help investors make these types of decisions. That is not our area of expertise. We really just want to encourage the matching of time frame and the understanding of the importance of actually starting young and forming the habit.

We’ve had conversations before where people see their income as available to them today. And what is so important is to recognise that there are two people that need to live out of your income. It is you today, and you when you can’t earn an income. So, when you are older than 65 or 70 years old, you no longer have your sturdy job and your paycheque, you need to live off of the income that you earned when you were 20, 21, 22 years old. And the only way to enable that is for you at 20, 21, 22 to put some of that away.

Caylin Conradie:

Or 25, 26. Or 30, 31, 32.

Madalet Sessions:

Exactly.

Caylin Conradie:

One thing, that really has stuck with me, that you’ve said in the past, and I’m going to mention it again here because I love this quote of yours. It’s an original Madalet Sessions quote. You’ve often said, ‘the money you spend now, you are borrowing from your future self’. And that is quite a scary thought.

Madalet Sessions:

Yes, your future self can’t replace it.

Caylin Conradie:

Yes, and that’s maybe the money spent on those extra things you want or you think you need, but you could actually be putting it away so that one day, when you aren’t earning income anymore, you have that money available to spend on living… and luxuries.

Madalet Sessions:

That’s right. I mean, a fantastic outcome for us all would be, have luxuries today and luxuries in the future. And the way in which we can maximise the probability of both of those is starting the savings habit early, investing in the right type of product.

So, you could be saving today at 5%, or you could be saving today at 10%. If you can save today at 10%, you need to save less to achieve a higher level of income in the future. If you’re saving today at 5%, you need to save more to achieve a level of income in the future. So, if you match appropriately and you have the habit, that is how you live a good life now and a good life then.

But by cutting your cloth according to size – I always forget how that saying goes – you also learn that you have an appropriate sense of luxury. You know, decent home-brewed coffee is a luxury. Sure, an outside coffee is also a luxury. But maybe go walk in the forest with your friends or go walk on the promenade. One doesn’t always need to spend the money to have a good time.

And so, in my opinion (I’m not a big spender myself), it’s not a reduced life. It’s just a slightly different set of choices that enables a richer life today and a richer life, in all its senses, tomorrow.

Caylin Conradie:

Yes, and I think it’s sometimes hard for people to see the flashiness of others, and the things that they’re enjoying, so stretch themselves to be able to enjoy those things, too. But ultimately, you’re not doing yourself any favours, because you’re just putting more stress on yourself and not being able to enjoy that one day in the future. It’s not sustainable.

Madalet Sessions:

It’s not sustainable. And also, and this is so important during life, you don’t know where those people’s spending is coming from. It could well be financed on credit cards that come with a 20%+ interest rate. That’s a very, very expensive lifestyle when you’re paying 20% interest on your life.

Caylin Conradie:

Maybe that’s a conversation for another day.

Madalet Sessions:

It is a conversation for another day. I think it’s very important. I do want to make this point, that debt is really only beneficial in the long run if you use it to acquire assets. To borrow to go on holidays, or for a cup of coffee on a credit card, or your groceries on your credit card and you don’t pay it for a few months, it’s very expensive, and it’s better not to do that.

Caylin Conradie:

To finish off – we have stressed the importance of saving early, but if there are people listening to this podcast and thinking, ‘Oh dear, I’m not quite in my youth anymore and I haven’t started saving yet’: Start today. It’s not too late. It will take you a little bit longer to get there, but rather now than never.

Madalet Sessions:

Exactly.

Caylin Conradie:

As an asset manager, we don’t offer advice ourselves, but if you are looking for advice, we are more than happy to put you in touch with the right people. You can contact us at investorrelations@denkercapital.com. Or, if you’d simply like to find out more about us and the funds we manage, then you can have a look at our website at www.denkercapital.com.

We hope to have more conversations on saving and investing in future.

Thanks, Madalet. We’ll chat again soon.

Madalet Sessions:

Thanks, Caylin.

Disclaimer:

The opinions expressed in this podcast are those of the participants and do not necessarily represent those of Denker Capital. This podcast does not take the circumstances of a particular person or entity into account and is not advice in relation to an investment. Please do not rely on any information without appropriate advice from an independent financial adviser. The value of investments may go down as well as up, and past performance is not a guide to future performance. Denker Capital is an authorised financial services provider in South Africa (FSP number 47075).

This information does not constitute financial advice as contemplated in terms of the South African Financial Advisory and Intermediary Services Act of 2002 (FAIS Act). Use or rely on this information at your own risk. Independent professional financial advice should always be sought before making an investment decision as not all investments are suitable for all investors.

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About the author

  • Caylin Conradie

    Caylin is responsible for the marketing and communication functions of the business. Her career started at Allan Gray in 2008, where she gained client service experience. In 2009 she joined Ora Fund Managers (now Trustee Board Investments) where she was responsible for distribution support as well as the marketing and communication functions relating to the company’s tax-efficient funds and equity investment solutions. She joined the team in 2017.