Start small to go big: compound interest is your biggest ally in becoming financially independent
Well-planned investing and taking advantage of the ‘magic’ of compound interest are two of the most powerful ways in which South Africans can elevate themselves financially, and secure their financial independence one day. There are many stories of people who were able to achieve such independence, despite not earning grand salaries or receiving huge inheritances to boost them. Perhaps one of the most famous cases is that of an American petrol attendant and janitor, Ronald James Read, who built up a net worth of USD 8 million in his lifetime, just through saving and compound interest.
This may sound like a dream come true, but it also doesn’t happen by accident. As Fareeya Adam, Head: Product Solutions, at Momentum Investments explains, these two simple components can put financial independence within the reach of just about anyone. “Even if you are only able to save and invest a small amount of your monthly earnings, it can add up to a lot over time. The key is simply to be disciplined and consistent with the amount you save, and to be patient.”
Even if you have very little experience with investing, there are ways to start easily and without an unacceptable amount of risk, explains Adam. When you decide to invest funds for your future, it is essential to know that not only are there different investment options to choose from, but also that there's also a wide variety and combinations of investment products and underlying assets. “There are many different types of investment products available, including discretionary investments, endowments, retirement annuities and tax-free savings plans. A wide range of underlying investments are also available to suit all types of risk profiles. We offer all of these at Momentum, but you will also find them at almost every financial institution, so be sure to compare the different offerings.”
To start, Adam says that simply placing money in a savings account at regular intervals, is already a fine way of earning compound interest. “When you place money in a dedicated savings account, your bank will offer you a set interest rate that will grow your money each year, like a snowball, which builds new layers on top of the old layers. Of course, the higher the interest rate, the faster this will grow. But, out of all the available options, growing your money like this is the slowest but most stable method.”
Next, understand that investing is easier than you might believe, says Adam. “It’s true that investment jargon and offerings can be complex, but the act of simply investing your money for good returns can be as simple as you want. All you need to do is to find a financial adviser or investment manager who can cater for your specific needs. A good adviser will sit with you to discuss your needs and work out an investment portfolio that takes your age and your goals into account. This is also an opportunity for you to decide on the rate of return that you can achieve with your money.”
Once your money begins to grow, Adam notes that your options may also increase. “Again, your adviser could be your closest ally when you start to build up your wealth. They could suggest more investments or other tax efficient financial vehicles that could help you on your way to financial independence. I would encourage anyone who has started on this journey to take the time to learn more about the possibilities, so that they can take advantage of the right opportunities.”
Indeed, it is really is just that simple to start on the road to financial independence, says Adam. “There will be many possibilities along your journey to financial independence, but the most important thing is to just start the journey. At first, you should get into the habit of cutting your spending as much as you can, and putting every penny that you can spare into your savings account. It gets easier over time, and your future self will thank you,” Adam concludes.