South Africans living on a tight budget will usually live frugally, choosing carefully where they shop, making sure that things last, not wasting electricity and so on. But, for some reason, few people keep costs down on what will probably be the biggest investment they make in their life: their retirement savings and other long-term investments.
For many of us there are a million ways we could trim costs here and there to be able to save a little more for retirement. And, believe me, most would do it if only they knew how much of a difference a small regular investment makes if left to grow over the decades. It is usually a case of choosing between things we like to spend money on and things we should spend money on, that classic struggle between short-term gratification and long-term security.
If savers were to consider how diverting, say, an additional R1,000 or R100 even a month into a low-cost, long-term investment would grow they would more easily be able to find that extra saving.
Compound interest, which Warren Buffet and Albert Einstein are both said to have described as the 8th wonder of the world, means that savings grow exponentially, creating a snowball effect where you earn growth on the growth and so on, much like a snowball rolling down a hill.
However, compounding works both ways, meaning that fees can cut into your savings at an exponential rate too. Unfortunately, the reality is that most South Africans don’t even know what fees they are being charged.
Not knowing your fee is like going to a shop and just taking a product off the shelf without even looking at the price. None of us is likely to do that with, say, a bottle of wine or a new pair of shoes, but for some reason when it comes to investments we don’t worry about what it is costing us even though an extra percent or two in fees is going to hurt a lot more than some extra rands on groceries or clothes.
When it comes to long-term saving, where time can be your friend or your enemy it is incredibly important to keep your costs down. Shop around, ask questions, make sure your money works for you rather than the asset management industry or the broker.
The retirement savings industry charges an average fee of 3% of the value of your assets each year; 10X Investments charges 1%. The additional 2% that is left in savers’ investment account to grow can make a difference of as much as 60% over a 40-year savings lifetime.
Brett Mackay is an Investment Consultant at 10X Investments