How to turn a R65 a month saving on data into R38k
Vodacom's data prices are set to fall even further as part of an agreement with the Competition Commission, Fin24 reported last week.
A 1GB data bundle that cost R149 in 2019 now costs R99, and will drop for a second time to around R85.
That is a 14% decrease from the current price, and a whopping 43% drop in just two years.
Falling data prices is, of course, good news for South African consumers, but how much difference will it really make? It could, for example, mean an extra coffee or two at a coffee shop every month, but what if you decided to invest that relatively small amount – let’s round it off to R65 – regularly over a long period of time?
Let’s do the maths. Assume you are saving just R65 per month for 25 years, earning a real – or after inflation – return of 6%, less 1% in fees, for 5% per year. To earn that, this money would have to be invested in a diversified high equity portfolio, with the hope that future returns approximate past returns.
Your total saving over 300 months would be R19,500, and earning 5% per year return would result in an end balance of around R38,000. Your return component is R18,500: you have doubled your money in real terms.
It is worth noting that if fees were 3% per year, instead of 1%, the final value would be only R28,600. In other words, your return would be only R9,100, effectively 50% less on the return of R18,500.
Chris Eddy, Head of Investments at 10X Investments, proposes looking at this a different way, using 'coffee-nomics', you might say. He says: "R65 a month is not so much anymore, say, two cups of coffee at a coffee shop."
"But if we forego those two extra cups per month until we retire in 25 years' time we could buy a Nespresso machine for R4,000, and be left with enough money to buy 4,000 capsules (at R8.50 per capsule) or a cup of coffee a day for 11 years. Or you could go to the coffee shop twice a week for a cup of coffee, for 11+ years once you retire."
"That is the premise of retirement saving: small sacrifices now – foregoing two extra cups of coffee a month – bring much bigger rewards when we retire," says Eddy.
Retirement and fees
Whether it is through a retirement annuity or a corporate pension fund, retirement funds gain in value over many years thanks to the power of compound growth, where you earn returns on the returns already earned in a cycle of growth that builds over time.
Starting to save for your retirement at a young age is so important because there really is no replacement for that special ingredient: time.
Another key fact about retirement saving is that the fees we pay, including to financial brokers, platform fees and for fund management, have a very significant effect on your total value in the end.
In fact, fees are the single most reliable predictor of your investment’s performance. While the industry charges an average of 3% in fees, at 10X investments, you are always charged less than 1% before VAT.
How does it work?
Like your returns, paying fees on a retirement fund also compounds over time.
Let's think about the earlier example in proper retirement savings terms where, for example, you might be saving R6,500 per month – or roughly 15% on a R43,000 monthly salary. (Because the retirement fund contribution is not taxed, your take-home pay reduces by only R4,160 – or around 10% of your monthly income.)
Using the formula explained above in the coffee example, you would end up with nearly R3.8million, in today's money terms. But if you were paying 3% in fees that would decrease to R2.85m, R950,000 less.
The R3.8m is not guaranteed, of course, because future market returns are never guaranteed, but you can lower the risk of missing your goal by paying lower fees.
You can also use 10X Investments' retirement calculator to create a unique retirement savings plan for you.
"The key is to invest with a long-term perspective (that is, in a high equity portfolio). Stay the course, even when other strategies appear more profitable in the short term. Make sure your portfolio is properly diversified and automatically rebalanced once or twice a year," says Eddy.
"Avoid the risk of picking a fund manager who does really poorly by using index funds rather than active managers. And choose a low-cost provider."
Start early and keep going
Avishkar Brijmohun, 31, a 10X client, explains, "We have this need to keep spending and it is really up to us to make that decision, and say what is enough."
Brijmohun is working hard to make sure he has choices when he retires. To read Avishkar’s story, read: Sacrifices today, options tomorrow.
To learn more about what you need to know for retirement, this handy e-book – The SA Guide to Investing and Retiring – unpacks all the basics for you.
This post is sponsored by 10X Investments and created by BrandStudio24 for Business Insider SA.