How to save R1 million

Becoming a millionaire is something that most of us have dreamt about. But what if it isn’t just an unattainable dream? What if saving R1 million is something so doable that you’d kick yourself for not having started sooner?

Experts weigh in on how we can realistically achieve saving R1 million

The South African context

ShareMagic, a provider of stock data services and software products, notes on their website, “The average South African doesn't earn a million over 10 years - and that's before paying all the bills. Even the average person in the top decile (10%) has to work for four years to make a million after tax - again, before deducting the cost of living.

“If you're in the ninth decile (i.e., better off than 80% of South Africans, but not in the top 10%) it will typically take you over 10 years to earn a million rand after deductions,” ShareMagic says.

Still, many investors believe that saving R1 million is a doable venture.

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Saving mechanisms

Many economists and seasoned investors believe that compounding growth is the way to achieve the elusive first million.

“Compounding simply means making money on your original investment as well as on the gains made in following years (i.e., growth on growth over time),” explains the Old Mutual website. In short, as your money makes money, so it should make even more - a relatively simple concept that, over time, is hugely beneficial.

“If you leave your investment for a long period of time, the investment not only grows each year, but grows exponentially. This interest is called compound interest, and is the key to long-term growth and wealth,” says Old Mutual.

Compared to conventional saving, if all that you achieve is the average market return, investing in shares is likely to halve the time it takes to achieve your financial objectives, says the ShareMagic website.

Unit trusts are one such mechanism. A unit trust is formed to manage a portfolio of stock exchange securities in which small investors can buy units and attract compound growth.

Ultimately, it’s possible to save using conventional banking products, but your return on investment may not be substantial.  

“Savings offer you a reasonable income yield, usually a few percentage points below the prime interest rate,” notes the PSG Wealth website. "Interest is fairly assured if you are invested in a major bank.

“However, after tax, the yield will not be much above the inflation rate. Unlike shares or property, there is no risk that your capital will be eroded by negative returns.”

How long will it take to save a million?

Attaching a timeline to saving R1 million is difficult because financial situations differ from person to person.

There are too many variables involved to predict a reasonable timeline, ranging from the inflation rate and rapidly-changing tax regime to the investor’s appetite for risk, which influences their investment choice in terms of preferred asset class. However, there are examples that offer some insight.

In 2010, Warren Ingram, a director at Galileo Capital, relayed that you can make your first million by saving R5,000 a month for a period of nine years. This is not an easy strategy to follow, as not everyone has R5,000 to put aside. However, once the first million is made, it becomes easier.

“If you keep investing R5,000 and adding it to the first million, you should have another million rand within four years. By sticking to the plan, you should have three million rand in total within 16 years,” Ingram told Moneyweb.

Ingram relayed a similar strategy to Destiny Man in February 2016. “If you’re prepared to be disciplined and avoid spending your money on things like expensive cars, clothes, and entertainment, you can make your first million rand quite quickly."

“The fastest I’ve ever seen was a young lady who saved her first million in five years and her second million three years later. After 10 years, she has more than R3.5 million and is creating another million every 14 months.”

ShareMagic says that it’s possible to achieve R1 million with less money - but then you’d need more time.

“If you put away R4,000 a month and achieve 10% annual compound growth, it takes over 11 years of disciplined saving to end up with a million rand,” notes the ShareMagic website. 

“At net 5% per annum, it takes over 14 years. If you save R2,000 a month it's going to take you 23 years - and at R1,000 a month, more than three decades.”

Of course, the vehicle in which you save your money can influence the timeline required to save R1 million. The key is finding the right rate of return.

John Manyike, head of financial education at Old Mutual, notes further, “The choice of investment partner is also critical, because asset managers might have their respective investment strategy and principles. It is not a bad idea to scrutinise the previous investment performance of your investment partner.”

On attaining a suitable partner and formulating an investment plan, it’s important to conduct reviews and updates from time to time, as personal circumstances and economic conditions change, notes the Old Mutual website.

As noted on the PSG website, “Gone are the days when you could formulate a financial strategy and forget about it, as markets change almost daily. Successful money management and saving require continuous updating. Financial planning is going to require an almost fanatical obsession with financial, economic, and political news.”

Tips for saving money 

The PSG website provides the following additional tips for wealth creation.

• Set goals. Specific and measurable goals are much easier to break down into smaller, achievable components to monitor your success. Goals should be challenging, but not unrealistic - just out of reach, but not out of sight.
• Decide to be financially successful. This is different from wishing, hoping, wanting, or even desiring to be rich. Making a commitment that this is going to happen, is necessary. Financial freedom is not an accident or a matter of luck. It usually requires some inconvenience and a lot of hard work.
• Start early. The important thing is getting started now. Whether you start with R50, R100, or R500 per month, for every month you delay, you are losing thousands of rand, notes the PSG website.

According to the Old Mutual website, “The earlier you save the better, especially given the fact that life expectancy in South Africa has improved. Women generally live longer than men and generally earn less than their male counterparts. It is better to start as early as possible to avoid the risk of outliving your retirement provision.”

• Understand how money works. The process starts with you mastering your relationship with money, says the PSG website. “Some of us spend for excitement, to show off, to prove we can. Some of us are addicted to spending, and some of us are just careless about it. Whatever your relationship with money, understand it and develop a relationship of respect, appreciation, and gratitude. Use your money, rather than allowing it to run your life.”

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