The Best Way To Invest R1000 Per Month

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What is the best way to invest R1000 every month?

For those of you looking to invest a few rands monthly there are various ways to go about putting your money to good use.

By doing so you’ll be creating a habit of accumulating wealth, a decision which you will definitely be grateful for in future.

Before starting to consider investment products you should first review any existing debt that you might have in place:

Short-term debt

The best debt to start with would be short-term debt, such as credit card or retail debt.

The interest rate on this toxic type of debt tends to be a lot higher than the returns that you’ll get from most investment products.

By eradicating these shorter term debts you effectively earn a higher rate of interest and place yourself in a better position to address other areas of investment at a later point in time.

Long-term debt

The next debt that you should consider addressing would be your long-term debt.

This normally refers to bonds used for paying off larger assets such as property. This is a healthier form of debt as it’s utilised to acquire an asset which in most cases increases in value.

By making additional contributions towards your bond you’ll effectively be getting a return equal to the interest rate of the bond repayment without paying tax on the interest saved.

After addressing your debt the following should be considered:

  • Your existing financial portfolio (investment products already in place)
  • Purpose of your new monthly investment
  • Time frame of your new monthly investment
  • Your risk profile (What type of investor are you? Conservative, Moderate, Aggressive?)

Once you’ve considered the above aspects you should have a better idea of what you’re looking to do with your extra monthly expenditure.

The products listed in the following table are best suited towards keeping up with inflation and increasing the purchasing power of your money over time.

The Best Way To Invest A Few Rands Every Month

Direct Unit Trusts

Endowments

Retirement Annuities

Term

No fixed term.

Medium to long term recommended for higher returns.

Minimum investment term of 5 years. Minimum maturity age of 55, which means that funds can only be accessed at age 55.

Risk

Varies depending on risk profile of fund invested in. Varies depending on risk profile of fund invested in.

Varies depending on risk profile of fund invested in, however restricted in terms of Regulation 28.

Regulation 28 limits the extent to which retirement funds can invest in particular assets or asset classes.

Liquidity

Fully liquid.Withdrawals normally take between 2–5 working days depending on platform or Unit Trust manager used.

Limited liquidity.Only one withdrawal can be made during the initial restriction period.

The restriction period refers to the minimum contract period for which the Endowment was undertaken.

No liquidity, as funds are only available at maturity age or if the paid up value is less than R7000.

Tax

Tax is paid on dividends received, interest earned and capital gains made, however certain exemptions apply.

These investments can be structured to fully utilise these exemptions.

Income tax and Capital Gains Tax is withheld at source (investment or insurance company used).

In terms of Income Tax, individuals and Trusts with natural persons as beneficiaries will be taxed at a fixed rate of 30%.

Due to this high taxation rate, Endowments tend to be more beneficial for individuals within higher tax brackets.

Retirement Annuity contributions can be tax-deductible.

No Capital Gains Tax, Dividend Withholding Tax or Income Tax on the capital gains, dividends or interest earned within the Retirement Annuity is paid by the investor.

Benefits

For persons under the age of 65 the first R23 800 of interest earned is tax free.

For persons 65 years and older the first R34 500 of interest earned is tax free.

Can be ceded as security (collateral).

Tax-free withdrawals can be made after the initial restriction period.

Protected from creditors and can nominate a beneficiary so as to avoid estate duty and executors’ fees in the event of death.

Useful Links

Unit Trusts: The Investment Basics  Endowment: The Investment Basics What is a Retirement Annuity?

 

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Be sure to discuss your investment options with an independent financial adviser if you require any further assistance. You can also
email Raul Jorge.

References:

Cloete, S. et al. (2012). Premiums & Problems. Cape Town: Old Mutual. B39 – B44.

Martin Hesse. (2011). 10 ways to invest R500 a month. Available: http://www.iol.co.za/business/personal-finance/financial-planning/investments/10-ways-to-invest-r500-a-month-1.1164560#.UYddj0rlTXR. Last accessed 5th May 2013.

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About Author

Raul Jorge is a CFP® professional at PSG. He specialises in estate, investment, retirement and risk planning. Prior to joining PSG, Raul completed his BSc (Honours) in Business Administration through the University of Wales and more recently completed his Postgraduate Diploma in Financial Planning through the University of Stellenbosch.