You don’t need to use any fancy, overpriced investment managers or complex plans developed for you by an actuary to make your first million,” says Ingram.
According to him, most people fail to reach their financial goals because this requires them to save money every month and to leave the money invested long enough for the growth to gain momentum.
He recommends following three simple steps to build your wealth over time:
STEP 1: PAY OFF ALL YOUR “BAD” DEBT
This is debt that is not linked to an asset, such as the mortgage bond on your house. “Bad’ debt includes credit cards, personal loans, overdrafts and store card debt. “There’s no reliable investment that grows faster than the interest being charged on these debts,” says Ingram. “Pay them first, so that you can start building your wealth, rather than trying to dig yourself out of a hole.”
STEP 2: Build up your emergency fund
Set aside some money to cover unexpected emergencies. Park it in an investment that you can access quickly should you need it, such as a money market account or fund. Ingram recommends building up a reserve of at least three months of expenses. If you normally spend R10 000 a month, aim to build up an emergency fund of R30 000.
STEP 3: Start saving your money into an investment
Putting away money every month allows your funds to grow and you can take advantage of compounding returns to build momentum. Setting up debit orders automates the investment process and makes it far more likely that you’ll stick to your savings goals.
What investments should you use?
Ingram recommends low-cost investments like index-tracking unit trusts or exchange-traded funds for your debit order. “You can also add lump sums when you get a bonus or some other windfall. Try to save at least 15% of your total monthly earnings – R1 500 per R10 000 of your salary.”
You can grow your investment faster if you use vehicles that take advantage of legal tax shields. “Invest the maximum amount allowed into your company retirement fund or your own retirement annuity,” says Ingram. “I like retirement annuities powered by unit trust companies and index trackers, such as SmartRand, Satrix, 10x and Allan Gray.”
The current maximum annual tax-free investment is the greater of R1 750 or 7,5% of your retirement funding income for employer retirement funds, and the greater of 15% of taxable income, R3 500 less any pension fund contributions, or R1 750 for retirement annuities.
“If you are making full use of your retirement fund allowances, you should start investing in a tax-free savings account,” Ingram says.
“Remember that these investments are limited to a maximum of R30 000 a year. Once again, I prefer unit trusts and index trackers. If you still have money to invest, you can use a normal unit trust or index tracker for the rest of your money.”
How long will it take to make a million?
How long it takes to build your first million depends entirely on you, says Ingram.
“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 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 a million every 14 months.”