Saving and investing: The power of starting early

Introduction to Podcast

0:00Welcome to the Denker Capital Podcast, where our highly experienced team of in-depth thinkers and other experts share their insights on a range of investment-related topics. In this podcast, we have conversations about developments in South African and global markets and what these may mean for investors. We analyze specific stocks and sectors and explore general themes relating to the fundamental principles that underpin sound investment decisions in an ever-changing world.

0:34Hi, everyone. I'm Kaylin Conradi, and I'm responsible for marketing at Denker Capital.

Discussing Saving

0:39Today, Madalette Sessions and I are having a conversation about saving. Madalette is head of multi-asset investing here at Denker Capital, and with Youth Day coming up this week, we thought we'd discuss the importance of starting to save early. Some of our listeners may be past what they would consider their youth, but what we discussed today should be applicable to everyone. But as we will point out in this podcast, the earlier you do start saving, the better. So welcome, Madalette. Thank you. So let's maybe start out with a simple question first. What is saving?

1:14That is a good question. Savings is the stuff that we individually have control over. So we all either have pocket money or some sort of income, and saving is how much of that we squirrel away into something that we put towards a financial goal. So either we are saving to buy our first car, we're saving to buy our first home, or if you're really lucky, we're starting to save for our retirement when we're 65. So 45, 50 years from now for the youth, hopefully. That's all savings. It's putting

1:45aside a little bit to help cover the needs that we won't be able to meet out of the income we will have in the future, or income we won't have in the future in the case of retirement. We need to put money away today to make that possible, that consumption in the future possible. Okay, so some of those terms that you mentioned, they are quite long. I mean, if you're saving for a car or a house, it might be a shorty period. But I think the retirement point that you mentioned there also comes back to the importance of starting early. Absolutely. And no matter what

2:18it is you're saving for, it's important to start early if you can. And I know that you've done some

Importance of Starting Early

2:24research, and this is something you're quite passionate about. So can you maybe tell us why is it important to start saving early? Yes, I thought the best way to explain this would be with a very cool example. So what I've done is I've taken an example. I said, we save 500 around a month, every month for 10 years, starting at the age of 20. So we save from the time we turn 20 until the day before our 30th birthday, so until we're 29. And we put 500 bucks a month or 6,000 around a year, we put that into savings. And we save just for those 10 years. And we save at 5% per annum.

3:00By the time we get to 65, having never touched that money, we get to a cool nearly 450,000 round. That's one example, right? So can I just make sure that you say, you mean you're only saving for 10 years? Only saving for 10. You're not saving for 45 years every month. You save from the age of 20 to 29. Exactly. Okay. Exactly. So that's really just for young people before the kids arrive before you start buying your house. Just save for that first 10 years that you earn an income. So that's one example. It's called example A. I'm being very creative here with our

3:34names. Example B, we're taking somebody who, like most of us, didn't really take life and the future all that seriously at the age of 20, and then wakes up on their 30th birthday and realize they need to start some planning for the future. And so starting at the age of 30, they now save 500 around a month, every month until the day they retire at the ripe old age of 65. Because they save for 35 years, saves over 200,000 round. Okay. So this investor, same amount per month, 500 around per month,

4:10but they're saving monthly for 35 years versus 10 years in the previous example. Exactly. This investor gets to 600,000 round, right? At 5%. So exactly the same thing. They just start 10 years later and they maintain their savings. The difference between these two investors is 445,000 round for investor A and just a little bit more than 600,000 round for investor B. Interesting. Investor B, the guy who

4:41starts at 30, only overtakes investor A at the age of 50. So he needs to save for 30 years, or actually he saves for 20 years to get to the same capital value as investor A. It's a big difference. Yeah, that's massive. Starting early means that compounding works in your favor for much longer. And then just to round us off, if we start at 20 and we save until we're 65, 500 around a month at 5%, so exactly the same as before, you get to a million round. So...

5:14Sorry, can you just say that again? Yes. So we had investor A that starts at 20 until 29. He gets to 445,000 round. Investor B starts at 30 and continues until they're 65. That gets to 600,000, just shy of 605,000. Investor C starts at 20 and saves every month 500 round a month from the age of 20 to the age of 65. All three investors saving at 5%. And investor C, guy who saves his whole life, it's to a million round. So it makes sense to start early,

5:52compounding works in your favor. Also makes sense to cultivate the habit so that if you get to your 20s and you've cultivated the habit of first putting a little bit aside, then you can maintain that for your entire life. You get well ahead of the alternatives. Starting later is not as good as starting early. Maintaining the habit is better than just starting early.

Good Financial Habits

6:16Okay, so you're speaking about habits. What are some other good financial habits you can suggest to the youth? So there are some good habits. So never save last. Put your savings first. It's a very good habit because it enables you to earn the compound return. So saving first is a very good habit to cultivate. Saving frequently is another good habit. Then we can talk a little bit more about debt or a little bit less about debt actually.

6:46But my advice to young investors specifically, but actually to all, is never borrow money or incur debt for anything other than buying an asset. So if you're going to borrow money, don't spend it on clothes or holidays or coffees. If you're going to borrow money, buy an education, buy a car, buy a house. Those are really either investing in your human capital or in your financial capital. Those are really, in my opinion, the only times when it's a good idea to incur debt.

7:19And then the last thing, I think it doesn't get enough time or air,

7:26is to match your savings to your financial goals. I'm going to talk a little bit about that in a minute. I just want to say why it's important to save first. So when Kelly and I were discussing this podcast, she said to me, how much does a cup of coffee cost people these days? And it wasn't because she wasn't sure how much coffee costs. But I did this analysis where I take 30 rand a week, right? So if you spend 30 rand a week on coffee, and you manage to persuade yourself, say,

7:56instead of going out for coffee, I'm going to have coffee at home, and I save myself this 30 rand. And for 10 years, I saved this 30 rand. I would have saved 15,000 rand, more or less, in coffee budget over those 10 years. And that monthly saving, the 15,000 rand, would have grown to 20,000 rand if I could invest that coffee saving at 5%. Now, we're using very low return rates here. We do actually expect much

8:28higher return rates, but just a sort of modest assessment of how much it costs you to have a cup of coffee every week. Physically, 15,000 rand, in potential return at very low rates of return, 20,000. It's a big number. It's a big number. So just to quickly round off the question, you know, why it's important to start saving early, you've mentioned two things, essentially. It's to form a habit of saving. Okay. And you've also illustrated the importance of compounding. And you've done it again now with

9:03the coffee example. But so in this coffee example, where we sort of got to roughly 20,000 rand at the end of 10 years of not buying coffee, if you leave that money to grow for 35 years, which is not unrealistic, if you save your coffees in your 20s, at the age of 30, you've got this pot of 20,000 rand. If you leave that 20,000 rand in the market at, again, a modest 5% return, at the age of 65, that would have grown to a little bit more than 110,000 rand. And that's from not buying coffee

9:35every week. That's the benefit of compounding. And then again, I mean, we're using examples here, your investor A, investor B option, examples that you started with. We're using 500 rand a month, but that could be any amounts. That could be 50 rand a month. It could be 100 rand a month. It could be 1,000 rand a month. It's just really to illustrate how far saving will get you, especially if you start early. That's right. So now the reason I picked 500 rand is a little bit self-serving. The unit trust industry

10:08takes, I think, a monthly debit order minimum, generally a 500 rand. I think there are exceptions. But so 500 rand is a nice clean number because it allows you to make investments in unit trusts. And where the money can really be put away. I think with 200 rand or 300 rand, you need to start looking at potentially a money market type of account until you get to a lump sum minimum. And again, the numbers or the sort of minimum values vary from unit trust to unit trust. But typically, I think sort of 5,000 to 10,000 rand would be the minimums allowed in the

10:43unit trust markets. I think something that maybe goes through the minds of a lot of the youth is, I mean, I don't need to start saving now. I can use my money, enjoy my youth and start saving later or wait till I'm earning more so that I've got more to save. And it's not easy for everyone to put money away, no matter how small it is. But if it is possible, it makes a massive difference. It makes a huge difference. I'll work to another example. I'm a sort of spreadsheet junkie. You know, you can illustrate so many things with examples. So I did this example to show the value

11:17of two things. So when you asked me about what are the good financial habits, so the one was saving regularly. And then the last one I mentioned was to save in a way that's time horizon appropriate. So what I did in this example, and I sort of, I think it's a big number, but if you have a child today, and you could put 10,000 rand away for that child, you never top that up. Runs off? Just runs off. It's just on the day of their birth. You put that 10,000 rand away for them.

11:48And then every year on their birthday, you give them a statement. I'm sure there'll be a fantastic birthday present. Anyway, so you do that for a child at the age of 65, right? So now we've really stretched this example to give you the maximum horizon, essentially. That 10,000 rand at 5% would grow to 240,000 rand. It's a big number. It's gone up 25-fold at very modest rates of return. Now, because we're actually looking at a really long-term horizon, let's say you

12:23could invest at a much more attractive 10% per annum. I'm going to guess what your growth and your asset value is then. It goes from 10,000 rand to just shy of 5 million rand. That's the difference between 5% return and 10% return. Okay. Now, the additional 5% is not free. You have to take risk for it. But if you're not going to need the capital for 20 or 30 years, you really should take that risk because it's the only way you open your door to really attractive outcomes. If, however, you're saving

12:58for a house or a car and you need your money next year or maybe the year thereafter, the equity market can fall 50%. You cannot afford to put money away that might be worth 50% less when you need it. That's a bad idea. This is also getting quite technical for some listeners maybe, but when you start talking about taking more risk, there's different asset classes. That's right. There's definitely different asset classes. And most fund manager or unit trust

13:31companies would give you sort of a sense of time horizon on their investment information. So there's a document called the minimum disclosure document, which you know a lot more about than I do. Kaylin puts ours together. But that'll tell you what is the appropriate time horizon for which this money should be considered as, call it in a vertical, as locked up. So a lower risk product would be a type of money market or an income product or a low equity product. And typically those would be suitable for three-ish, four-ish, five-ish years.

14:07And equity or high equity or flexible products, those are really much longer term products. You really need to be looking upwards of seven and 10 years. So that's not for saving for a house. That's because it's more risky. It's more risky. And what it means with risky is you are not sure what the capital values will be in the short run. That's what it means with risky. Because it's slightly more volatile. It's more volatile, exactly. But that volatility is what gives you the upside. So if you don't need

14:43the capital, you don't care about what it's worth in two or three years' time, you want the maximum likelihood of earning really attractive returns over an appropriate investment horizon, which is 10 years plus. You really don't want to be sitting in conservative products if you're saving for retirement or saving for some future objective. If you're starting early. If you're starting early. And that's the beauty. If you start early, you can afford these risks. If you start later, you've got to be a little bit more concerned. In other words, if you're starting

15:16at 60 to save towards 65 and you need to start drawing an income or living off of a portfolio because you stopped working at 65, you've got to be a little bit more concerned about what your capital will be worth because you might need your capital. So again, we're talking really to the youth today. And so one of the benefits we want to highlight or habits is if you really don't need your money, don't put it in a money market. If you need your money, put it in a money market.

15:48Money market means lending overnight or in the next month or two to somebody who gives you your money back in the relatively short period and just earning very modest rates of returns, but consistently. Very little capital volatility or uncertainty about your return. If you're saving for your house or a holiday at the end of the year, it's a very good idea to do that. If you're not going to touch the money, you want to put it away until you're 65, do not take such little risk. It's a bad idea. And again, here we're assuming it's a unit trust type product. So it can be a general unit trust fund

16:23or a tax-free savings option on a unit trust fund or even a retirement utility. But this assumes, as you mentioned earlier, it's a generally minimum investment of 500 round a month or various lump sum options, whether it's 10,000 rand once or 20,000. Various funds are different. But someone who's saving less than that a month, they do have the option of, say, for example, saving them their bank account. If it's 200 rand a month, not enough to invest it in a unit trust,

16:58those people can wait until that amount has built up to be able to put a lump sum into a unit trust fund. That's right. So they're very innovative. Every single bank now will offer a savings or a money market or a higher interest rate facility. And we're really talking unit trust because that's our area of expertise. That's all we know. That's what we do. Exactly. But you could, as you say, if you have 200 rand a month, you could save it in a high interest rate type of account until you

17:32have a lump sum to put away. So even in our example of the coffee, nobody's going to allow you to put 30 rand a week into an investment product. It's just too expensive to administer. So you would need to have the discipline to put that 30 rand aside yourself and then build it up until you have sufficient amount of capital to put it into a unit trust or another type of investment vehicle. So that you can earn a return on it because it's not going to earn a much return if you've got it

18:05in cash. Exactly. No, exactly. Bank account, transactional bank accounts, the stuff that we have most of our, you know, income paid into, they are not return products. They are transactional products. So if you want to save, so there's two reasons to move it onto that account. One, it's much harder to spend if it's not in your bank account. And two, it means you've put it aside and you can earn a return on it. So there are a lot of, I mean, it's always time dependent. It depends on what the reserve bank is doing, but there are always interest rates available for

18:38making your money unavailable to yourself for some period of time. So banks will offer you a seven day deposit or a 14 day deposit or a 60 day deposit rate that is much higher than what is available in your transactional bank account. And it means you lock your money up for that period of time. You can't touch it. That's another good discipline, tying up your money so you can't touch it. And so again, there are ways of building up lump sums towards a unit trust investment. But also my understanding is that there are people in this market, financial advisors, who can help investors make these types

19:12of decisions. Yes. That is not our area of expertise. We really just want to encourage the matching of timeframe and the understanding of the importance of actually starting young and forming the habit. Because I mean, we've had conversations before where people see their income as available to them today. And what is so important is to recognize that there are two people that need to live out of your income. It is you today and you when you can't earn an income. So when you're older than 65 or 70

19:46years old, you no longer have your steady job and your paycheck, you need to live off of the income that you earned when you were 20, 21, 22 years old. And the only way to enable that is for you at 20, 21, 22 to put some of that away. Or 25, 26, all the way. 20, 31, 32, you know. Exactly. The one thing that really has stuck with me that you've said in the past, and I'm going to mention it again here. And I love this quote of yours. It's an original, Madalette Sessions quote.

20:18So you've said, the money you spend now, you are borrowing from your future self. And that is quite scary. Yeah. Your future self can't replace it. Yes. And that's maybe for those extra things you want, you think you need, but you could actually be putting away so that one day when you aren't sitting in income anymore, you have that money available to spend on living and luxuries. That's right. I mean, a fantastic outcome for us all would be have luxuries today and luxuries

20:50in the future. And the way in which we can maximize the probability of both of those is starting the savings habit early, investing in the right type of product. So you could be saving today at 5% or you could be saving today at 10%. If you can save today at 10%, you need to save less to achieve a high level of income in the future. If you're saving today at 5%, you need to save more to achieve a level of income in the future. So if you match appropriately, and you have the habit, that is how

21:25you live a good life now and a good life then. But by cutting your cloth according to a side, I always forget how that saying goes. You also learn that you have an appropriate sense of luxury. You know, a decent homebrew coffee is a luxury. Sure, you know, sort of outside coffee is also a luxury, but maybe go walk in the forest with your friends or go walk on the promenade. One doesn't always need

21:57to spend the money to have a good time. It's not in my opinion. I'm not a big spender myself, but it's not a reduced life. It's just a slightly different set of choices that enables a richer life today and a richer life in all its senses tomorrow. Yeah. And I think it's sometimes hard for people to see the flashiness of maybe other people and the things that they're enjoying. So always stretch

Avoiding Debt and Living Within Means

22:28themselves to be able to enjoy those things too. But ultimately, you're not doing yourself any favours because you're just putting more stress on yourself and not being able to enjoy that one day in the future. Exactly. Also, you don't know, and this is so important during that, you don't know where those people's spending is coming from. It could well be financed on credit cards that come with a 20% plus interest rate. It's a very, very expensive lifestyle when you're paying 20% interest

23:02on your life. And so again, I think it's a conversation for another day. I think it's very important. I do want to make this point that debt is really only beneficial in the long run if you use it to acquire assets. To borrow to go on holidays or, you know, for a cup of coffee on a credit card or your groceries on your credit card and don't pay it for a few months, it's very expensive. And it's

23:34better not to do that. Again, but just I think to finish off quickly, we have stressed the importance of saving early. But if there's people listening to this podcast and thinking, oh dear, I'm not quite in my youth anymore. I haven't started saving yet. Start today. It's not too late. It will take you a little bit longer to get there, but rather now than never. Exactly. As an asset manager, we don't offer advice ourselves. But if you are looking for advice, we are more than happy to put you in touch with the right people. You can contact us at InvestorRelations at denkercapital.com for that.

24:08Or if you just simply like to find out more about us and the funds we manage, then you can have a look at our website at denkercapital.com. Thanks, Madeleine. We'll try it again soon. Thanks, Carolyn.

24:21Thank you for listening to this episode. We hope you found it interesting. If you would like to join us again, please subscribe for more investment insights. To find out more about our team and the funds we offer, please visit our website at denkercapital.com. The opinions expressed in this podcast are those of the participants and do not necessarily represent those of Denker Capital. This podcast does not take the circumstances of a particular person or entity into account and is not advised in relation to an

24:51investment. Please do not rely on any information without appropriate advice from an independent financial advisor. The value of investments may go down as well as up and past performance is not a guide to future performance. Denker Capital is an authorized financial services provider in South Africa.