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Tuesday, 7 August 2012

Can a salaried worker generate R3m in savings within 17 years?

Below I have an example of a how a salaried person (lets call her Amina) can generate R3 million in savings within 17 years.

The first million takes the longest

If Amina starts work as a debt free graduate at age 23 and takes home R15,000 per month and we assume she spends R10,000, she will have R5,000 to invest every month. As a starting point she should build up some cash reserves of R30,000 (3 x monthly living costs). This is her safety net in case of unforeseen emergencies. This cash should be invested in a money market account that pays high interest, but can be accessed within 24 hours. It will take Amina 6 months to raise this amount. Thereafter she can start investing the R5,000 per month, we are going to advise her to invest in shares via Satrix. We project that Satrix will grow at an average growth of 15% per annum over Amina's lifetime. There will be years when she will get a lot more growth and other years when Satrix goes down but 15% per annum is a realistic average.

If she invests in Satrix every month, Amina should have R300,000 within 3 years and 9 months. At this time she will need to take her biggest risk and borrow R150,000 from the bank to buy more Satrix. Typically, banks are prepared to lend you 50% against the value of your blue ship shares provided you cede the shares to the bank as surety. It will cost Amina R3,891.08 per month (according to a large bank's personal loans calculator) to repay the R150,000 loan over 5 years. In the interim she will use the R150,000 to buy more Satrix which means she now has a total of R450,000 invested. At 15% growth compounded per annum she will have R905,110 within 5 years. This means that Amina will have R905,100 invested in Satrix by the time she is 34 years old and she will be debt free. She will also have a sizable amount of cash in the bank from her R30,000 safety net that she started when she was 23.

Now the fun really starts

Once she has her first million (by the end of the year she turns 34) Amina will be able to generate her next R1m within 4 years i.e. by the time she is 38 years old. It will only take another 3 years for her to raise her next million, so she will have R3m "in the bank" by the time she is 41. This whole process could be accelerated if Amina keeps borrowing every 5 years or if she increases her contributions above the R5,000 per month. Once she has a few million saved she will generate capital more and more quickly. As an example, once she has R5m invested she will have R6m after 1 year and three months.

Is this case study realistic?

It is definitely possible to become a millionaire within 10 years, however, it is not usually wise to borrow money to invest. Borrowing money to invest in Satrix is relatively risky, but perhaps not more risky than investing in a rental property. You certainly won't need to worry about tenants not paying rent or destroying your property but you will have loads of stock market fluctuations. If you can live with these fluctuations and you can afford interest rate increases, you can make real wealth. It is also possible to invest R5,000 per month as a salary earner if you have a reasonable job. You will certainly be tempted to spend money on cars, houses and holidays but if you can delay your spending for 8 years, you can get a great head start. My calculations assume that you only ever invest R5,000 per month i.e. I have not assumed that you increase your savings as your salary increases. This means that you can use your increases to buy cars and houses but you should always try to invest the R5,000 per month. 

Naturally many people will struggle to limit their lifestyle costs - it is human nature to want to spend your money every month. If you really want to get wealthy, you will need to sacrifice your short term comfort in favour of long term wealth. If you are prepared to make these sacrifices then you are already 50% of the way there as most South Africans would rather buy expensive cars, homes and clothes.

"Money is like a seed. You plant it, protect it, and nurture it. Over time, it suddenly gets bigger and generates more seeds (more money) for you to plant. Just like it may take 20 years for you to end up with an orchard, it takes time to become wealthy. But if you are going to get older anyway, God willing, why not plant the seeds now so you can have that future?"

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