Young but wanting to invest early

[apparition]

So I (22/f) started saving up last year, randomly, when I got my first job and have ended up with around 20k in dec 2020. I’m currently sitting with that amount in my savings.

A lot of the advice I see towards young people on the sub is that you shouldn’t invest long term very early because there’s a chance you might need that amount of money for emergencies and general living expenses, something along those lines. I understand that and see the point.
I’m currently unemployed, live at home, have my bills paid, get support from my parents and don’t have any financial responsibilities other than extra things I want.

My question is, what do I do with what I have saved up now without completely restricting myself for the future? Do I just keep it in my bank account and add more or is there another way I can be smarter and somehow use these savings when I still have the chance?

 

[resjudicata]

@apparition It depends how accessible you want the money to be. If you want it within the next few years, it will have to be in a bank type saving product (fixed deposit) but you will earn very little on it. Opposite end of the spectrum, and best use, is to put it in a TFSA and let it compound for the long term. To be honest, I see very little point of anything in between with that amount of money.

Saving for the long term is great because compound interest is EXTREMELY* powerful. Although starting early isn't that useful normally, because the rate at which a young persons income increases is very rapid through your 20s and 30s, if you're in a professional career.

That said, the habits and lessons of starting early are invaluable.

My vote is if you want that money for something important, like education or travel or something put it in the bank and use it for that when you can/must.

If you don't need the money, put it in a tax free account invested in equity ETFs... and essentially write it off for the next 50 years it will compound nicely with no tax liabilities, and you will learn about how to save and grow your money over time. It's important - for when you start earning the big bucks!

R20,000 50 years at 13% = R9mn.
Just for illustration

 

[mikey01]

@resjudicata This is the way.

 

[zandry42]

@resjudicata I think that even for a medium - long term goal (5-10 years) it’s definitely worth putting it in equities. ETF: S&P500 or MSCI world. The growth you’ll get on there far far exceeds any bank account interest (especially at current rates) and will make all the difference. For this, you obviously don’t used the TFSA because you have plans on withdrawing in the near future

For the compound interest impact to happen in an ETF you need to reinvest dividends into the fund.

 

[marcosgpro]

@apparition TFSA
or
Interest earning savings account, you can still freely access your money

 

[lizziepearl]

@apparition You can move your money to Tymebank goalsave account. I use it as an emergency fund but the interest is OK compared to other banks and there's no service fee which is nice.

Another option is to put it towards an ETF on Easyequities like EC10 etc, its easy to remove money from Easyequities when you need it.

 

[real_mayonnaise]

@lizziepearl I'm in the same boat as Ok_Bad_1813. Do you think it would be a good add the money(~20k) to the EE zar account (not TSFA) on an ETF like S&P500? That way it will possibly make more interest than in an FNB savings account and you can withdraw it without affecting how much you can add to a TSFA. Also, if I add it to the EE zar account, when do I start paying tax?

 

[abbayabba]

@apparition From the advice I have been given and the many articles/podcasts/talks I have read and/or listened to, it is always best to have an emergency savings fund that is about 3-months of your typical salary. COVID showed that idea up and so now many people are recommending 6-months of your salary instead to be safe. Either way, you really don't know what could happen in the next few weeks or months, so it's always best to have a fund which you can easily dip into without any drawbacks.

 

[zandry42]

@abbayabba I agree, but I think it’s only necessary to hold 3 (or 6) months of expenses in an emergency fund. Generally part of your salary would go to savings / discretionary spending and it’s unnecessary to allow for this in your emergency savings . Rather keep the emergency fund to the smallest safe amount and invest the rest in a high grow asser

 

[nadinepeony]

@apparition Hey - not a financial expert by any means - and by any means I REALLY mean - I guess.

So 20k for a 22 year old even in SA is a lot of money - it took you a long time to earn. I am also extremely risk adverse so have only recently started venturing out to more "risky" assets.

I think the advice from Ramble_don is right - and you need to make a choice - but in saying that - you are young - and you take more risk when you are young as you have a longer time to make up for it.

What I have done:

1. Kept most of my bulk savings invested as cash in an interest bearing account.
2. I took 20% of my savings, and put 10% into various self chosen Equities on EE (Easy Equities)
3. I took the other 10% and put them in Crypto.

The reason I only risk 20% is if I make a mistake - and an investment goes belly up and I Lose 100% of it - Ive only risked 20% and the rest of my capital is safe. The gains are smaller I realise - but like I said - I am risk adverse.

Now the equities I pick - complete guessing - shoot me down if you guys like - but I have 0 knowledge on stocks, shares, forex etc - I put money in the more "better known" companies - and so far its been good - Ive been beating the interest rate offered by my bank. I did so well on an initial stock, I doubled my money, withdrew my initial investment, and left the other half in the stock - this way the money I am risking I treat it as like its something I never really had in the first place.

Crypto I am keeping for the long term - the very long term. I put in R700 a month (500 into btc, 100 into ltc 100 Eth).

I suggest opening up a TFSA (Tax Free Savings Account) - what kind is up to you - I chose a cash TFSA - it allows you to invest R36 000 a year, with up to a total of R500 000 (excl. interest) allowed in yoru lifetime, so it will take you +- 15 years to get to the R500 000, at R35k a year.

Keep in mind however that (for simplicity sake) you get to R500 000 in savings (excl. Interest), you have an expense and you withdraw R10 000 - bringing your new total to R490 000 (excl. Interest) you CANT put back that R10 000.

So I treat this as a dirty fund to supplement my retirement one day - I put in 36k a year - in 15 years I will have close to 800k - +- R220K of that was interest, and tax free - and you let it grow.

So things I suggest you do:

1. Keep majority of your savings available - maybe a call account or immediate access account - they have lower interest rates but you have immediate access to your money.
2. "Risk" a % of your savings you would be "happy" with losing if worst came to the worst -an amount that would be bitter to lose, but not put you into financial ruin.
3. Regularly save into something - be it a TFSA, Crypto - maybe you put in a few hundred in Equities for you to play around with.
4. Expand your portfolio - something I only started doing late - because I am so risk adverse I kept all my money in cash in an interest bearing account - but I think they call it dead money or lazy money. With current interest rates so low you are technically losing money because of inflation.
5. Pay off your debts first - I have a car that is financed, the monthly interest I get from my cash account I put into my car - I build up a small sum, then get a capital reduction done on the outstanding value, this reduces my monthly payment, I then use the amount my monthly payment has reduced by and put that into my car too - to further increase how much I am paying off. The positive sums I put into my car bear interest too so in a weird skewed view - its paying its self off too.

Again this is not financial advice and I am just telling you the path I took. Is it right? no.... but it seems to be working for me.

 

[mikey01]

@apparition tax free investments and retirement annuities are great, especially for long term, and crypto currency is banging right now. Invest!