We dream of riches and fancy sports cars and exotic holidays to island destinations, yet we never actually get down and start the process of wealth creation. We think it’s too hard, we worry that we need to be rich to get richer or we imagine we lack the knowledge and tools to create wealth.
The stark reality is that making ourselves richer than we are now is seriously easy, with one caveat: there is no quick fix, it is very much a process that takes time and if there is a secret it’s that the more time we have the easier it is to create wealth.
The first step in the process is the one that scares people the most: you need to get a handle on your finances. Spend a couple of hours working out what you own (your assets) and what you owe (your liabilities). In a sense do a personal balance sheet so that you have a snapshot of your current financial wellbeing — or lack thereof.
Then start on your spending habits, check the last few months’ bank records and work out where you’re spending your money. If you seem to have lots of unaccounted-for expenses start a money journal in which you record every expense for a couple of months. Now you know that the coffee you buy every day at work adds up to over R3 000 a year. What you need to get to is a situation where your income is more than your expenses so that you can invest the difference. And if your comment is you can’t afford to save money then you’re doing it the wrong way around. Most people spend and then save — you need to save and then spend. Saving is basically paying the future-you and while it may mean no daily coffee for the current-you, the sacrifice will be well worth it in wealth creation.
The investment journey
Once that’s done and you’re in control of your finances you will have some surplus cash every month. Initially just save the money, and only when you have a nest egg stashed away can you turn towards investing your savings.
So where to start? The best asset class over the long term is the stock market. Sure the media often runs horror stories about markets crashing and losing large amounts of their value, such as the global financial crisis of 2008/9. But over the longer term equity markets do very well and will turn your savings into wealth.
Typically the best place to start for somebody new to the stock market is a great product called exchange traded funds (ETFs). Like their better-known sibling unit trusts, they enable an investor to buy a basket of shares and track general market performance. The key benefits of ETFs are that they are cheap in terms of costs and give exact market performance. They track the market because they simply buy the shares in the market, put them into a basket and you can buy the basket.
For instance, launched in 2000 the Satrix 40 ETF tracks the largest 40 companies listed on the stock market. So by buying Satrix 40 you invest in global diversified miners such as BHP Billiton and Anglo America, local giants such as the big banks, MTN and Vodacom, retailers like Shoprite, a host of resource stocks such as Sasol, Impala Platinum and Anglo Platinum and gold miner AngloGold Ashanti.
Investing is about time, and to 15 July 2011 Satrix 40 had an annual return of 11,2% over the last five years and 15,6% over the last ten years — both periods include the financial meltdown of 2008/9. An amount of R10 000 invested in Satrix 40 ten years ago is now worth some R42 000 while the inflation value of that R10 000 would be around R18 000.
Now you have your first well-diversified investment and you can even check its performance in the paper every day or week, albeit for long-term investments you don’t want to be worrying about daily, weekly or even monthly. You begin to feel comfortable with the market and after a while you may venture into buying directly into shares you feel will do even better than the market average. The JSE as well as some stockbrokers offer free courses on investing in the stock market and the Internet is naturally full of information to get you started on your journey into the world of investing.
As a last comment, remember that wealth creation takes time. As I mentioned earlier your best asset when investing is time, so avoid the temptation to try your luck with get-rich-quick schemes, penny stocks or derivatives. Sure they can result in great profits very quickly. But you need a lot of knowledge because even in experienced hands they can be very dangerous leading to large losses in double quick time.
All the best on your journey of wealth creation.