The impact of small steps and consistency on money management

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How do you invest when your salary is very small? Is investing for rich people only? Many people are not aware of the impact of small steps and consistency on money management. What can you do with a R 500 investment?

Most investments products in South Africa require a minimum deposit of R 500. Considering that the minimum wage is around R 20.76 per hour (approximately R 3 700 per month), the least paid people are able the invest at least 13% of their income.

I am aware that setting aside R 500 may be very difficult for a low income earner but where there is a will, there is a way. Yes it is difficult but it is not impossible – sacrifices can be done for a better future.

In this article we will talk about the impact of setting aside your little money consistently. We will focus our attention on:

• Exchange Traded Fund (ETF),
• Life Insurance,
• Increasing the repayment amount and
• Cutting small expenses.

Assumptions

The following assumptions are made to simplify the calculations:

• You will afford to make a deposit of R 500 every month.
• Your risk appetite is fairly low (that is you are not a risk taker).
• Withdrawals are not allowed.
• Investments are for long term and the returns are reinvested.

The Long Term Financial Impact

ETF

Let us consider an ETF that tracks the performance of an S&P500 index for example Satrix S&P 500 ETF or Sygnia S&P500. Suppose that you employ the dollar cost averaging strategy and invest every month consistently. According to Nerdwallet, the historical yearly average return of the S&P500 is 10%. Let also assume that after catering for fees and additional costs you are left with approximately 7% return and you are aged 25. In this case we can suppose you will be investing R 500 for 40 years.

At the end of 40 years (that is at the time of retirement) your investment balance will be approximately R 1.3 million. In this case you will retire a millionaire but what you only do is to have a monthly investment of only R 500!

The graph above shows the growth of your money in the 40 year period. Since ETFs are less risk investments, you are less likely to lose your money.

Relevant article: Investing for the first time with a small budget.

Life Insurance

In case of severe illness, disability or death, if you have a life insurance, your family will get paid a lot of money.

With Discovery, a 29 year old man who is a non-smoker qualifies for a R 3 million payout in case of death with a monthly premium of only R 340. The same man will have to pay only R 500 monthly premium to get a payout of R 4.75 million for his family.

Life insurance varies with people and also the expected payout. Some companies can offer you a R 1 million payout for a monthly premium of around R 150.

Note that women will pay a very cheap premium because their life expectancy is higher than men. The younger you are, the cheaper will be your premiums. A 25 year old woman will get a payout of R 4.75 million for a monthly premium of less than R 500.

Insurance companies like Discovery can refund a portion of your premiums if you live past a certain age or if you are having a healthy living (like exercising or buying healthy foods like vegetables and fruits).

Bonus note:

Even if you die few months after getting a life insurance, you will still get the full payout. This is really great especially if you have a young family. At least you will not stress about their well being after your death or if you get critically ill or get disabled.

Relevant Article: Planning for the future of your children.

Paying off debt fast

Suppose that you are in debt, for you to be able to pay off that debt fast, you can increase the monthly repayment. As before, we want to show you that a small amount can make a big impact on your life.

Relevant Article: Investing before paying off debt – Does it make sense?

For illustration purposes, we will assume that you are owing R 50 000 for 20% interest compounded monthly from the bank with initiation fees of R 1 207.50. The loan is supposed to be repaid in 5 years with monthly repayments.

There are two scenarios we will discuss :

• You pay monthly repayment of R 561.87
• You add extra R 500 on the monthly payment (the total payment will then be R 1 061.87)

Our goal is to show you what will happen if you add an extra R 500. For simplicity, we exclude insurance costs and service fees of a loan. A 5 year loan will be fully paid in 25 months (2 years 1 month) if you increase your repayment by R 500. This is clearly indicated by the figure below. Note also that, your total loan balance outstanding falls to zero faster than the option of no extra payments.

Cutting small expenses

When your income is very small, you need to ensure that you cut down unnecessary expenses. Small expenses if added together will sum up to big amounts. When you are budgeting, small expenses are usually negligible but their impact is massive.

Suppose you spend about R 25 for your lunch everyday at work (this sums up to approximately R 500 per month), you can save a lot of money by bringing home-cooked meal to work. This can save you a lot of money.

You can also save the amount of money you spend on calls by buying monthly data and voice bundles. Whatsapp calls are extremely cheaper than a normal voice call.

Depending on your spending behavior, if you make it a goal to cut small expenses which are not really important, you can have enough money to invest.

Suppose that you are saving expenses worth R 100 per month, in a year’s time you would have saved R 1 200 (excluding interest). If you are putting this money in a saving account that pays 3% interest compounded monthly then in 10 years you will have saved R 13 974.14. Now that is a lot of money!

Relevant article: Think beyond Income and Expenses.

Summary Points

Small amount of money can make a difference if we analyse the impact in the long term. Whether you invest, cut down on expenses, pay life insurance or increase the repayment on your loan, the impact is massive. Therefore the impact of small steps and consistency on money management is very big.

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