Mapalo Makhu is a personal finance coach, speaker, money columnist and founder of Woman & Finance – a platform that aims to educate and demystify personal finance. In this extract from her book, You’re Not Broke, You’re Pre-Rich, she busts the myths involved with investing, buying versus renting and when to start saving for retirement.
“I WROTE THIS BOOK because I believe the road to financial freedom is a journey everyone can embark on. I wrote this book with you in mind. You, who perhaps have never been taught anything about how money works. You, who have been too intimidated to pick up and read a book about personal finance because you were too scared of the jargon. You, who want to #getyourmoneyright. I had you in mind when I wrote this book.”
– Mapalo Makhu
MYTH #1: I need a lot of money to start investing
You absolutely don’t need tons of money to start investing. The most important thing is to start early.
MYTH #2: I need a financial adviser
You don’t need a financial adviser to access the different products available on the market. While there are good financial advisers around who provide a much-needed service, you don’t necessarily need one. You can easily go for the DIY approach and save yourself money in the long term. (This approach is mainly for those who are disciplined, though, and a skilled financial adviser can provide not only financial advice, but also help you by making you accountable for your investment actions.)
MYTH #3: I have to accept whatever interest rate the bank gives me when I borrow money
Interest rates are always negotiable. You can negotiate the rate at which the bank either lends you money or pays you interest on your deposits.
MYTH #4: It’s not worth saving if I can only contribute a small amount
A small amount can go a long way. Don’t believe me? I’ll prove it to you:
EXAMPLE 1.1 Investing a small amount over a long term
You invest R500 every month for 20 years in a tax-free savings account, or TFSA. If you continue to pay R500 throughout the 20 years, and your investment grows at 10%, you will have invested R120 000, but your investment will be worth R361 993.36! So start saving now! It’s better to start immediately than to wait until you think you have ‘enough’ money one day. You won’t ever have ‘enough’ money.
“I have come to realise that many people hold on to widely held beliefs about money that aren’t true at all. Do yourself a favour and allow yourself to question them.”
MYTH #5: Eventually I’ll make enough money to catch up on my retirement funding and other investments
Because of compound interest, it is very hard to catch up with someone who starts investing in their retirement early. Remember that compound interest is interest on interest, so the sooner you start earning it, the more your money will grow over time. Even if you double the contributions of someone who starts investing earlier, it is almost impossible to catch up with that person if you start investing late.
EXAMPLE 1.2 How to save R1 million
If you invest R2 750 per month over 15 years at 10% per annum, you will invest R495 000 and the investment will be worth R1 104 458. Playing catch-up will be extremely difficult, even if you invest double the amount. If you invest R5 500 a month at 10% for half the time (7.5 years), you will also invest R495 000, but your investment will only grow to R659 576.13. In fact, if you want to reach the R1-million mark in 7.5 years, you would have to invest R7 609.52 per month.
MYTH #6: I am too young to start saving for retirement
Absolutely not! The earlier you start saving, the higher your savings will be. The calculations in the two examples above show this clearly.
MYTH #7: My partner manages our money, so I don’t need to worry about it
I don’t want to be the harbinger of doom and gloom, but reality shows that many relationships don’t work out. Or, even worse, your partner might pass on before you. If you have never bothered to understand your finances, you might find yourself in financial turmoil. Three years ago, my then general manager and I were discussing money matters, and she told me of a woman whose husband had taken care of all the couple's joint household finances. The wife had only been responsible for buying groceries. Soon after her husband died, her electricity was cut off. She discovered only then that payments were outstanding – not because she didn’t have money to pay the electricity bill, but because she had never made any payments in the past! It is extremely unwise to be uninformed about family finances, as this can leave you very vulnerable if something happens to your partner. Be proactive. Make sure you are knowledgeable about your joint finances.
MYTH #8: Buying a home is better than renting
You may have heard people say that if you are renting, you are paying someone else’s bond when you could be paying your own bond and own your own house. But remember that buying a property comes with a lot of costs – not only when you purchase the property. The cost of ownership can be very high, as it will include maintenance of the property. You need to ask yourself why you want to own a property: Do you want it for investment purposes, or do you want to live in the house yourself? Especially if you are still young and likely to move around the country or travel the world as you advance in your career, buying a property might not necessarily be the best choice for you right now.
"A credit card is not an emergency fund!"
MYTH #9: I don’t need an emergency fund; I have a credit card for that.
Repeat after me: ‘A credit card is not an emergency fund!’ Remember that it costs money to borrow money. You will quickly be caught up in a debt spiral if you don’t start saving up money for emergencies now.
MYTH #10: Fees are a necessary evil to get good returns
This is not true. The fact of the matter is that high costs eat away at your investment. The whole point of investing is to have more money at the end for whatever your goal is. If an investment attracts high costs, you will probably not reach your goal.
MYTH #11: Small purchases don’t make a difference
Benjamin Franklin said, ‘Beware of little expenses; a small leak will sink a great ship.’ When trying to get your finances in order, a level of frugality is required. You may have to cut back on eating out to put more money towards your investments or towards paying off debt.
MYTH #12: Paying off all your liabilities (bond, car) will reflect poorly on your credit record
Fact: Paying off your debts will reflect well on you with any lender. It shows that you are able to service your obligations. There are many other ways to ensure a good credit history even when your major expenses are paid off.
ABOUT THE AUTHOR
As a personal finance coach, speaker, money columnist and founder of Woman & Finance – a platform that aims to educate and demystify personal finance – Mapalo Makhu is passionate about educating and inspiring women to take charge of their finances and make the best financial decisions for their current and future selves.
Through Woman & Finance, she has collaborated with some of South Africa’s best financial minds to generate fresh and relevant insights into an area many feel unqualified to engage in. Her contributions to local media channels such as City Press, Classic FM, eNCA and Afternoon Express on SABC 3 and further afield are aimed at providing a unique brand of jargon-free financial education with a specific focus on women.
Instagram: @mapalomakhu
Twitter: @WomanAndFinance
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