Starting to invest can be both exciting and overwhelming. When I began my journey, I opened a Tax-Free Savings Account (TFSA) on Easy Equities, putting in a few hundred Rands whenever I could. I did not have a clear plan, just a general sense that I should start “saving” somewhere. Little did I know then that achieving financial independence is less about saving randomly and more about having defined financial goals. Here is what I learned along the way that I hope will help you start your investment journey more purposefully.
1. Setting Up a Safety Net: Building an Emergency Fund
It was not until my commission-based income took a dip that I realised the importance of having an emergency fund. This fund became my first financial goal, helping me feel secure if my income suddenly dropped. I began putting a set amount into a money market fund every month, aiming to build enough to cover at least three months of living expenses. This way, I could sleep better at night, knowing I had a buffer for unexpected events.
If you are just starting, prioritizing an emergency fund can offer peace of mind and a solid foundation before diving fully into investing. Think of it as your financial safety net.
2. Learning to Define Financial Goals
At first, I was putting money into different accounts, my TFSA, emergency fund, and a retirement annuity (RA), without any clear purpose. But after reading books and listening to financial experts, I learned that successful investing needs a clear goal-setting strategy.
Once I knew why I was contributing to each fund, I could prioritise them effectively. For example:
• Emergency Fund: I wanted to cover three months’ expenses as a starting point, eventually growing to a year’s worth.
• Retirement Annuity: This was a long-term investment aimed at helping me live comfortably in retirement. The tax benefits were an added bonus, as RA contributions reduce taxable income in South Africa subject to certain limitations.
• Tax-Free Savings Account: My goal here was to build wealth tax-free, enjoying the growth on dividends and capital gains without the usual tax implications. Since contributions are capped at R36,000 per year (up to a lifetime limit of R500,000), I aimed to maximize this benefit each tax year.
3. Aligning Investments with Your Goals
With my goals in place, I adjusted my monthly allocations to reflect my priorities. I paused contributions to my retirement annuity temporarily, focusing on my emergency fund until I met my initial goal. Simultaneously, I kept up my TFSA contributions to make the most of its tax-free growth limit, since unused contributions don’t roll over to the next tax year.
After 12 months, I reached my emergency fund target, covering three months’ worth of expenses. Now, I’m building toward a goal of 12 months’ worth, but with a smaller monthly contribution. I also restarted my RA contributions, now allocating 10% of my income to ensure my future retirement is on track.
4. Takeaways for Starting Your Own Investment Journey
• Start Small, but Start Now: Whether it’s a TFSA, RA, or money market fund, take the first step with whatever you have.
• Set Clear Goals: Knowing what you’re saving for (like a safety net or retirement) will help you focus and keep you motivated.
• Review and Adjust Regularly: As you reach your goals, assess whether you need to shift your focus to other areas or rebalance contributions.
Building financial independence takes time, but starting with these basic steps can make your journey smoother and help you avoid some of the early missteps I experienced. Good luck, and remember, each step brings you closer to financial freedom!