TLDR; Here’s the golden nugget: Make sure you wouldn’t need to work until the day you die.
The personal finance community and FIRE / Frugal community has grown over the last year in South Africa, and I can see there’s fresh blood coming into the community which is really awesome.
I do find a very low focus on anything else except ETFs. putting your money in the stock market and waiting for it to climb. I want to explore some of the options here, including these to help you diversify.
The most important two words in the world of personal finances is cash flow – think of it like the veins in your body that brings life. Think about what cholesterol does to your body: it blocks the arteries so that not that much blood can flow through to the areas that needs it.
It’s the same with debt = it blocks the cash from flowing freely for you to invest in things that would generate more cash flow.
When you look at the below, think about things that will help you with cash flow.
Saving vs Investing
Before we get started on the list below, let’s review the difference between saving and investing:
Saving is when you put money (cold hard cash) away in a very liquid place. This means the money is easily accessible and you can quickly get hold of it if needs be.
Investing is putting your money/capital into an asset (a paper asset or something physical) that has a good probabilility to generate handsome returns over time.
Notes on cash
If you invest your hard earned cash in the bank – not in your cheque account – it should generate some interest on the money you invested. Remember this is a good way to save money, but not for investment purposes.
Interest rates are normally not that great – in South Africa you might get anywhere between 0-13%.
It’s absolutely worth having some money available in case you need
I love real estate, as this is what I know. Property is a good asset class to diversify into – you can buy a physical property and rent it out – you could even allow your tenant to pay off your bond, meaning you score even bigger on this!
The idea is that the asset will increase in value, and you will receive rent for your asset (which I like to refer to as dividends on my property).
Note that not all property, as in all investments are a good investment. I suggest you do a lot of research to make sure your investment is solid.
Stock market related income sources
The stock market has in recent years become exceptionally easy and relatively cheap to invest in. There’s many different investment products which people write books about, but here I will only discuss two which I think is worth looking in to – note that I am biased!
Bonds and shares
If you ever wanted to invest in a company, then this is your opportunity. You can either buy a share in it, or finance it with debt (bonds).
For the normal investors like us, there’s normally two different strategies: passive and active trading – some people actively trade stocks daily, whereas others let their stocks sit passively and wait for prices to accumulate in the long run.
Some shares pay dividends – this is like giving you some of their profits if the company is making money. It’s a fine balance though between growing the company or paying dividends.
ETFs is an interesting product – basically how this works is there’s a set of rules in a computer on what this fund tracks – e.g. market cap, company size, ratios and other fancy words no normal person understands. As soon as a company doesn’t match the criteria, they get sold out of the ‘basket’ and other stocks are purchased.
ETFs are diversified and can pay dividends!
Business related income sources
I had a friend come to me recently and ask if I wanted to invest in a company he is starting. I also have a family member that started a company that is doing exceptionally well, who I offered to invest in. This could be financial or investment by other means such as skill, time or physical equipment. In the long run this could pay off an awesome dividend every month!
This strategy cuts out the middleman en loads of fees, but is slightly more risky. Make sure you have all the needed paperwork in place though to cover yourself!
As in one of my previous posts (find it here) on side hustles – I fully believe that they can grow to be very mature and income generating. Even some small ideas can grow to become very big. Think how something like you making your own preserved jam and chutney can escalate into a big company!
It might take some extra effort, but with perseverance could be well worth it.
Unconventional income sources
There’s many unconventional types of income sources that could give you money. I don’t want to go too deeply into the other options, as many have a shelf lifespan (think bitcoin) – but here’s a few you are able to look into if you like
- Online courses, ebooks, web design, blogging etc etc etc
- I believe this market is quite saturated, and everyone is doing it – but it does not mean this is not profitable! Just make sure it’s an investment and not a liability or a waste of time.
- Peer lending
- Though not huge in South Africa yet, this is a novel approach to get good interest on your money – and often more than the banks would offer.
- Buy a cow
- If you check a few places, you are able to buy a cow, let the farmer manage all the things for you and pocket the money – the returns seems to be fairly low (10-14 %), but it might be a good place to diversify. Check the link here.
Above is the main investment vehicles people choose from. I have deliberately not included things like retirement annuities and unit trusts, as I personally cannot justify the fees involved.
I also think there’s many fads in the industry – think bitcoin and the notorious ‘Start a blog’ article on the net that will make you want to kill yourself.
I do think that the only way to become financially free would be to buy more assets than liabilities. As someone on twitter said recently: “Repeat for a few years and you have financial independence”
Frugal Local runs his own company (Effectify). He does software development and helps small businesses and startups with digital solutions. He enjoys writing articles and simplifying complex things – such as the article you’re reading!