Making money while you sleep and making your money work for you are phrases that have been thrown around a lot recently in South Africa. This is a guide on how to make money work for you.
The subject of money is sensitive and still taboo among other cultures, before we look at the vehicles we can use to grow our money. We should first look at our money habits and where we spend our money.
The stairway to money
In the wealth of nations; Adam Smith talks about the accumulation and employment of Capital. Countries and individuals are similar because they both accumulate and employ capital. The stairway to money looks at the worst possible ways you can spend your money and the best ones.
Imagine a staircase, going right from the bottom to the top, at the very bottom lies the worst way to spend money and at the very top; the best way to spend money. Let’s explore this staircase, from worst to best.
Services for consumption
Spending money on services that are geared towards consumption is the worst way to employ capital. As you will consume them instantly and not get any value in return, these are things like entertainment subscription services, vacations, eating out and any other services that are meant purely for consumption.
This doesn’t mean you should live in total boredom, but you may need to evaluate the amount of capital that is totally going to waste.
Products for consumption
Products depreciate in value as soon as they are out of the shop but they are not as bad as services. Mainly because you will still be able to sell products even after they lost their value, you can’t sell the food you have already eaten at spur but you can always sell your car.
Products that don’t lose their value
These are products that often don’t lose any value to depreciation and can sustain their value even through inflation. Items that fall in this category are collectibles and a house to live in. The house that you directly live in doesn’t count as an investment because you need it to live and most people don’t like downgrading to a lesser house.
Investments
At the top we have investments; which are anything you put your money into that will appreciate over time. Anything that is expected to use your money to generate more money in the future belongs here. This can be starting a business, educating yourself, investing in the stock market or renting out properties.
How to make money work for you?
Assume that your money needs to be employed, looking at the above 4 categories; which one is the best for your capital? Investments are the winners, in order for your money to work for you; it should be invested.
Let’s look at some of the things you can put your money on so that you get a good investment.
A business
The best way to have your money work for you by far is to put it in a business. Businesses tend to be very good vehicles for increasing wealth, you can be able to get a 40% return per year just by running a business. Something you are not likely to get anywhere else.
The problem is that people expect businesses to generate returns of over 3000% in a year. How can you start your business with R10k and expect to be making R20K per month by year end? You should not even expect to make R10k per month. Unrealistic expectations lead so many people to close down businesses that have a good potential.
Stocks
Investing in stocks is the best way to grow your money without actively managing it. Stocks generally have higher returns than those of most traditional investments and may sometimes outperform a business in some years.
If you don’t know anything about stocks then I suggest investing in ETFs, you won’t have to learn actively trade stocks. You will just put your money in and watch it grow, it’s important to note that stocks can be very volatile but the trend moves up generally. This means even if the market can drop 40%, it will recover and make more gains, as long as you don’t panic and exit.
Banks
You can deposit your money in a bank and have it earn interest. The interest rate from banks is usually small and best for protecting your money against inflation. It can be a lot if you have a lot of money. Some banks give you an 8% per year interest on your fixed deposit. That’s not much if you deposited R10K but can be a lot if you put up R10million.
You can put up any amount in time bank and earn around 7% per year, in a savings account. Money you can withdraw at any time.
Conclusion
This was a guide on how to make money work for you in South Africa. Do you have any thoughts or questions? Comment below.
