"Time is your friend; impulse is your enemy." (John Bogle)
You know how easy it is to spend money on your credit card because the payment is automatic and the pain deferred? The exact same logic applies to investing via debit orders – except this time it works in your favour.
Debit orders take the emotion out of investing. With a debit order in place you won’t have to fight with your conscience about whether you’d be better off contributing to your RA (or any other investment vehicle) or taking the family on a much-needed weekend away.
Debit orders force you to adhere to your budget and mean that you are much more likely to achieve your investment goals. Assuming you’ve consulted with your financial advisor before setting the value of your debit order, you are much more likely to retire happy, healthy and wealthy if you have an investment debit order in place. Investing the same amount every month also helps you to stay the course and not be disturbed by market cycles. No matter what anyone tells you, you cannot time the market.
Debit orders help you to benefit from a phenomenon known as “rand cost averaging”. When investing a fixed amount on a regular basis, one buys more units (of shares or unit trusts) when prices are low and fewer when prices are high. By doing this over an extended period, you benefit from a reduced average cost per unit over time. What’s more, by automating your investing via debit orders, you minimise the risk of losing capital if the market falls shortly after investing a lumpsum amount.
While most investors understand the benefits of compound interest (growth on growth for supersized profits), few realise that these wondrous benefits are actually enhanced when you make frequent investments. Simply ‘doing the math’ proves, once and for all, that monthly debit orders trump an annual investment of the same total amount.
You will earn a whopping R169,880 more by simply investing monthly. Debit orders don’t sound so scary now, do they?
Let’s face it, life gets in the way of the boring stuff and we often end up missing our annual reviews with our advisors. If this goes on for some time your investment debit orders will quickly fall behind inflation (especially in a country like South Africa), and your once-golden nest egg will soon lose much of its lustre. Fortunately, there’s an easy way around this – simply arrange with your investment provider to increase your monthly contributions by at least 5% (preferably more) every year.
Remember that auto-escalations are not a substitute for a financial review, as your investment goals may change over time and your asset allocation will certainly drift as the markets fluctuate. Which is basically another way of asking you not to decline your annual review requests!
Now that we’ve looked at how debit orders create savings discipline and leverage the benefits of both rand cost averaging and compound interest, you should have a much higher opinion of these much-maligned banking instruments.
If you haven’t already done so, speak to your financial advisor about setting up a monthly investment debit order.
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