“Money makes money. And the money that money makes, makes money.” (Benjamin Franklin)
As investors, it feels like we have a lot to worry about. We want to know which funds are going to perform best. We listen for predictions about whether the US stock market is going to keep running, or if the JSE will outperform it. We wonder what the higher oil price is going to do to our investments.
However, all of these things are really outside of our control. Focusing on them is therefore not the most effective or efficient way to improve investment outcomes.
What is guaranteed to make a difference, however, is something that is often overlooked: the time we give our money to compound. No matter where or how our money is invested, time is ultimately the most important factor in determining how it will grow.
Starting early
There is no better way to think about this than the power of South Africa’s tax-free savings accounts (TFSAs). Originally launched in 2015, government recently raised the annual contribution limit to R46 000 per person.
If you use that allowance wisely, these are one of the most potent wealth-creating tools available to local investors. And if you as a parent or grandparent make contributions into one for a child, the results can be mind-boggling.
Consider what would happen if a TFSA was opened in a child’s name on the day they were born. This has to be done by a parent or legal guardian, but once it’s established, anyone can contribute to it. If their family invested R3 800 for them every month from that moment, this would just about meet the annual limit of R46 000.
Currently, the lifetime limit is R500 000, which you would reach around the time they turned 11. If the investment grows at a reasonable rate of 9% per annum, the TFSA would by that point have increased to R851 000.
The tax-free miracle
It’s what happens from this point that is truly astonishing.
Even if the government never increases the lifetime limit, and so you never add any more to the account, the value of that investment will grow as follows if it is never touched:
By the time the child turns 18, their account will hold R1.5 million.
At age 21, they will have R2.1 million.
When they reach their 30th birthday, they will have R4.7 million.
By the age of 50, the account will have grown to R28 million.
And if they decide to retire at 65, they will have R108 million!
Making a reasonable assumption about inflation, that would be worth around R11.5 million in today’s money.
It gets better
Bear in mind, this is the amount the account would accumulate if the government never increased the lifetime limit. It is, however, not unreasonable to assume that this will happen in future, since the annual limit has already been pushed up twice.
If that happens, and you are able to keep contributing R3 800 per month into the child’s TFSA until the day they turn 18 at a return of 9% per year, they will already have R2 million at that point.
If that investment is never added to or touched again, when they reach 65 it will have grown to R138 million! That would be the equivalent of around R15 million today.
What that means is that if you are able to consistently maximise a child’s TFSA until they turn 18, that would have gone most of the way to funding their retirement. You would have largely taken care of their most important financial imperative.
And that is all due to something entirely within your control: giving that money the maximum amount of time to grow.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.
© FinDotNews
