The best way to save for your dream holiday or hon...
Saving for your dream holiday or honeymoon is easier with our goals-based financial planning philosophy; we match investment goals with the right strategies to get you there, rather than the more simplistic approach of merely placing your money in a product that seeks the highest possible returns for a given risk profile.
Errol Meyer, Head of Advisory Services at Standard Bank Financial Consultants, says the first step in planning your savings strategy for your dream holiday or honeymoon is to define the investment horizon. This will be short-term, so products focused on long-term investment, such as RAs, shouldn’t be considered.
“For a short-term savings goal with an investment term of around three to five years, a unit trust or tax-free investment vehicle may be your best option,” says Mr Meyer. “It would be far better suited to such a strategy, as they provide the necessary diversification in asset classes, and the funds can be accessed once the investment term has ended.”
Once you have defined the term of your investment and chosen the solution for your needs, choose where you plan to holiday and how much it will cost. Assuming your destination is local with a current cost of R100 000, factor in the inflation rate anticipated over the investment term. If inflation is expected to average 5% over the five-year investment term, your after-tax returns must amount to R27 628 just to cover the impact of rising prices over the investment course.
In the above scenario, you’ll need to contribute at least R19 000 each year with an expected return of inflation-plus-5% to reach your goal. If this contribution won’t get you to your long-term goal, consider contributing a little more each year, say R20 000. Keep the investment in a moderate inflation-plus-3% product, rather than exposing a smaller amount to a more aggressive portfolio.
“Trying to make up returns by going more aggressive isn’t always a good strategy in a short-term investment horizon, as you have less time to recover from any potential sell-offs,” says Mr Meyer. “You want to stick to a goals-based financial planning strategy in which you are focused on how to achieve a specific goal, rather than merely chasing the biggest possible return, which can come with more risk.”
If you’re planning a foreign holiday or honeymoon, consider an investment portfolio denominated in the currency you will be spending at your destination. This will ensure that any possible sell-offs in the rand don’t erode your investment returns.
“An offshore investment in a currency like the US dollar or euros will likely have a lower inflation plus objective to meet, but it will remove the concern of a currency sell-off. It’s always possible that the rand can move in your favour, but if you’re planning something like a honeymoon, then that’s not a chance you want to take. If the rand moves the other way, you might end up spoiling your honeymoon.”