Different goals require different levels of investment contributions. If you are like me, you’ve got some big, scary, audacious goals, that require large amounts of money. When you work backwards that is likely a contribution that is more than you can currently afford. It can be overwhelming and demoralizing. It’s like standing at the bottom of Mount Everest and looking up. Thinking “How the heck will I ever get to the top?”
In a recent meeting a client asked me, “How much should I be contributing to my investment?”.
“As much as possible” I said with a cheeky smile.
Jokes aside, I gave him a fuller answer to his question. Before I share it with you, I’d like to offer some things to think about when you are setting your investment contributions.
Contributions take some luck out of the equation
The contribution you make is one of the most important success factors for any investment. The more you contribute, the smaller the required investment return will be to achieve your goal. Investment returns, particularly for risk assets like Equities and Listed property are unpredictable and non-linear. We know what these asset classes have delivered in the past, but the timing of the returns and how good they will be is uncertain. Past performance is not a guarantee of future returns. There is a degree of good fortune involved. Often the most important/greatest returns come at the most unexpected times. But the higher the level of contributions you make, the less “luck” you will require to succeed.
Consistency is key
Consistent contributions to your investment are more certain. You can set the amount and a frequency to deduct automatically from your bank account. You will have some bad financial months in your life when you are feeling pressure. At those times it is very tempting to stop all investment contributions to provide some relief. This temptation is even greater if your contributions do not go off your bank account automatically. The emotional double whammy of having a hard time financially and putting your goals on ice at the same time, is tough to deal with. That’s why I’m in favour of automatic monthly debit orders. There is comfort and motivation in knowing that big goal you think about all the time has been provided for this month by the debit order.
If things are particularly bad, I’d recommend scaling back to the minimum contribution possible instead of stopping completely. That is probably in the range of R500 to R1 000 per month for most South African discretionary investments. Then when you have weathered the financial storm, you will still be on track and can scale up to where you were before without having missed a beat.
Each contribution we make is a drop in the bucket, but if we keep contributing: the bucket will soon fill up. Hit those contributions every single month for years on end and exciting things will happen.
Start where you are
How to do you get to the top of Mount Everest? You start where you are and take a small step forward. And another step, and another after that. Assess where you are financially and start with an amount that you are comfortable contributing on a regular basis. It may be smaller than you like and it may feel like you are getting nowhere at times, but every month you will be a little bit closer to achieving your goal. Getting started is the most important thing you can do, followed closely by perseverance.
Stretch yourself a little bit
That contribution that you would be comfortable making every month? I’d encourage you to give a bit more than that. Put yourself just a little bit out of your comfort zone. Stretch yourself a little bit. I’m not talking 50% more, it could be 5%. All or nothing strategies often result in nothing. What I’m suggesting is more sustainable. Giving yourself a nudge in the right direction. Human beings are very resourceful and creative when given restrictions or limited resources. Provided you have not completely overextended yourself, you will be able to make it work. The likelihood is you will prove to yourself that you are capable of more than you thought.
Increase as time goes on
Research from economist Shlomo Benartzi titled “Save More Tomorrow” detailed how they were able to improve retirement outcomes for employees of a large company by asking them to agree to escalations today that would only take effect 12 months and more in the future. This is one of the things I used to suggest to my planning clients whenever we started a new investment or were looking to improve their contributions to existing investments. Putting a realistic increase in place from next year is far more palatable and likely, than having to increase your contributions right now. This, married with purposefully increasing contributions as your financial circumstances improve, is a recipe for success. It will quickly turn a R500 monthly contribution now into a R5 000 monthly contribution in the not-too-distant future.
So…What did I end up saying to my client about his contributions?
“There is a level of contribution you are comfortable with. I’d recommend you aim for a bit more than that. Make yourself a little bit uncomfortable. Then contribute a bit more every year and as your finances improve.” He smiled. I could see him thinking about it and noticed a glint of determination in his eye. I’m pretty sure he’ll summit his personal Everest.
Written by Brendan Dunn for Honest Money Podcast