If you want to achieve long-term financial security and success, you’ll need to save and invest your money over time. This will take planning, discipline, and commitment, especially when you’re younger and starting your investment portfolio.

You need a plan that you can stick to, outlining clear financial goals in the short, medium, and long term. Your plan must also cover how you’re going to achieve those goals, and how long each one will take. Having a long-term plan helps you stick to your wealth creation goals even when short-term challenges arise.

We’ve identified 7 focus areas that can give you a framework on which to build an achievable strategy for building your wealth over time.

Building wealth: A step-by-step approach

This framework begins when you start working, as soon as you can afford to put a little money aside every month. The beauty of this framework is that it applies to everyone, at every stage of life. You can revisit the framework anytime to assess which step below applies to you. That step will provide a guideline of the next suitable action to take on your journey to financial resilience and wealth.

• Step 1
  Your first step is to save around R5,000 to R10,000 in a savings account as a start towards your emergency fund. You’ll then have a small backup, so that unexpected expenses like car repairs or an emergency trip to the vet won’t force you to dip into other investments or go into debt.
  
  
• Step 2
  After accumulating a small emergency fund, the next step is to pay off as much debt as possible (excluding your home loan), as fast as you can. The ‘snowball’ approach is a popular method of paying off debt like student loans, store accounts and credit cards. You channel any extra money towards clearing your smallest debt first, then move onto the next biggest. Now you can add the amount you were paying on the smallest debt to this payment every month, which reduces the total interest you pay and clears the debt faster. In practice, this method tends to work best because it keeps you motivated as you tick off each debt. If you follow this approach consistently, you can pay off all your debt while living within your means.
  
  
• Step 3
  The next goal is to continue to build up your emergency savings fund until it equals 3 to 6 months’ income. This gives you extra reserves against unforeseen expenses and provides a safety net if you are left without an income for any length of time.
  
  
• Step 4
  Now start looking at the longer term. If you don’t already have a retirement plan in place, investing in a financial instrument designed for retirement is a good option. This could be a pension or provident fund or a retirement annuity, as they all provide certain tax benefits. Work towards saving at least 15% of your household income in your retirement investment vehicle. You may not be able to save the full 15% at first, but you can work on increasing the percentage you contribute over time until you reach this target – for example, when you get an increase, consider paying it all towards your retirement fund.

• Step 5
  At this stage, your financial health is in good shape and it’s time to start thinking about saving for your children and their future needs. When saving for your children, especially if they are still very young, consider tax-free investments (TFIs). The returns in a TFI are tax free, which boosts growth. You can save up to R36,000 a year, up to a maximum of R500,000 in your lifetime, in TFIs. They can help provide for your children’s education, boost your retirement savings, or contribute to generational wealth.
  
  
• Step 6
  As you get older and become well-established in your career, your priorities will continue to change. Using savings to pay off your home loan early can save you a huge amount in interest payments, which would leave you with more available income to re-invest.
  
  
• Step 7
  This is the stage when you are debt free and can focus more on investing to grow your wealth. You might also be considering ways to give back to the community by working with an estate planner to set up charitable donations, endowments or trusts.

The importance of long-term planning

This framework on its own is no guarantee of financial success, but it does provide you with a long-term guide to managing and growing your money through your life. You can divide your lifelong investment journey into 3 basic phases:

• Phase 1 – Starting out in savings
  The first 3 steps above focus on reducing your debt and putting money away for emergencies. The savings and investment vehicles that you use in this phase are typically focussed on the short term and less volatile, because you may need to tap into these reserves unexpectedly – so, for example, they may be considered suitable for a term of up to 3 years.
  
  
• Phase 2 – Building your investments
  The investments in steps 4 and 5 above are typically for longer-term life goals. TFIs, investing for your children’s education, retirement savings and paying down your home loan should all be priorities. The investments that are suitable for this stage are typically marked as being suitable for a term of 5 years and longer. Since these investments cater for specific future needs, you need to be careful not to take unnecessary risk by investing in niche or concentrated investments. A well-diversified investment is better suited to these needs.
  
  
• Phase 3 – Wealth creation, intergenerational wealth transfer and philanthropy
  Congratulations, you are well on your way to achieving financial freedom and are investing beyond your long-term needs. You can concentrate on building legacy wealth and philanthropy. Given that these investments do not need to meet a specific liability, you have the freedom to take on additional investment risk, should you wish to do so. A wide variety of investments and structures may be used to grow your wealth – for example, unit trust investments, endowments, trusts, and share portfolios.

In any phase, consult a financial adviser about your investments and estate planning. This can improve the quality of your retirement and leave your family better off after you pass away.

Get proper guidance and advice about investment planning. We have a range of savings and investment products that can help you on your journey, whether you’re saving for the short, medium or long term. Speak to a Nedbank adviser to choose the right products for your needs at every stage of your journey.