Question:
I am 23 and have just started working and investing. I invest a fixed amount through Liberty (unit trusts), but it is not a liquid investment and I am saving for my studies next year.

Is this a wise investment? My investment goals are saving for retirement, my studies and savings in general.

Answer:
It is extraordinary to see such a disciplined 23-year-old — well done! As far as your question goes, this is the perfect time to be checking your bearings as some bad habits early in life become pretty destructive over time.

To my mind, there seems to be a few key issues here. You have just started working, you hope to continue your studies and you wish to save for the long term, yet need some short-term savings too. With this in mind, there are a number of principles that are important to understand.

Your first job changes a number of financial aspects of your life, as you've probably experienced. Commuting to work, buying your first property and car are only a few examples of the new financial considerations you are facing. The first mistake many of us make is over-committing on these expenses, leaving us with no capacity to save. The easiest way to deal with this is to force yourself to create the habit of saving as early as possible and to not increase your standard of living unless you know it is sustainable going forward. A properly qualified financial planner — ideally a Certified Financial Planner — should be able to help you understand this.

As a guideline, you should be saving at least 10 percent of what you are spending per month if you have about 40 years to go to retirement. So if you, for example, are spending R10 000 per month, you should be saving at least R1000. Your pension fund or retirement investments (such as a retirement annuity) should make up part of this as these have some very significant tax benefits. Again, your financial planner will help you understand how much should go where. The later in life we start saving, the more we need to save to make up our backlog. By starting as early as you are, you are making your life much easier.

In your question, you also ask whether unit trusts are a wise place to invest. As there are literally hundreds of unit trusts available in South Africa today, my answer is a qualified "yes". By investing in unit trusts, we are able to enjoy the following benefits:

• Your money is fully liquid. If yours is not you may be in an endowment policy, which on the face of it makes very little sense for you as you say you need liquidity. In an endowment, lower income earners generally also pay more tax on their returns. Please check if this is the case.

• If you select the right funds, unit trusts allow you to enjoy superior returns over time. Just be sure that you understand the short and long-term risks so that you will be able to ride out uncertain markets while still being able to sleep at night. Be aware, though, that less risk in the short term leads to sacrificing returns in the long term.

  Once your financial planner has helped you choose an appropriate selection of funds, please take care to stick to your strategy until there is a very good reason for you to revise it. Declining markets are not usually a good reason to cash in if you are a long-term investor. South African shares have never lost money over a period of 10-years or longer, so sticking it out will certainly reward you over time.

• Unit trusts are available in a number of different vehicles such as endowment policies, retirement annuities and even in some retirement funds. Be sure to find the right vehicle for your objectives as the tax benefits of these can provide you with some "extra returns" that you would not otherwise have had. As long as you save the tax you get back!

• If you are uncertain, choose the often less "glamorous" funds that deliver consistently over time. A unit trust with a sound long-term track record that is not too specialised to only benefit from certain market cycles is usually a good place to start. It very seldom happens that today's short-term (three years or less) top performer still does the job tomorrow.

As far as your studies are concerned, this will amount to one of the most valuable investments you can make. However, if it is possible, keep saving at the same time. In this way, you will cover all your priorities and won't need to invest more later to make up for lost time. I hope this helps and good luck with the studies!

acsis Limited is an authorised financial services provider. The response to the question covers some of the issues in a general and factual manner and does not constitute advice. It is important to consult with a financial planner who, after an analysis of the individuals’ personal needs, goals and circumstances, will be able to provide comprehensive and appropriate advice.

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