The Importance of Saving
There are no magic secrets when it comes to making your money grow, but there are some tips to follow to help you save for your future or for a specific goal.
Simply put, there are three things you can do with your money: spend it, save it or invest it:
- You spend money for day-to-day needs such as food, housing, transportation, clothing, health care, debt repayment and other expenses such as coffee, movies or vacations.
- You save money for unexpected emergencies, unexpected opportunities, or to meet short- and medium-term financial goals.
- You invest money in business ventures to earn income over the long term.
The best advice for how to manage these three parts of your financial life is simple to say, but harder to achieve:
Spend wisely. Save regularly. Invest prudently.
One of the major problems identified in the growing over-indebtedness of South African consumers is the lack of savings, and the truth is that savings are necessary to help you in an emergency or to secure your future.
If you want to avoid unwanted debt, people need to be prepared for unexpected expenditures by saving some money. This can then be used for some of the emergencies such as car and home repairs, retirement, securing your children’s future, or achieving short and long-term goals.
Achieving your goals requires a strong commitment to saving; it requires a change in mindset and attitude. Saving gurus recommend that you should commit to saving at least 10% of your annual income if you are able to. Research has shown that South Africans only save between 0 and 8%, and in truth, if you want to retire comfortably, you would need to save 20% of your annual income.
Another general rule of thumb is that you should have three months’ salary set aside or saved in the event that you suddenly have a loss of income, you have an emergency, or you experience financial problems. This may be difficult to achieve, but it is a target for which to aim. However much you manage to save, remember any savings you have will give you more security than no savings at all.
Your circumstances can change at any moment and you must get yourself into a position where you will be able to deal with it. Even if you were to lose your job, it takes a while before you will be able to claim from government’s Unemployment Insurance Fund (UIF) and you will need to support yourself until then.
The benefits of saving
- It gives you an emergency cushion, which gives you more peace of mind in those situations.
- It will prepare you for retirement. The average life expectancy has increased, so we will live longer and therefore need more money to carry us through our life.
- It enables you to achieve your short- or long-term goals.
- The cost of education is increasing every year, and you will need a savings fund to secure your children’s future.
- Compound interest means your money grows while the monthly instalment stays the same, so you are earning money by saving.
- It allows you to afford the things you need or want, such as a house or vehicle.
- It allows you to have fun – it can pay for holidays and other luxury items.
Saving and investing versus paying off debt
As mentioned, saving might not be possible for everyone. You should rather prioritise repaying your debt and when you have extra funds available again once your debts are paid off, you can then start saving. That is because the interest on debt usually accumulates faster than the interest on savings.
What is the difference between saving and investing?
Your savings are usually put into the safest places or products that allow you to access your money at any time. Examples of these would be savings or fixed deposit accounts. They usually have lower returns, but you can have it for a specific purpose, such as a short-term goal, within a short time frame.
Investments, on the other hand, are for wealth building, and with greater returns you also have a greater chance of losing your money than when you save. Access to the money usually also has some restrictions or costs associated with it, so you usually leave investments for reaching your long-term life or financial goals.
The emergency fund that you should set aside every month in your budget should not be part of your savings. This is only for unexpected emergencies on a month-to-month basis. It should be put into an envelope and kept to one side and used only in such an emergency. If by the end of the month you have not needed to use the money, it should be allocated to one of your savings plans.
Ways to save money
So you want to be a millionaire? A billionaire? Everyone wants to have plenty of money and the freedom to spend it however they choose. Maybe becoming a billionaire is an unrealistic goal, but you can achieve considerable savings no matter what you earn. Remember, you can do it. All it takes is some hard work and clever strategies — such as making your money work even harder than you do.
A budget helps you save. People who keep track of their expenses often have more money left over at the end of the month than people who simply pay out money without following any kind of spending plan. Characteristics to consider when choosing a savings service are:
- Convenience and ease of use
- Opening deposit requirements
- Interest earned on savings
You should set a savings challenge for yourself for the year. Determine an amount you can afford to save in January and then increase that amount by 10% every month for the 12 months of the year.
Suggestions on how to get started
- A simple, flexible savings account. Here you can deposit or withdraw money at any time. The interest earned is not very high on these accounts, and is usually much lower than inflation.
- Inflation-beating savings accounts. These offer interest rates higher than inflation, offered by different credit providers. Find out what costs are associated with this account.
- Notice deposit accounts. These accounts usually require a minimum deposit as well as a minimum balance. You also need to give a defined period of notice to withdraw any funds from the account. In general, the higher the minimum deposit and the longer the notice period, the higher the interest rate earned.
- Flexible fixed deposit accounts. These are lump sum saving accounts, where you can deposit as much and as often as you like for a fixed term, and you are only permitted a specific number of withdrawals from the account within a year, or you cannot withdraw at all during that period.
- Unit trusts. Your money is invested in blue chip shares on the stock market. Unit trusts are very flexible. You can deposit as much as you like whenever you like, as long as it is more than the minimum installment – usually more than R500 a month. They generally have higher returns than a normal savings account, but also higher charges associated with managing the account.
- Endowment policies. These are life assurance policies that are invested in various funds and can be cashed in before death. They have fantastic returns on investment, but carry a higher risk. You should speak to a financial planner if you would like this type of plan.
- A retirement annuity. This is a policy where you are unable to access the funds until the age of 55 to 65. Other than giving you a tax concession through increasing your yearly contribution to beat the negative effect of inflation, you will be well prepared for your retirement.
Credit health tips
Below are some practical tips to help you start saving:
- Make saving for your future, and for achieving your goals, a priority.
- Have a plan for saving, one that is part of your monthly budget, and stick to it.
- Pay off all debts that have high interest rates and are costing you a great deal of money every month, because that is money you could be saving.
- Don’t buy on impulse. Take the money that you might have spent on your daily snack or drink and put it in a savings jar.
- Stop buying lottery tickets; rather put that money into your savings jar. Chances are it won’t be you who wins, and that money can be used to achieve your goals.
- Speak to your credit providers and try to negotiate an interest reduction on loans.
- Give up expensive habits, such as drinking, smoking or gambling.
- Hide your credit cards and do not use them again until you are in a more secure financial position.
- Cancel any unused club memberships.
- Give a gift of a service, such as babysitting or painting the house, instead of an item.
- Join a volunteer service. This will keep you busy doing something valuable and will lift your spirit and keep you motivated.
- Try buying cheaper brands of products you buy every month.
- Make a dream board. This will be a board that you put up in your house that visually represents what your goals are, for example a picture of a house or car, students graduating from university, etc. This will motivate you to stick to your savings plan.
- Tell your family and friends about your plans. They will then be a support system and will encourage you to achieve your goals, and will also stop you when you might want to do things that will hinder you from reaching your goal (for example going to a concert).
- Look for a cheaper place to live.
- Grow your own fruit and vegetables if you have a garden. You might even be able to sell any items that you cannot use.
- Analyse your bank and cell phone accounts, and cancel any services you aren’t using or don’t need.
- Never give up – it might be difficult now, but it will be worth it when you achieve your goals.