Six ways to save even when it seems impossible
Saving is important, however, many people claim not to have enough money to save. With the cost of debt and living rising, it is not surprising that many people believe they are unable to save. Moneybags journalist Jessica Anne Wood finds out how you can make changes to your budget to allow you to dedicate some of your money to savings.
Nolene Parboo, senior manager of savings and investments at Standard Bank, notes that when speaking of money people often talk about investments such as buying a car or home, without taking the time to evaluate their overall spending behaviour.
“Fast food habit runs don’t threaten our finances, but the cumulative effect of bad spending habits can be the difference between rich and poor,” says Parboo.
Online financial website Investopedia notes that saving has to start somewhere. So even if you think the few Rand you have left at the end of the month isn’t worth saving, think again. You have to start somewhere, and over time that little bit you can afford to save will start adding up, especially if you invest in an account that earns interest.
Why is saving important?
Lack of savings is one of the major contributing factors to the growing over-indebtedness of South African consumers, according to Mark Young, deputy CEO of Bayport Financial Services, South Africa. “When you have savings you don’t need to borrow money in an emergency. The harsh reality for millions of South Africans is that the ever-increasing cost of living coupled with macro-economic conditions may mean a lack of ability to start saving.”
However, the inability to save is not solely the consumer’s fault. There are a number of factors impacting this at present, such as the decreasing exchange rate, rising inflation and a struggling economy. These factors are making it difficult for consumers to make ends meet.
Young highlights that South Africa is a nation of borrowers, with many people borrowing more than they save. “South Africa has one of the lowest savings rates in the world.”
Ideally you should save at least 10% of your annual income. However, if you want to enjoy a comfortable retirement, this figure increases to 20%. These figures may change as the cost of living increases, but research indicates that South Africans currently only save between zero and eight percent of their income.
“Ideally you should have a minimum of three months’ salary set aside to cover emergencies such as loss of income or car or home repairs. This may be difficult to achieve, but it is a target to work towards. Even saving a small amount will give you more security than no savings at all,” notes Young.
There are a number of reasons why it is important to save. Young points out:
- Saving gives you a financial cushion.
- It helps you to prepare for retirement.
- Saving enables you to achieve your short or long term goals.
- Saving grows your money through compound interest.
- Saving allows you to be able to afford assets that support the creation of wealth (e.g. house).
Tips to help you save money
Saving starts with a mindset and attitude. Young stresses that you must have a strong commitment to saving and, even if you are unable to save at this time, start the process. This will include settling debt and better managing your lifestyle.
Experts agree that one of the steps to saving is to properly monitor your spending. “Being a good saver really takes discipline. In order to stay on track and not get swayed by impulse purchases and non-essential spending, you need to remind yourself of why you’re saving in the first place,” says René Grobler, head of Investec Cash Investments.
Having a budget and sticking to it is an important part of this process. Below are some tips on how you can modify your spending behaviour to help you save money.
- Know where your money is going:
BrightRock, a licensed financial services provider, stresses that the first step to saving is to get a grip on your spending. Parboo agrees, stating: “The morning coffee run can cost as much as R25 a day. Take that cost over the month and the total comes to R750. That’s R9 000 a year. If you invested R750 per month for five years at a seven percent return, you would accumulate R53 000 in savings.”
BrightRock suggest getting copies of your last three month’s bank statements, including your credit card, to understand your spending behaviour. BrightRock points out that debt counselling firm Octogen provides the following as a typical breakdown of household income:
- 35% on household expenditure
- 25% on financial services
- 35% on debt repayments
- 5% on emergencies (not including long term savings)
“Try to restructure your expenditure accordingly. Start by looking into what all your debit orders are for. How about those added services that overlap with what you already have with your short and long term insurers? Is there a way to cut costs on pay television and internet access in your household? All the little things add up and chances are there are quite a few services you don’t need ─ or never use. Cancel them,” suggests BrightRock.
- Be aware of the interest you are paying:
In addition to knowing where you money is going, you also need to know what interest you are paying on your accounts.
“You may be coping with your clothing account payments, but the interest payments are often high. Many people complain about car payments, but often their retail accounts add up to much more and are expensive to repay. Consider cutting down on some of your retail accounts. This will not only help you to save, but will also improve your wealth significantly in the long run,” advises Parboo.
- Have a budget and stick to it:
“People who keep track of their expenses often have more money left over at the end of the month than people who don’t follow a spending plan,” points out Young.
One way that you can do this is to go shopping with a list. “Never go shopping without writing a shopping list beforehand. Make a careful plan of what you need to buy before you go and stick to it. Don’t put anything in the basket or trolley that’s not on the list and you’ll save,” says Parboo.
- Make sure you are properly insured:
Insurance is important. Parboo highlights that sometimes the decision not to spend on risk management tools such as medical, car, disability and life insurance, can put you under financial pressure over the long term.
BrightRock agrees on the importance of insurance, stating: “Nothing makes as big a dent on savings as unforeseen expenses that could have been covered by your short and long-term insurance policies.”
It is important to ensure that you have the cover you need, and are not paying for things that you don’t need. Having enough insurance is also vital. “If you have debts to honour and a spouse and/or family to provide for, you need to be covered for death and disability. Question the flexibility of this cover. Does it change as your needs and responsibilities change? And check out the provider’s track record for claims pay-outs,” adds BrightRock.
- Start an emergency fund:
“Although the risk of unforeseen expenses is significantly reduced by adequate cover, you will still have unforeseen expenses that you will have to budget for – that’s where your emergency fund (not your overdraft or credit card) comes into play. It needs to make provision for any budget shortfalls like household emergencies, unexpected car maintenance and shortfalls in your medical cover,” explains BrightRock.
Parboo suggests implementing a policy of ‘pay yourself first’. This means, when you get paid, immediately deposit money into your saving account. Have a set amount that you transfer every month.
“Try implementing the 50/30/20 rule. From your after-tax salary, allocate 50% to essentials (housing, transportation, utilities and groceries); 30% to financial planning (retirement, savings, risk cover and debt) and 20% to lifestyle (travel and entertainment). If you are over-indebted, the lifestyle allocation needs to reduce,” advises Parboo.
- Save for retirement:
In addition to having an emergency fund, it is also important to have a long term savings plan in place for your retirement.
Parboo stresses: “It is important to save for retirement, but you keep finding things in your budget that need more attention like DsTV and your golf membership. You could easily be spending over R1 000 per month on luxury services you don’t need. Decide what is really important and what you can do without.”
Some companies offer a retirement benefit as part of your salary package. If your company does offer this, you can always increase your monthly contribution to put more away into your retirement savings.
However, if you do not receive a retirement benefit, there are a number of financial products available. Speak to a certified financial advisor to find the best retirement solution for your needs and situation.
“By examining your spending habits, it’s possible to have a positive impact on your finances in a rather short time,” states Parboo.
“Everyone wants to have plenty of money and the freedom to spend it however they choose. This may be an unrealistic goal, but you can build up a savings account no matter what you earn. All it takes is some discipline and clever tactics — such as making your money work even harder for you,” adds Young.