Save, save, save – we hear it all the time from economists, the finance minister, our mothers. And they’re all right. Saving money helps you become financially secure and provides a safety net for emergency expenses.
But how do you save when you’re barely making it through the month? Don’t despair, say experts who spoke to YOU. Do what you can with what you have. You can start saving even with a small amount of money.
And as July is Savings Month, there’s no better time than right now – whether you want to salt money away for a deposit on a car or a house, build up an emergency fund, get out of debt or start planning that holiday you’ve always dreamt about. Figuring out a savings plan can seem daunting and complicated.
How do you know if you’re saving enough or if you’ve chosen the right savings mechanism? Should you decide how to do it on your own or consult a financial adviser? Follow these tips and start saving today.
Workout a savings plan
The key to successful saving is having a goal, Ester Ochse of FNB’s financial advisory service says. This will help to motivate you to get started and keep you focused. It might help to write down your goal on a piece of paper and stick it up in a place where you’ll see it often.
Once you know what you’re working towards, Ochse says, you should consider these issues:
- How much you can afford to save or invest.
- The period for which you want to save – remember, the longer you save the more your money will grow.
- Whether you want to take a safe or aggressive approach to growing your money.
- The best savings or investment vehicle for your purpose. Setting a savings target, at which point you will evaluate your progress. Whether you need a financial adviser. It’s important to be realistic.“Your savings plan needs to be aligned with your financial situation so you don’t end up feeling pressurised, as that could lead you to stop altogether,” Ochse says.“If you really don’t know where to start, it’s worth consulting a financial adviser for guidance.”
What's the difference between safe and aggressive investments?
Saving your money in a bank account is a safe investment as you won’t lose your capital unless the bank goes bust, says Antony Brady, an independent financial planner registered with the Financial Planning Institute (FPI) of Southern Africa.
This type of saving is good for emergency funds and short-term goals such as putting together a deposit on a car – in other words, cash that may be needed within 18 months to two years. Aggressive investments are buying stocks and shares (also called equities). The prices go up and down with the markets, and some are more volatile than others. “So they do carry risk of capital loss, especially in the short term,” Brady says.
“But over the long term, more aggressive funds generally give the highest returns. “Any investment other than a bank account generally carries risk, but you can be rewarded for taking the risk,” he adds. “I’d describe balanced funds, which are typically used for pension fund savings, as medium risk. They’re good if you have a savings goal of three years or more.”
Although they’re more volatile, the returns on aggressive investments tend to be higher in the long run. They’re generally more appropriate for younger people who want to save over a longer term, Brady says. “It’s for people who won’t need to access the money for at least 10 years.”
Most asset management companies and banks require minimum monthly premiums of R200 to R300 or an initial lump sum of R1 000, he adds.
How far can small amounts take me?
Remember that every little bit makes a difference. Even R100 put aside every month will give you a lump sum in the future that you otherwise wouldn’t have had. “It doesn’t take a big amount of money to reap a big return later,” Brady says. He provides these examples for comparison:
- If you prefer a more conservative approach and simply want to save your money in a bank account, take note of when interest is applied, he says. Bank savings accounts apply interest either monthly, quarterly or annually. “If it’s applied more frequently, you get more compound interest,” Brady says. “Banks often have this in the fine print so it’s important for consumers to be aware of how often interest is applied when comparing interest rates.”
- “If you’re unlikely to access the money within two years, it’s better to save in investment funds such as unit trusts and exchange traded funds that provide a higher return, although with some volatility and risk,” he says.
“There are about 1 400 unit trusts to choose from, catering for a variety of goals and circumstances. There are a few hundred exchange traded funds and the number is growing fast.” “The first step is to move away from the misconception that investing is for wealthy people,” says Carin Mayer, head of FNB Share Investing.
“It doesn’t require large amounts. Some banks and asset management companies offer investment products for as little as R300 a month.” The FNB Share Saver account, for example, which invests in the top 100 companies listed on the Johannesburg Stock Exchange (JSE), requires an investment of only R300 a month. The standing rule for investments, Mayer adds, is that one should be in it for the long haul – at least five years or more. “Emergency cash should not be invested in long-term investment products.”
Do it tax-free!
In March last year the government introduced tax-free savings accounts to encourage saving. They’re offered by most banks and asset management companies. It means is you can invest up to R30 000 a year without having to pay dividends tax, income tax or capital gains tax on the proceeds.
There is a lifetime limit of R500 000, however. So once the amounts you’ve invested add up to R500 000, you can’t contribute tax-free any more. “It doesn’t matter how much growth you earn on your contributions, as long as the amounts you put in don’t add up to more than R30 000 annually or R500 000 in total,” Brady says.
“It takes many years to take advantage of the tax benefits. If you invest R2 500 monthly, it will take 16,67 years to reach the R500 000 lifetime contribution limit.”