MAKING YOUR MONEY WORK
Most persons are probably experiencing a reduction in their disposable income as a result of the reduced economic activity and rising prices. The first reaction is likely to be that of dispensing with all savings initiatives. Instead of a full cut back, there lies an opportunity to revisit your spending habits so as to employ some creativity in an effort to maintain your current savings levels. As a starting point you will need a plan – commonly referred to as a budget.
Start out with the income that you make on a monthly basis. Do not include amounts anticipated from overtime hours worked. Then list your monthly commitments - food, mortgage or rent payments, utilities etc. Do not forget to consider the payments that are made on an annual basis such as house and motor vehicle insurance. Allocate such payments over twelve months. Add up your commitments and deduct same from your monthly income. If you are in a negative position, you will need to revisit your spending and reduce on things that are not necessary- a common one being eating out.
Income tax also impacts your cash flows. If on an annual basis you have a net tax refund when you file your tax returns you should immediately revisit your tax code based on the allowances to which you are entitled. When a refund is due, you are effectively giving an interest free loan to the government as the refund will be paid to you sometime into the future, and will attract no interest. So it makes sense to have immediate access to your money so that you may invest same and earn interest income in the process.
Life insurance is another expenditure that impacts your cash flows. The two most common types of insurance policiy in our environment are Whole Life and Term insurance. A term insurance has a life insurance component only, is for a fixed period and, upon death, the face value is paid to your beneficiary. On the other hand, a whole life insurance policy has an investment component. As a result, whole life insurance policies tend to be more expensive as you are paying for the investment component in addition to the life component. If you have no dependents you may not need a whole life insurance policy and can reduce your expenditure with a term Insurance. If you have a mortgage loan, your bank will accept term insurance coverage or mortgage insurance that covers the term of the loan.
Keeping and investing your savings is critical - instead of working for your money, your money is put to work for you. A disciplined way of building your savings is to ask your employer to make a direct deposit to your bank account as a salary deduction. You may start out with as little as $100. Consider for a moment that if you start out with a monthly saving of $100 at an interest rate of say 3.5%, in 10 years’ time the future value of your bank account will be $14,527 and you would have earned interest of $2,427. Assuming that you are 30 years old today and plan to retire at 60 years of age, if you continue with this savings plan, then by age 60 you will have $64,012 in your bank account as a result of compounding interest – by just saving $100 per month.
A basic rule of thumb is that you should have available an amount to cover at least six months expenditure to cover emergencies should you lose your job. It is strongly recommended that you place those amounts in a savings account at a regulated financial institution. Do not hide it in some corner in your house, as you will be losing value, as your money will not be attracting interest.
The golden rule of saving: spend less in order to free up money to save more.