Five practical ways to save
Putting money into a savings account is not just for your own well-being – it can also have a massive impact on the economy as a whole.
i‘m sure that many of us have looked forward to a salary increase or annual bonus so much that we just went ahead and shamelessly spent our money on all the desirables we’ve been looking forward to all year even before payday. Sobering is that moment when payday arrives without your expected salary increase or bonus during a time when the prices of necessities such as electricity and fuel are skyrocketing. Suddenly you find yourself staring at a negative bank or credit card balance, and the month has barely begun.
But don’t blame only yourself for your subjective judgment on spending habits – the entire South African economy has been heading down the same path for quite some time.
Local GDP declined by 0.7% for the first quarter of 2017, after declining by 0.3% in the last quarter of 2016, which means that we now officially find ourselves in a recession. After our downgrade to junk status earlier this year, the Reserve Bank, which normally would have lowered interest rates after such figures have been released, would have to think twice before taking action. So ultimately, things don’t look so good for the rest of South Africa.
It is perfectly normal to get used to, and to want to get actively involved in an economic growth process. Your degree of commitment, enthusiasm and drive in your own economic involvement, is what determines your own personal financial freedom.
What few realise, however, is that economic growth can only take place through either savings or loans. You need capital to create wealth (as the old saying goes, “it takes money to make money”). This means that growth can only be realised if the net savings effect yields more money, or if the net finance effect becomes more favourable (e.g. moving financing to a lower rate facility).
With July dubbed National Savings Month in SA, it is only appropriate that we take a look at how well we did with saving in the past.
Over the past 20 years, net personal savings as a percentage of personal disposable income has dropped from 11.3% to -0.44% in SA (as at end of 2016). According to all possible benchmarks, this figure is unacceptably low. The period between 1995 and 2000 saw personal disposable income rise by 69%, yet personal savings dropped from R6.2bn to a mere R2.9bn. With higher prices and the possibility of higher interest rates, it would seem that the ability to save is now less than ever before.
Figures clearly show that South Africans are struggling to save money and until you examine and become willing to change bad spending habits, you can forget both your significant wealth and financial freedom.
Here are some possible practical solutions:
First, get your bank statements together and analyse your spending habits. Are you a squanderer? Do you remember where all those ATM withdrawals went? Make a point of cutting out the “fat” in your spending habits.
Next, commit yourself to a plan that will force you to save. Set up a monthly debit order through which you can contribute to your savings.
Third, find the best savings framework for yourself. Make use of a tax-free investment, a unit trust investment or a five-year term policy investment. Since tax-free investments and unit trusts are fairly flexible when it comes to withdrawing funds, prospective savers should be careful not to succumb to the temptation of capital withdrawals. If that is the case and you know yourself well enough to admit that, rather consider a term-investment.
Ensure that your savings are properly managed in order to transform your money into an investment with above-average returns. Don’t just leave your savings in money market where you will only earn money-market rates (currently around 7%), especially if your risk profile allows you to invest in potential higher income investments. Rather fix your investments for intervals of between 30 and 90 days in order to get 7.65% to 7.8% annual growth, while still retaining some level of liquidity. Even if we take the great correction of 2008 into account, the local stock market still delivered an average of 5% better growth yearon-year, when compared to money market.
Finally, ensure that each rand you save is invested in the best and fastest-growing way possible, as long as it falls within the limits of your personal risk profile, so you can continue to build towards your personal wealth and financial freedom. ■