En­joy the free­dom that sav­ing brings

If liv­ing your best life means max­ing out your credit card month af­ter month to keep up with the lat­est fash­ions, you’ll never know the sense of free­dom that comes with be­ing fi­nan­cially se­cure. This re­quires a change of pri­or­i­ties in what you do with you

Weekend Argus (Saturday Edition) - - LIFE -

You’re young, you’re floss­ing, you’re ballin’. You’re liv­ing your best life – got the car, got the clothes and the shoes, go­ing out ev­ery night. And it’s all on In­sta; Snapchat your good times. Ev­ery­body’s gotta know how good you have it.

But do you? The truth is prob­a­bly closer to the bone. If you are like most South Africans, chances are you are liv­ing be­yond your means and your best life is cost­ing more than you earn. It’s easy when all it takes is swip­ing that plas­tic.

July is Na­tional Sav­ings Month, a time to re­flect on our prac­tice of liv­ing on tick and to learn ways to lower our debt and change our spend­ing be­hav­iour.

“Our re­la­tion­ship with money is im­printed when we are young,” says Cora Fer­nan­dez, the chief ex­ec­u­tive of San­lam In­vest­ments: In­sti­tu­tional Busi­ness. “First, it comes from how peo­ple you look up to treat sur­plus money. Sec­ond, it comes later in life, say in your 20s, when you find your­self in a fi­nan­cial dis­as­ter and you re­flect on why and how you got into this sit­u­a­tion. That event can fun­da­men­tally change your re­la­tion­ship with money go­ing for­ward; if you learn the right mes­sages from that ex­pe­ri­ence.”

This could be when you leave var­sity with a big stu­dent loan, and to be the “hip and hot” stu­dent, you’ve bent that credit card to the max. You have a load of debt even be­fore you’ve even earned a cent.

“Some peo­ple em­bark on a path to cor­rect this sit­u­a­tion, and that de­ter­mines their re­la­tion­ship with money go­ing for­ward, but, un­for­tu­nately, oth­ers don’t,” Fer­nan­dez says.

You can ac­tively and con­sciously change your re­la­tion­ship with money, but it is dif­fi­cult. It is, how­ever, the con­ver­sa­tion we need to be hav­ing – and we should have been hav­ing it for a long time al­ready.

“I love the idea of Con­spic­u­ousSav­ing,” says economist An­na­maria Lusardi, the founder and aca­demic direc­tor of the Global Fi­nan­cial Lit­er­acy Ex­cel­lence Cen­ter and ad­viser to the US Trea­sury.

She is re­fer­ring to San­lam’s # Con­spic­u­ousSav­ing cam­paign, which has Cassper Ny­ovest and Pearl Thusi as am­bas­sadors. It is about putting the spot­light on peo­ple who are com­mit­ted to work­ing hard and sav­ing hard.

“It is im­por­tant to tell peo­ple there are lots of ad­van­tages to sav­ing and that sav­ing can bring you hap­pi­ness and free­dom,” Lusardi says. “It is im­por­tant to coun­ter­bal­ance that temp­ta­tion we have ev­ery day to spend … and im­por­tant to see the ad­van­tages in sav­ing. It makes us more fi­nan­cially se­cure, it al­lows us to do things we want to do.

“That free­dom of choice is very im­por­tant, but it re­quires ef­fort to coun­ter­act all the mes­sages we get ev­ery day to con­sume.

“We need to make op­por­tu­ni­ties avail­able to save – re­tire­ment fund at work, bank ac­counts. We need to make sav­ing as mind­less and easy as we have made credit and con­sump­tion.”

Fer­nan­dez takes it back to “show-and-tell”. She says: “If you show any­body what the op­por­tu­nity cost of not hav­ing a good re­la­tion­ship with money amounts to, they will change their be­hav­iour. Cur­rently, we don’t have a re­ward mech­a­nism. If I ask whether you know that if you don’t buy that pair of shoes you don’t need for R800, by De­cem­ber next year that money could be worth R1 000, in­vested in X in­vest­ment, would you buy those shoes?”

She be­lieves a causal link should be shown between sav­ing and re­ward, so peo­ple can see that sav­ing is tan­gi­ble. She talks of goaldriven sav­ings, “be­cause you are try­ing to get peo­ple to save, but they don’t know for what, how much or for how long. There is no goal, but I can have the shoes now.” Be­fore you can save, though, you need to clear your short-term debt.

And Fer­nan­dez is specif­i­cally con­cerned about peo­ple who have a big in­come but who live from pay cheque to pay cheque be­cause they live be­yond their means. They gen­er­ally have a se­cure in­come and at least one as­set, which means banks hap­pily lend them money. They get credit, and they get into debt, con­tribut­ing sig­nif­i­cantly to South Africa’s high level of in­debt­ed­ness.

“You need to change your pri­or­i­ties and ac­cel­er­ate the re­duc­tion of your debt. Lower your in­debt­ed­ness, es­pe­cially the short-term debt – those as­sets that are not ap­pre­ci­at­ing in value (cars fall into this cat­e­gory) or have no value any­more. Clear that debt.” So you have cleared your debt and are ready to save. Where to be­gin?

Lusardi says: “To ac­cu­mu­late wealth you need to have that ob­jec­tive … and you need to change your be­hav­ior to reach your goal.”

With a goal set, you need to use the power of com­pound in­ter­est. “This is the most im­por­tant prin­ci­ple in per­sonal fi­nance; it is crit­i­cally im­por­tant for build­ing wealth,” Lusardi says.”It re­ally mat­ters to use time in your favour. There is a very sim­ple way to be­come wealthy and that is to start sav­ing early.

“We need to show that start­ing early will help peo­ple to ac­cu­mu­late wealth, and po­ten­tially a lot of wealth later in life.”

If you want to have R1-mil­lion by year X, Fer­nan­dez ex­plains by way of ex­am­ple, ask your banker or fi­nan­cial ad­viser, or go onto the in­ter­net to work out how much you have to save per month over three, five and 10 years to have R1 mil­lion in spare cash. What sort of a re­turn do you need? That’s a goal you can work to­wards.

“Once peo­ple get the hang of it, they can tweak it: if I only want half-a-mil­lion, how much must I save monthly? If I want it in four years, how much is it go­ing to be?”

To make full use of com­pound in­ter­est, Lusardi says you must in­vest wisely to grow your wealth.

“You need to grow your wealth faster than in­fla­tion. This is why in­vest­ing is re­ally the im­por­tant part of grow­ing wealth. Th­ese are the ba­sic prin­ci­ples of per­sonal fi­nance that ev­ery one of us can use to grow wealth over time: have a goal, start early and in­vest wisely, make use of com­pound in­ter­est, grow your money faster than in­fla­tion,” Lusardi says.

It’s as easy as one, two, three: set a goal, work out how much to put away and where, and then do it.

“It is the in­verse cal­cu­la­tion that you do when you buy a house or a car,” Fer­nan­dez says. “When you buy a car, they tell you the car is, say, R300 000 and the rate on the car is prime plus two per­cent. From that, they tell you the monthly in­stal­ment you have to pay the bank over the next five years is, say, R3 200. If you can do that on a car, why can’t you do that with sav­ings? That is what the bank or the deal­er­ship is do­ing to you – they are forc­ing you to save for some­thing they gave you up front.”

And if you start sav­ing early enough – when you are still young, like Thusi and Ny­ovest – you can take full ad­van­tage of com­pound­ing re­turns.

Don’t de­spair, though, if you are older and haven’t saved yet, though. “You need to in­crease the amount you are in­vest­ing monthly, and in­vest in as­sets that have higher re­turns to make up the time and the op­por­tu­nity that you have lost. Th­ese higher re­turns come with slightly more risk.

“You have to un­der­stand what you are in­vest­ing in. Google, friends and your fi­nan­cial ad­viser are all great sources of in­for­ma­tion and ed­u­ca­tion. Ask around and com­pare notes. You will be amazed at how many savvy in­vestors are lurk­ing in your midst,” Fer­nan­dez says.

Cassper Ny­ovest – seen above in the video of his song “Mr Mad­u­mane (Big $pen­dah)” – and ac­tress-model Pearl Thusi, left, will en­joy the magic of com­pound in­ter­est by hav­ing started sav­ing young. Fol­low them at #Con­spic­u­ousSav­ing on Twit­ter or go to www.Con­spic­u­ousSav­ing.co.za

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