How to save for a rainy day

WE’VE all heard the expression “saving for a rainy day”, which suggests a future financial need that might not materialise. But the reality is that no one can predict the future, and if you don’t have the money to pay for an unforeseen expense, you are extremely vulnerable to falling into a debt trap.

An emergency fund is not only useful to pay for vehicle and home repairs and medical expenses. According to the latest statistics from property administrator Payprop, one in four South African tenants are unable to keep up with their rental payments.

With the cost of living increasing, bank balances that run dry every month could become a regular occurrence, leaving you unprotected against unplanned expenses, let alone a major financial emergency.

Saving even a small amount each month is better than nothing. The key is to break the pattern of living from hand to mouth, and the first step is to get a grip on your expenses.

An emergency fund should be sufficient to cover three times your monthly expenses. This will help you to self-fund day-to-day expenses and meet your debt obligations if you aren’t earning an income. Three months’ expenses might seem like an unrealistic target. If it is, you can initially aim to reduce your expenses to 80% of your take-home income and save the remaining 20%. If you do this, it will take you about a year to build up your emergency fund.

Here are some steps to help you start saving:

● You’ve heard it before, but are you actually doing this? Put money away as soon as you receive your salary. Even better, set up a debit order so that a fixed amount automatically goes into a separate savings.

● It’s frightening how few people realise the money they waste each month on debt-servicing costs. If you are first going to repay any debt, try to increase the repayment amount. And if you are struggling to put money away now, the best time to start is when you receive a salary increase.

In addition, use debt effectively. By this I mean try to stick to good debt (for example, the mortgage bond on your home or a study loan) and use cash instead of credit or store cards for other expenses. You pay high interest on short-term debt, so make it a priority to reduce it.

●

Write down what you spend your money on for a month, and you’ll be surprised by how much insight you get into your spending habits. Split your debit orders into debt repayments, essential expenses and non-essential expenses

(such as eating out and takeaway coffee). You may be able to create room to save once you’ve taken a hard look at your nonessential expenses. You need to be ruthless – clothes, for example, are essential, but designer labels aren’t, and you don’t have to buy something just because it’s on sale.

●

Although your budget must create room for saving, you also need to budget for things that you enjoy, or you run the risk of spending money on these things without budgeting for them. At least if you budget for them, you can make adjustments to your other monthly expenses upfront.

Many of us make the mistake of spending a lot of money on a number of small items, which we may not even be able to recall at the end of the month. Rather save for a real treat.

●

Decide which of the nonessentials are important to you and which ones you are willing to give up. For example, you can skip buying a cappuccino every morning and drink the office coffee, take a packed lunch to work, and make cellphone calls using wifi or social networks.

●

As the cost of living rises, your ability to cover additional unplanned expenses will decrease if you don’t have enough money in an emergency fund. Start saving from your next pay cheque, so you can avoid getting into debt when the next “rainy day” comes along.

André Wentzel is the solutions manager at Sanlam Personal Finance.