July is national savings month and, with the financial setbacks that many South Africans experienced this year as a result of the nationwide COVID-19 lockdown, there is no better time to think about how you are going to reach your future financial goals.
This is according to Ray Mhere, Head of Momentum Investments Distribution, who says that while 2020 may not have been kind to most people’s pockets, South Africans shouldn’t give up on their financial goals. “Cultivating a culture of savings is incredibly important, and it is something that we need a lot more of in South Africa. It is commonly believed that saving and investing is exclusive to people with money, and in the current economic environment, many more people may think that they won’t be able to save any money at all. However, people from all income groups can benefit from saving, and we all need to start somewhere.”
Let’s start by defining the terms saving and investing.
· Saving is putting aside a portion of your money and not spending it.
· Investing is buying assets such as equities, bonds or property with the expectation that your investment will make money for you. Investments can be used for your short, medium and long-term goals and they can be accessed through unit trust funds.
The first step, according to Mhere, is to have a savings plan with realistic goals and time frames. He explains that you should start by making sure that your goals are realistic and achievable by working out how much you can afford to save each month. “It is human nature to work harder and smarter if you work towards a set goal. Once you figure out what you can afford to save, you can establish where and how you need to invest those savings in order to achieve your goals in a realistic time frame. As soon as you have that in place, get into the habit of paying yourself first. Set up an automatic debit order that deducts money from your bank account and invests it as soon as your salary is paid.”
An easy example of this principle in action, is when parents want to save for their children’s education. “Let’s say Zola has just begun Grade 1 and her parents want her to go to university one day. For this dream to come true, they will have to save about R500 000 over the next twelve years. To achieve this goal, they would have to establish how much they can afford to save each month to pay into Zola’s University investment account. Depending on the investment vehicle that they use, the parents could well reach this massive goal if they put away around R2500 per month.”
Building a financial buffer is also important for future emergencies. A good practice is to build a buffer fund of at least three months’ salary. You can deposit it into a savings account or even your access bond so that you have immediate access to it when an emergency arises.
He adds that getting into the habit of accumulating instead of spending, is also very important. “Firstly, try not to spend any of the money that you receive unexpectedly – for instance, a tax refund or your year-end bonus. Rather, remember the saving and investment goals that you set for yourself and put as much of the extra cash as you can into this plan. Secondly, think about the small amounts of money that you needlessly spend on a daily basis. For example, if you replace your daily takeaway coffee with the one you make yourself, you save R25 per day. That amounts to R125 that you spend less every week and R500 that you have extra each month. If you put that money into a savings plan every month, it can total R25 000 in just under four years.”
Mhere explains that the secret to successful investing is to start as early as possible. “The power of compounding is the most important tool to help you grow your wealth, but it needs time to work. If you invest your money as early as possible, it will provide an opportunity for your capital to grow and produce a good return. This is also why we should all be teaching our children the value of delayed gratification. If they understand from a young age that they are sacrificing now for a better future, they will quickly learn how to achieve their goals.”
Lastly, he says that South Africans should use the advantages that are at their disposal. “Our government has made tax-free savings plans available to South Africans in order to encourage us all to save more. You can invest up to R36 000 per year per person without ever having to pay tax on it. You can open an account for each person in your family or for anyone you choose and set up a debit order which is the most effective way to save. You can also pay a lump sum into the tax-free fund.”
In closing, Mhere says that saving money is important and possible for people at all levels. “Even in this tight economy, it is within our power to put at least a small amount of money away. Just remember the simple rules – start saving as soon as possible, set achievable goals, build a buffer, invest, be disciplined, and use a tax-free savings account,” he concludes.