We have to remember to pay ourselves first
With interest rates rising and the cost of living increasing, the idea of finding money to save feels like an impossible task. Just finding the money to make ends meet each month is hard enough.
The problem is, if we only focus on meeting our monthly bills we miss out on the opportunity to create real wealth. Due to the power of compounding, every cent you save today starts to work for you.
If you start saving R500 a month today in an investment with an average return of 12%, that would grow to over R100 000 in just ten years.
Make a commitment to pay yourself first every month. This means that the first “bill” you pay every month is your savings. Leaving it to last, to see what is left over, after the other bills have been paid, is a recipe for disaster.
You don’t need to have a lot of money to start saving, you just need to start.
Commit to future saving
Being human, we find it easier to commit to a goal achievable over a longer period of time rather than trying to do it immediately. Psychologically and emotionally an incremental approach to saving will not have such an immediate impact on your lifestyle and therefore you are more likely to stick to it.
The save more tomorrow scheme is described in the book Nudge where a person commits to increase their savings slowly over time. If your target is to reach 10% of your salary, you achieve this incrementally over 5 years by shaving a bit off your salary increase each year.
Richard Thaler and Cass Sustein, the authors of Nudge, introduced this scheme in Australia and after 4 years 78% of people were committed to the plan. The average investor had increased their level of savings from 3.5% to 13.6% within those four years.
For example if this year you received a 7% salary increase, sign a debit order immediately to put 2% of your new income into a savings account. Every year commit to increasing that debit order by a further 2% of your salary. Within five years you will be saving 10% of your salary without having to cut back on your spending. One way to make sure you stick to this goal is to make a commitment to your financial adviser that you will increase your savings each year. It helps to have someone reminding you of the promises you’ve made to yourself.
Alternatively you can start a debit order with a 10% escalation so each year your savings will increase without any admin hassle.
The key to success however, is to first make sure that you are living within your means before your salary increase. This is so that you are not relying on the increase to meet your expenses.
Use your bonus to boost savings
Consider taking even a small percentage of your annual bonus each year and use it to “top-up” your retirement savings. Think of it as a step towards funding your “bonus” once retired. One of the many advantages of a retirement annuity is that your contribution is tax deductible up to certain prescribed limits. This means that SARS is actually helping you fund your retirement savings.
Save for a specific goal
Identify a specific goal and set aside separate savings to meet this goal. Not only will this keep you focused on maintaining your savings, but it will also motivate you as you watch your savings grow. Saving for short to medium term goals can be done very simply in a savings account or via the money market. However, when your goal has a time horizon of more than 5 years, make sure that you discuss options such as endowment policies, unit trusts and other savings options with your financial adviser. These savings instruments can offer good tax advantages, as well as provide various investment options to meet your risk appetite.