Recent reports have shown that only 20% of South Africans have any kind of formal savings, but most of us have a good appetite for credit.
When times are good, we can service our debt. But when a financial emergency hits, our wallets may be pushed to their limits and we won’t be able to set aside cash to pay our bills or save for the future.
Fortunately, there are a number of different financial resources for every life stage that can prevent savings emergencies and over-indebtedness.
Nitesh Patel, Head of Customer Financial Solutions: Personal Banking at Standard Bank gives us the 4 most important stages to save for.
Short-term plan: three months to three years
- Short-term savings can be defined as anything that you would usually use store or bank credit cards (the credit portion of the credit card) for. This may include new furniture, a holiday or a big-ticket item like a sound system. In other words, luxury purchases.
- Saving for luxury purchases instead of financing them achieves two things: no interest payments and if anything happens to your income flow, you can put a hold on the purchase of the item. In contrast, when you buy items on credit you are committed to the payment.
- The products that suit short-term savings plans are bank savings accounts, call accounts, fixed deposits and money market accounts – all investments that are flexible and relatively easy to access. You should avoid investments that are affected by market fluctuations, as the value may be compromised if you need to access the funds suddenly.
- Lifestyle purchases (entertainment and food, for instance) should never be financed as they depreciate (i.e. lose value), and financing depreciating assets saps wealth and prevents saving.
Medium-term plan: three to five years
- A medium-term strategy can be adopted for more expensive purchases. This could be a child’s university education, the deposit on a home or a new car. Spend some time carefully planning how much you will need to save and then set up a systematic savings plan via a debit order from your bank account. Also remember to pay yourself first when you are paid at the end of the month – put money into your savings and then live off what’s left.
- The type of products you can consider are unit trusts, money market accounts, longer-term fixed deposits, SATRIX, and endowments. Unit trusts and endowments should be used for a five-year plan, because they are affected by equity markets and need more time to grow.
- These investments are still fairly flexible and easy to access, with the exception of an endowment, where you are committed to the full term you agree to. They also inspire discipline, because you are required to pay a certain amount each month by contract.
Long-term plan: six years and longer
- This is mainly for retirement, but you may want to save for a child’s education from the day they are born.
- It is advised to save at least 15% of your salary for 25 to 30 years to ensure you have a sustainable retirement income. Also realise that retirement planning is not something you should do alone – a qualified financial planner will help you chose the right strategy and combination of products.
- If you want to save for a child’s education, consider unit trusts, equities or a specially structured education policy. A property purchase could also be considered a long-term investment, because it could provide an inflation-linked source of income once the bond is paid off.
The emergency plan
- This is perhaps the most important plan as this can stop you from dipping into retirement funds in the event of a crisis” says Mr Patel.
- The best case scenario is that you have six months’ of income in an investment that can be accessed quickly to weather unforeseen financial storms.
“If you are cash strapped, try and pay off as much debt as possible by cutting expenses and redirecting cash to interest-bearing debt. It won’t happen overnight, but dedication to a plan will pay huge dividends in the long run.” Concludes Mr Patel.
