How to save for every life stage
Johannesburg - Recent reports have shown that only 20% of South Africans have any kind of formal savings.
According to Nitesh Patel, Head of Customer Financial Solutions: Personal Banking at Standard Bank: “One of the main reasons people become over-indebted is that they do not know how to save, so they rely on credit."
Mr Patel said while not all credit is bad, "...the most damaging aspect of it is the funding of an unaffordable lifestyle..." He advised South African's to reexamine their financial health and to consider a saving strategy.
“Getting to grips with an effective savings strategy has two strong benefits, the first being a reduced reliance on expensive credit and the second is having cash available for saving.”
He said a successful savings strategy consists of four elements: a short-, medium-, and long-term plan, and an emergency fund:
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.
He said: “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. Mr Patel said when luxury items were purchased on credit, one becomes committed to the repayment of the item.
Medium-term plan: three to five years
A medium-term strategy can be adopted for more expensive purchases. This could be for a university education, the deposit on a home or a new car. Mr Patel advised that consumers should carefully plan how much they would need to save and then set up a systematic savings plan via a debit order from your bank account, to achieve the goal. He said remembering to pay yourself first when you are paid at the end of the month. meaning, set aside money into your savings and then live off what’s left.
He said: "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."
Long-term plan: six years and longer
This is mainly for retirement, but you may want to save for a items or experiences that you know are in the future.
Mr Patel said consumers needed to save at least 15% of your salary for 25 to 30 years to ensure you have a sustainable retirement income.
He said there were plenty specially structured policies that consumers could invest in for returns for when they needed the money.
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,” Mr Patel said. He warned that a sixth month income investment would assist greately. "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."
His advice for those who are cash strapped was to try to pay off as much debt as possible by cutting expenses and redirecting cash to interest-bearing debt. IHe said being debt-free might not happen overnight, but dedication to a plan would pay huge dividends in the long run.