By saving, you can make your money work for you as it earns interest in the bank or other financial services provider. If you save enough you can negotiate favourable loan terms or a cash discount, or minimise the effects of emergencies on your budget.

How to start saving money

You may know the importance of saving money, but perhaps when it comes to starting your savings plan, you don’t know where to find the money or where to invest it?

Maybe this is why you have never started an investment?

By saving you will:

    • Prevent yourself and your family from suffering future financial hardship.
    • Protect your future and get the best out of life.

If you have money in reserve – for a rainy day, your child’s education, that dream holiday, your child’s dream wedding or your retirement – you will be better protected, better covered and, best of all, you will be in control!

Get your debt under control

It is pointless to try to save when the return on your savings is less than the interest you pay on credit. Solving the problem is obvious: erase your high-interest debt before making any investment decision.

Emergency fund

Your first priority is to create a savings account with five to six months’ worth of your living expenses – this is money you can immediately access should you need to. An emergency fund will help prevent you having to use your investments and thus affect their future value.

Retirement plan

Your greatest savings goal is a comfortable retirement; so you need to try and save the maximum you can in your company pension plan, your own retirement annuity or your investments.

Where do you find the money to invest?

You don’t necessarily need extra cash to save. You need to create the cash with which to save! And you do that through a budget.

Set spending goals, which then allow you to allocate some of your monthly money into a savings plan. Saving just R50 every month can add up to a substantial amount over time.

If you receive lump sum windfalls, save them first of all. It will make budgeting so much easier.

Compound interest

Simply put, this is the interest on interest that you earn. From your first month of saving, you already earn interest. That is then added to your next month’s saving amount; then both amounts earn interest. The same happens with the third month and onwards.

The more you save today, the more you’ll have tomorrow. It’s as simple as that!

Forego one daily cappuccino at R8.50 and invest it. Assuming a return of 10% per year, you’ll have over R317,000 in 25 years. Increase that by the annual rate of inflation (8%) and you’ll have over R642,000 over the same period of time.

Time makes money, so start early!

Inflation

We know that R100 today will buy much more than R100 in 10 years time. In other words, the future value of your money is less than today. So you need to compensate your savings to meet the threat of inflation. Every year you should increase the monthly amount you save by at least the inflation rate. That way you cater for the effect of inflation and make your future money worth something.

Where to save?

Saving is a short-term method to accumulate money. That means you may need to use some or all of it within the next few years. If you want to save for five years or more, you become an investor.

To be able to use your money at short notice, you should not commit to a long-term plan such as an endowment or unit trust. These investments have costs and it takes time to recoup these expenses. Ideally your savings should be in a bank. Currently, the best product offered by a bank is a money market account or fund; however, they do require quite high minimum balances. It is best to use a normal savings account while you are saving towards that minimum balance.

Bank saving accounts return interest, which is added to your total income for tax. Don’t be too concerned, as SARS have given us reasonable deductions from income tax for interest earned. You need a fairly large amount in a savings account before you are liable for tax. Check with a tax adviser if you are concerned.

Timing

The effect of compound interest is huge. That’s why it is called the 8th Wonder of the World! However, it requires time to work. Therefore, the sooner you start, the sooner you will reap the rewards.

Our Employee Wellbeing Programme (EAP) is available 24 hours a day if you want to discuss financial planning.