A timely reminder of how essential it is to save – yes even in these tough times.
We discussed last time the importance of building an emergency fund through saving a portion of one’s salary each month. Savings in general, though, should provide for many needs and not just short term but for the medium and long term too.
In determining what one’s financial goals are and how to provide for them, the first step is to decide how much one can afford to put aside each month. With the continual rise in living expenses this is often much easier said than done. Many simply do not have disposable income at all, such is the extent of their monthly outgoings. In these cases, a thorough examination of one’s regular expenditure is essential. In so-doing wasteful or unnecessary expenditure can be stopped and re-directed into a proper savings programme.
There is no fixed guideline for how much one should save. It could be 10% or even 15% or more of one’s income but the aim must be to save sufficiently to meet one’s goals be they short, medium or long term.
When assessing what one’s financial goals are for the future and how much to allocate to each, it may be necessary to prioritise, at least in the beginning and then, if time permits, to provide for each and every one of those goals once the savings programme is underway.
In South Africa we have an excellent range of savings vehicles many of which can provide inflation beating returns. These include unit trust investments, tax free savings accounts, endowments and retirement annuities. Furthermore, some of these have very beneficial tax and estate planning advantages which add to their overall benefits. Some, such as offshore unit trusts, have Rand hedge and geographical diversification advantages.
It may not seem immediately obvious but another important potential savings source is to reduce debt, particularly bond and other forms of debt. By increasing monthly repayments even by a small amount, one is saving at a rate equivalent to the percentage charged on the debt. At current high levels of interest, additional amounts added to normal debt repayments can result in a significant saving.
All these options should be considered and acted on. The important thing is to actually save regularly to provide for future needs.
Please contact your Maximus adviser who can give advice on the various savings options to suit your needs.