Everyone should be saving their money into three easy yet strategic piles: Short, Medium and Long term.
When managing our money, it’s far easier to plan if you know what you’re planning for. Of course the first step should be setting aside an appropriate amount towards savings, ideally around 15% of our earnings. Rowan Burger, Head of Investment Strategy at Liberty Financial Solutions says a good way to limber up for financial fitness is to divide your savings into three pots; Emergency savings, Medium term savings and Long terms savings.
Emergency Savings
“Imagine if you lose your job tomorrow. Are you prepared for the gap between unemployment and receiving your UIF payout?” asks Burger. Most advisers recommend an emergency fund of between three and six months’ salary to cover that gap and any other unforeseen financial requirements that may arise. But where do you hold that money? “A good idea is to use your access bond, a 30 – 90 days fixed deposit bank account or a money market unit trust,” suggests Burger. This way, you and your family will be well supported should anything unexpected arise. The sooner you build up this pot after removing all short term debt the better.
Longer term planning for medium term gain
Perhaps you want to buy a house in five years’ time, or a new car, or you need to prepare for sending your child to university. “Consider unit trusts,” says Burger. “Generally, the longer you stay invested, the longer you have to ride out investment risks which means you can invest to target a better return. Also, if you invest in a solid, well managed balanced unit trust you are fairly safe from suffering a big financial loss over a five year period,” he says.
Long term security
This is where the value of Retirement Annuities and pension funds cannot be underestimated. In effect, the Government will pay you to save because they don’t want you to be a burden on the state once you retire. So you will see good tax benefits in an RA investment because the Government wants you to use that money to support you during retirement. “Look to those areas where you can maximise whatever the tax man gives back to you, for example Retirement Annuities or your company pension funds,” says Burger.
Burger says at any given time each person should have all three of the above aspirations and should be managing all three pots effectively. “But this is not something that resonates easily with South Africans. We change jobs and instead of reinvesting that long term retirement money, we spend it on short term luxuries and neglect to replace it,” he says. This leaves one financially vulnerable. “Remember too that we are living longer. In America, the average period after retirement has increased from 8 to 19 years over the second half of the last century and the trend will continue.
Most South Africans actually retire at age 61 and there’s no sign of the retirement age increasing because we have such high levels of unemployment and need to open up the market for younger entrants,” explains Burger. What it means though is we have a good 20 – 30 years’ retirement to plan for, almost a third of one’s life. “The challenge is to plan to work beyond formal employment, because right now, very few South Africans can afford to maintain their living standards once they retire,” says Burger.
We’re in tough times right now. Fuel and food prices are up and transport costs are set to rise. Fortunately we’ve been in a very low interest rate environment, but again, Burger says those rates will soon go up. “Don’t dig into your retirement pot too soon. Manage your finances and keep all those three pots looking healthy. It will make a huge difference to your life in the short and long term,” concludes Burger.