Saving should be an on-going process
“One of the main reasons people become over-indebted is that they do not know how to save, so they rely on credit. Not all credit is bad, but the most damaging aspect of it is the funding of an unaffordable lifestyle and the impact on savings. 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,” revealed Patel.
According to Patel, there are four elements to a successful savings strategy. These are short, medium and long term planning, as well as an emergency fund.
The short term plan
When planning for the short term, you should be planning for the next three months to the next three years. This type of saving would be anything that you would usually use credit to purchase, including big ticket items such as furniture or paying for a holiday.
“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,” noted Patel.
According to Patel, a savings account, fixed deposit, money market or call account would be suitable for the short term.
The medium term plan
Saving for the medium term may include things such as saving for your child’s education, or a deposit for a new car. This will require careful planning, and you must be sure to add this to your monthly budget, effectively “paying” yourself each month when you pay-off your other bills.
Patel said that suitable products for this type of saving include unit trusts, money market accounts, longer-term fixed deposits 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,” revealed Patel.
One of the benefits of using these methods to save for the medium term, is that you are required to deposit a certain amount of money into the account/fund each month, thereby ensuring that you save.
The long term savings plan
For many this would be planning for retirement. Patel stressed: “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.”
However, saving for your child’s education can also fall into this category, as well as purchasing property, as “it could provide an inflation-linked source of income once the bond is paid off,” added Patel.
The emergency fund
It is important to have a bit of money tucked away for any unforeseen events that may cause you to tap into your savings or retirement funds.
According to Patel, you should ideally have six months’ income in an investment that can be accessed easily in the case of an emergency.
Recent reports indicate that only 20% of South Africans have formal savings. If you are struggling to save due to debt, Patel suggested the following.
“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,” said Patel.
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