Although the importance of saving for either a rainy day or financial security is well documented, your approach to saving money might need a bit of tweaking.
Although the importance of saving for either a rainy day or financial security is well documented, your approach to saving money might need a bit of tweaking.
With the disposable income of many people dwindling, given sustained rising costs, South Africans might find it difficult to have a savings pattern. This has resulted in the country being rated as among the world’s worst savers.
But for those who are about to establish a savings pattern, Sygnia Asset Management CFO Louw Rabie says it’s important to have a savings goal.
Though drawing up a savings goal might sound complex – in fact it’s not. Rabie says establishing a goal might actually motivate you to save.
As he puts it: “If you are putting money away on a monthly basis and you don’t know why are you saving, then there is a good chance that you are going to stop saving or dip into your savings pool”.
For example, if you are saving for a deposit on a house with a view of buying it and the need for a new TV surfaces – then you need to weigh up the need for a new TV versus saving to buy a house. “If you didn’t know what you were saving for then there is a good chance that you would take the money and buy that TV because you can’t weigh up what your goal is.”
Having a savings goal applies to both beginners and those who have long cultivated a pattern of saving.
Approaching a savings goal
A good place to start is to determine whether you have a short-, medium- or long-term savings goal.
A short-term savings goal would typically be up to three months to purchase (for example) an electronic device; medium-term spans from three months to five years and could involve saving for an overseas holiday or a deposit on a new car; while long-term would be anything longer than five years such as saving for retirement or your child’s education.
“A savings goal influences your investment time horizon and the way you are going to save. You are probably not going to have the same investment product for a short- or long-term goal.”
“Everyone has goals of where they want to be in five or ten years’ time and what you want to do. And it’s just about mapping your life goals to your savings goals.”
There are numerous investment products available to help you save.
Rabie says: “If you need to save for three months, you are probably not going to invest in a high-risk, high-return portfolio, but you would probably invest in a normal bank account. If you have a long-term savings goal, you would probably invest in a product with higher exposure to equities and offshore markets.”
Not having a savings goal is arguably a big mistake when it comes to personal finance. Rabie says another mistake people make is having a savings plan in place and not constantly reviewing it in relation to market conditions or lifestyle changes.
Having the same investment strategy for 20 years is not prudent given that the investment market constantly changes. Underscoring this is that over the past 20 years, the investment market has opened up to offshore markets and the interest rate environment has changed.
“You need to revisit that savings and investment goal at least on an annual basis if not shorter. If you are in the 25 to 35 age group it is very important to do it, as this is a time in your life where a lot of things change – people get married, have children, and buy a house. And this has a serious impact on your financial situation.”