In a nutshell: Start saving today, even if it’s just R100 per month. Mastering this will greatly impact your financial well-being for the rest of your life. Once you have established an emergency fund, your next saving goal will determine the savings vehicle you use.
Saving vs. Debt
Saving is setting money aside for things you need to pay for in the near future. It could be for fun things like a new laptop or smartphone or boring things like paying a technician if your fridge breaks down. Boring or exciting, it is important to have an emergency savings account.
Typically, savings are accessible and unlikely to earn interest that beats inflation. But, if you have savings, you don’t have to go into debt to pay for your “wants” or to cover unexpected expenses.
The easiest way to save is to set up a monthly debit-order amount that goes off on the day after your salary arrives. In that way, you adjust to getting by with less money. Start small, even if it’s just R100 per month.
If you don’t have an emergency fund and your washing machine breaks, you will have to use credit to replace it by paying with a credit card or making use of in-store credit options.
When you go into debt you borrow money from the bank or a shop. You must repay the loan amount as well as interest. The interest rate on credit can range between 11% and a whopping 27%!
If the fridge costs R1 500 and you repay it over 12 months at an interest rate of 15%, you’ll pay R1 625 for the fridge in total.
If you had saved R140 per month over 12 months, you could pay for the fridge and still have some money left over.
Do your future self a favour and plan ahead.
All the different savings options can get confusing. The rule of thumb is that the easier it is to access the money, the lower the interest rate. First, decide what you are saving for. For example, if you want to set up an emergency fund, opt for a savings account with immediate access.
Banks have various types of savings accounts that can be divided into two broad categories: Immediate access (or flexible) or access with notice (fixed). “Immediate access” means you can draw the money any time you want. “Access with notice” means you must first give notice to the bank that you want to draw money and then you have to wait for a certain period.
What to consider when opening a savings account:
Interest rate: This refers to how much interest your money earns per year – it typically varies between 3,45% for a flexible savings account and 8,25% for a fixed deposit account (providing you don’t touch the money for 12 months).
Minimum starting amount: This refers to how much money you need to have to open the account. Some banks require as little as R100 while others might require at least R1 000.
Notice period: This can vary from being able to draw the money immediately at an ATM, to having to give notice of 24 hours, 7 days, or 32 days before receiving the money.
Deposits: Most accounts allow you to make regular deposits, but some allow just a one-off deposit.
Temba opens a savings account as an emergency fund and deposits R250 every month. His bank offers an interest rate of 3,5%. After a year he has saved R3 000 and earned an estimated R55 interest. It’s not much, but when he had to replace his fridge, he could pay in cash without going into debt.
Fixed deposit account
If you are saving for something that you do not immediately need, like a new lounge suite or a second-hand car, you can opt for a fixed deposit account with a waiting period.
Sibusiso wants to buy a second-hand car in two years’ time. He opts for a 32-day fixed deposit account with an interest rate of 7,95% and a minimum opening deposit of R5 000. The account also allows him to add money to the account, and he sets up a monthly debit order of R500.
After a year Sibusiso earns R613 in interest and has a total of R11 613 in his bank account. After another year he earns interest of R1 139 and now has a total of R18 752.
R5 000 + (R500 x 24 months) + (R613 + R1 139) interest = R18 752 saved after two years.
By saving for two years Sibusiso made use of compound interest. That’s interest earned on interest. In the first year, he earned interest on R11 000, but in the second year he earned interest on R11 613.
When saving for a few years for something big like a new car or a deposit on a flat or apartment, it’s better to invest in a unit trust instead of a savings account. Here’s why:
In a savings account with a bank, your interest is guaranteed. There is very little risk involved, but your returns are capped.
When you save or invest your money in a unit trust, it means you’re putting your money together with other people’s money to buy lots of different things, like shares on the stock exchange, property or commodities.
Each of these asset classes has risks and rewards. For example, a unit trust called a balanced fund might have some money invested in shares, some in bonds, and some in property. This can be good because if one of the underlying investments doesn’t do well and loses money, you won’t lose all of your money.
Another reason a unit trust is a good option to save for the medium to long term is that the returns generated over time can potentially outperform the bank’s interest rate and inflation.
When you save money in a savings account, you are typically guaranteed a fixed interest rate, from 3% for a savings account to 8% per year on a 32-day fixed deposit account.
The value of a unit trust can go up or down, depending on the performance of the underlying investments. Historically, some unit trusts have achieved an average annual return of around 8% to 10% over the long term. But it could also be between 3% and 4% because of market downturns or lack of diversification. It’s important to know that when you invest your money in a unit trust, there is no guarantee that you will make more money or that you won’t lose any of the money you invest.
Thando saves R10 000 in a 32-day fixed deposit account for five years at an interest rate of 7,5%. After five years the money will be worth R14 356,30.
If Thando saved the R10 000 in a unit trust that grew at 10% per year she might have R16 105 after five years, but if it grew at only 4% it will only be worth about R12 167.
Before you decide to invest in a unit trust, talk to a financial adviser. This is someone who knows a lot about money and investing and should be licensed by the regulator, the Financial Sector Conduct Authority (FSCA). He or she can help you figure out how much risk you’re comfortable taking and suggest a fund that might be a good fit for what you want to do with your money.
Questions to ask when choosing a unit trust:
Fees? All unit trusts charge fees, and it’s important to understand these fees. They may include an initial fee, a monthly/annual management fee, and a performance fee. Compare fees across different funds to determine which fund offers the best value.
Risk profile? Choose a unit trust that matches your level of risk tolerance. If you go for a higher-risk unit trust, you may earn more money, but the value of your investment may go up and down more often. If you choose a lower-risk fund, your investment will likely grow more slowly, but you can expect more stable returns over time.
Past performance? Past performance is not a guarantee of future performance, but it can provide some insight. Look for unit trusts with a consistent track record of strong performance over the long term. Ask the fund manager how the fund has performed in comparison with inflation.
Investment minimums? Some unit trusts require a minimum investment amount, which can range from R500 per month to a lump sum of R20 000. Make sure you choose a fund that has a minimum investment amount you can afford.
Interest is like paying “rent” for lending or borrowing money. If you save money in a bank, the bank pays you “rent” or interest for borrowing the money from you. If you borrow money from a bank or a shop, you must pay “rent” for this privilege.
Inflation is the reason you should not save your extra cash under your mattress. Inflation refers to the general increase in the prices of goods and services in the economy. In South Africa, inflation is measured by the Consumer Price Index. Currently, inflation is at about 7%. This means that if you keep R500 under the mattress, after a year its value, also called buying power, will have decreased to R465. Under your mattress the money can’t keep up with inflation. Your money can “fight” inflation by earning interest in a savings account. If you saved the R500 in a savings account for 12 months at an interest rate of 8%, it would be worth about R540.
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