By Sydney Sekese, CFP® professional and member of the Financial Planning Institute
‘Procrastination’, or putting something off, is the ‘thief of time’ because you end up wasting time by putting things off. Most of us waste time when we could have been accomplishing what we need to achieve. It’s common for people to put off savings because they can’t save very much right now and there’s always the hope that next year will bring a big raise or a reduction in expenses that will allow for a more significant savings.
The month of July is usually a “National Savings Month” which is an initiative that was started in 2001 by a non-profit organisation; South African Savings Institute (SASI). The campaign aims to raise awareness of fiscal planning and saving, as well as getting all citizens informed and active when it comes to investments and savings. Research indicates that most South Africans have a poor savings culture. The reasons range from economic issues, bad financial decisions and a lack of discipline when it comes to saving.
But what is savings and why is it important? Savings is the portion of income not spent on current expenditures. Because a person does not know what will happen in the future, money should be saved to pay for unexpected events or emergencies.
A savings account is the perfect vehicle for short-term goals, since the money put there is somewhat safe from loss. At the same time, the money you put in a savings account can earn a bit of interest, maximising the value of your savings and making it that much more effective.
It can be very tempting to purchase something you want today using credit rather than saving up for it and paying cash for it in the future. When you use credit, you add to the cost of the purchase because of the interest you have to pay on the loan. When you save so that you can pay for purchases without borrowing money, not only will you not pay interest, but you also earn a little interest as the money sits in a bank account waiting to be used.
We can improve our savings culture by adopting simple and practical formulae. These formulae can be customised and made specific to each individual and therefore avoid pressure to keep up with “the Jones’s, the Jooste’s, the Khumalo’s and the Motsepe’s”.
The net-worth formula:
The first practical formula is your net worth. If you add up the value of all of the things that you own and subtract from it all of your debts, what’s that number? Saving with the purpose of improving this number can increase your net worth and keeps you on track year in and year out. Ideally, that number should be higher than it was a year ago. If it’s higher, then you are achieving financial success. If it’s not, then you are making some missteps and not achieving financial success, especially if this pattern keeps going up.
The savings rate formula:
The other mathematical formula is your savings rate. To calculate your savings rate, start by adding up all the money you are contributing to your savings and investments each month. Add any additional payments which you are making towards debt.
Once you have the monthly total, divide that amount by your total income (the total monthly amount which lands in your bank account).
Multiply that amount by 100 to express your savings rate as a percentage of your total income. This number represents how much of your money you are using to improve your financial situation (as opposed to blowing it on other things). The higher your savings rate, the better. A high savings rate not only means you are in control of your cost of living, but it means you are taking financial strides forward every month.
The best way to “arrest” the thief of time is to start saving early. The compound growth can give your savings a big boost and you can weather unexpected market events. If you save R100 000 at a 10.5% rate for a fixed term deposit of 5 years, the payout at the expiry of the term would be R164 745.
The best and practical approach to fight procrastination is never to hide your head in the sand. I came across an article that recommends setting a weekly, bi-weekly or monthly financial meeting with yourself to form action plans and give yourself a firm date on when you’ll have it done. Open-ended words like “someday”, “soon” or “later” make it far too easy for us to bail out of our goals.