Saving for a specific goal? A deposit for a new car, a dream holiday or education? Rutherford Capital shares some practical tips on how to stash your cash – and fast!
You’re planning an exciting overseas holiday to celebrate a special anniversary and decided it may be wise to start a savings plan. So, you thumb suck an amount to put aside every month, then miss the odd month and when the holiday comes around you end up maxing out on credit cards and overdraft facilities to make up the balance. And then, long after the happy event, you are still paying the bill. Does this sound familiar? Then read on, help is at hand! The good news is that with a bit of planning it is possible to avoid the debt trap!
Set Your Goal and Give it a Name
Research shows that setting a goal and naming it will help you save more effectively. If you’re simply putting money aside every month, it is much easier to skip a month or withdraw cash for various reasons. However, if you’re saving for a particular reason, it’s much easier to stick to the plan and remain disciplined. You’ll not feel so deprived going without your morning cappuccino and Friday night pizza if you’re saving for ‘Romantic Rome’.
If this is your first attempt at saving, it may seem daunting, so start with a small goal. When you’ve had success, it’ll be much easier the second time around – as they say – success breeds success!
Work Out How Much to Save and For How Long
There are two ways you can approach this: based on a defined amount per month or according to a deadline date. The first instance is driven mainly by affordability and the cost of the goal. How much can you afford to save after all your monthly expenses have been catered for? For example, you want to save R10 000 for a deposit on a new car, and you can have R500 cash spare to save per month. Assuming an interest rate of 7% per annum (compounding monthly), it will take 19 months to reach the R10 000 target.
The second approach involves a deadline date, such as a dream holiday in two years’ time. Let’s say that the holiday costs R50 000 today and so with the effects of inflation it is likely to cost R56 180 in 2019. To achieve the goal, a monthly saving of R2 188 would be required (assuming interest of 7% per annum compounding monthly). There are many savings calculators online that can help you with these calculations, or you can call your financial advisor. It is crucial that the savings goal is realistic and affordable, otherwise, you’ll be discouraged if you never hit the monthly target and the entire scheme will be doomed from the outset.
Choose the Best Account for Your Savings Goal
If you just leave the money you are saving in your daily transactional account, you’re more likely to fritter it away. Rather open a specific account for your savings goal and set up an automatic monthly payment online. There are a variety of accounts to choose from, and interest rates vary, with longer term deposits offering higher rates of interest. Investors over the age of 60 often qualify for higher interest rates too. If your savings goal is additional funds for retirement, it’s very worthwhile considering a Tax-Free Savings Account (TFSA). Currently, you are allowed to save a maximum of R33 000 per year tax-free limited to a total of R500 000 per lifetime. If you plan to withdraw the money to pay for a holiday, for example, a TFSA would not be the best option as once funds have been withdrawn, they may not be replaced.
Review Your Savings Goal and Financial Position
It’s quite possible that your financial position might change while you are saving which means that your monthly savings amount may change too. If you get a pay rise, it’s a good idea to adjust the monthly contribution to the savings plan. It’s also a good idea to check that your savings strategy is going to give you the result you want in the proposed time frame. For example, if you are saving for your child’s tertiary education and have taken inflation into account, you may however, become aware of the fact that education inflation tends to run higher than the standard inflation rate. This means that you will need to adjust your savings goal. Otherwise you may well find that the savings program that you are working hard at will not give you the results you need.
Tips to Stay on Track
Draw up a budget and track it to stop you from overspending or just frittering money away. It can be surprising how much seemingly insignificant daily expenses can cost over the long-term. A morning cappuccino, a sandwich and cold drink for lunch and something sweet along the way can soon add up to R100 per day – that’s R500 per week and R2000 per month. Taking lunch from home will not be without cost, but will go a long way towards freeing up some cash in your budget for your savings goal. Keeping your savings in a separate account makes you think twice before dipping into it. Also, savings accounts and fixed deposit accounts have higher interest rates than a day to day transactional account. Reward yourself as you hit milestones. Research shows that you are more likely to achieve greater success with your savings plan if you allow yourself small treats as you reach important milestones. If you have a setback, don’t abandon your plan completely, rather adjust the timeline wherever possible. It is important to make sure that your goals are realistic and achievable so that you don’t get discouraged and give up completely. There’s no harm in moving the goal posts slightly if your plan is not working. Maybe revisit the choice of laptop you are saving for or delay the holiday for six months. Avoid the temptation to fall back on your credit card. You pay interest on your debt at an effective 23% and possibly higher (effective rate is the standard debit interest rate compounded monthly) and can only earn 7% on your savings. You don’t need to be a genius to work out that is not a good deal. If anything, this should provide the greatest motivation to stay on track. There’s no fun in anything if you’re worried about money hassles and the expensive credit card debt that is waiting for you at home. As a final thought, consider this quote from Albert Einstein “Compound interest is the eighth wonder of the world. He who understands it earns it – he who doesn’t, pays it.” Now sit back and watch your savings grow!
Submitted July 14, 2017 at 06:05AM by Rutherford_Capital http://ift.tt/2um15ZP
