South Africa has an incredibly low rate of savings compared to other major economies. Where the saving rate of South African households is about 1.7%of GBP, by comparison Chinese households save about 22% of GBP.
South Africa has an incredibly low rate of savings compared to other major economies. Where the saving rate of South African households is about 1.7%of GBP, by comparison Chinese households save about 22% of GBP.
The consequences for a country with a low savings rate are dire: People get themselves deep into debt and end up paying a significant percentage of whatever they earn to service this debt. Far too many people are not able to retire with sufficient funds to support themselves and have to rely on others or the State for survival.
Instead of living beyond their means and spending what they do not have, people should identify those areas in their lives where they could reduce or eliminate unnecessary expenditure, and redirect the resultant savings into an appropriate investment.
Most people, regardless of their economic status are likely to be able to identify some areas where they could cut down. For example, people who eat out, gamble or visit their local watering holes on a regular basis could do so less frequently. Instead of purchasing luxury items such as the latest cell-phone, smart clothing, a new car or an expensive holiday on credit, people should rather delay these purchases until they could be paid for in cash.
The habit of smoking is another area to reduce, or even eliminate, expenditure. A person who smokes 20 cigarettes a day typically spends around R750 per month on cigarettes.
In addition, smokers pay insurance premiums which are considerably higher than premiums for non-smokers. Assuming the additional cost of cover was R250 per month, the actual cost of smoking would therefore be R1 000 per month. By quitting, this individual would immediately be able to save the cost of the cigarettes, and after a reasonable period of time, could apply to the life company for a reduction on premium to non-smoker rates. In this example, an ex-smoker could have R1 000 per month available for investment.
Reducing or eliminating unnecessary spending is only aspect, however. It is also vital to invest the amount saved in a disciplined manner.
An amount invested monthly, taking advantage of rand cost averaging and the magic of compounding can grow into a sizeable investment.
For example, if the amount of R1 000 per month identified in the example above (increasing by 10% each year) were to be invested in an investment that, over time, generates a return of 12% per year, the investment would be worth around R4,3 million in 25 years’ time.
In today’s money, that would be like having an additional R1 million in the bank right now.
It is never too early, or too late, to start saving; what is most important is to start.
For the smoker in the example above, that money is currently literally going up in smoke.
Rands and Sense is a monthly column written by Ross Marriner, an accounting and tax practitioner and CERTIFIED FINANCIAL PLANNER®
