30 July 2019
Much like our country’s policymakers do, we all face a number of competing priorities when it comes to choosing where we should spend our money. Often, these include both obligations and aspirations over the short and long term.
The harsh reality is that many South Africans live month to month, where the challenge is finding the next rand to cover expenses. When there is extra cash available, this may seem like an amount too small to make any meaningful difference to savings, investments or debt repayments. The truth is, however, that every small amount saved can make a big difference in the long run.
Not sure how to begin making a difference? Here are our top five tips for reflecting on your personal economy and making a shift this Savings Month:
Understand (and own) the gap between what you earn and what you spend.
Your net savings rate (the amount you save relative to your income) is probably the most important indicator in your personal economy. This gap can give you breathing room when the unexpected happens. It can also provide an opportunity for you to go on that dream holiday or put down a deposit for a home. You also need to use this gap to provide for your future self in retirement. And finally, creating this gap enables you to help others and contribute toward a better future for South Africans in general.
If you don’t control this gap, it will control you. When this happens, managing your income will primarily be focused on paying for your current lifestyle. You could get stuck in the here and now; and struggle to imagine what is possible in the future.
Don’t get trapped in the spending spiral.
Beware of conspicuous consumption, which is spending for the purpose of displaying your wealth or social standing. This type of spending kills your savings gap. When it is financed by debt, such as credit cards and store accounts, your past spending decisions act like a chokehold. This is because the gap never seems to open up – any extra income, such as a bonus or rental income, may bring relief in the short term, but will not get you ahead.
It is challenging to control something you don’t understand; and difficult to understand something you don’t measure. You should therefore write down your expenditure, so that you can identify and eliminate conspicuous and wasteful consumption wherever possible.
If you have created a gap, allocate some of this money to a savings goal. This could be something that you aspire to achieve but can’t afford right now.
Even if you have not yet managed to free some of your income for saving, identify a savings goal. This will help you to prioritise your spending more effectively going forward. You may come to realise that some of the things you regularly spend on are actually less important than saving towards your goal.
By going through the process of choosing one savings goal, you may also identify other objectives that you can focus on when you are able to create the right savings mind-set. These may be more future-focused goals, for example.
Consider saving with the Sanlam Goal Manager, which enables you to set up goals and track your progress as you save in relation to your objectives.
Focus on the little things that you could compromise on in your daily life in order to save more money. For example, you could pack lunch rather than buy food at work or substitute one or two of your daily cappuccinos for the office blend.
If you have not yet managed to figure out what your greater, more ambitious savings goals are, you can still achieve a lot by focusing on saving what you can, right here and now.
If you need ideas, consider borrowing a few (interest free!) from our 31-day Frugal Challenge Calendar.
There is no need to go solo.
Dan Gilbert, in his TED Talk, “Why we make bad decisions”, speaks about two types of mistakes that people tend to make during financial decisions. These include errors in estimating value and errors in estimating the likelihood of events. An inability to imagine the long-term financial consequences of your decisions means that you either need to be extremely diligent and self-critical of how you manage your personal economy, or you need to ask for help. Most people would benefit from some financial planning advice and assistance.
Ultimately, it is important that you get help from someone with whom you are comfortable enough to have a frank and honest conversation.
