Time is key ingredient in successful savings journey
A savings plan needs to be supported by setting goals
My earliest memories of the idea of saving money came from accompanying my mother for trips to the Post Bank. Back when the Post Bank still had a largely functional network of branches across South Africa, you could deposit your savings in various accounts with different interest rates and time periods.
After a few trips, I noticed that mom would always use the same type of account. Regardless of the goal that the household was saving for, mom’s go-to account to park savings remained the same.
Our household had won half the battle (which is having a disciplined savings plan). While this is the most important step, it needs to be supported by the second half of setting savings goals.
A key ingredient in any savings journey is understanding and clearly defining what it is you are saving for and how much you are saving. This is your savings goal. Next, you need to know how long it will take you to save for the goal.
You will often hear people refer to this as a time horizon. Once you know how far away the goal is, you will be in a better position to make informed decisions about where to put your money.
The biggest reason why time is important is because you can use it to your advantage to improve the growth of your money into the future. For example, while unit trusts that hold JSE shares or equities are risky in the short term, this risk generally translates into better rewards in the future.
Similarly, unit trusts that hold cash and bonds are less risky, and will therefore typically have lower rewards in the future compared to shares. Let us look at an example.
Assume you’re saving for a deposit on your dream house which you plan to move into in 10 years' time. If you diligently put away R1,000 on a monthly basis, what would the difference be if you invested through your bank’s cash account versus buying an equity unit trust from the same bank?
The typical 6% you would have earned from your bank would mean that you end up with R164,700 at the end of 10 years. If you saved through the unit trust (and assume growth of 10% a year), you would have ended up with R206,500. The difference is because equity unit trusts are long-term investments, while savings accounts are better suited to short-term needs and goals.
There are a few tips that could make a significant contribution to your savings journey:
- If you have excess money at your disposal and you are wondering what to do with it, it is almost always better to pay off your debts first before saving.
- Once you are ready to begin, draw up a savings plan that clearly defines your goals and when you expect to meet them. This will help by keeping you motivated and disciplined.
- Don’t use your savings for day-to-day consumption or entertainment. Focus on your goals and do not allow short-term circumstances to derail you.
- If you are saving for a long-term goal – for example, tertiary education for your newborn baby - consider opening a tax-free savings account. This type of account allows you to save for the long term without paying any taxes on any of your gains.
Mom’s saving habits were great for the family. However, a savings plan that catered for time horizon would have been even greater. Without discipline - like having a savings plan - it is almost impossible to build sustainable wealth. Without knowledge – like making use of the value of time - it is impossible to maximise your savings efforts.
* Siwundla holds the Financial Manager Risk qualification and is the investor relations and product analyst at CoreShares