Saving starts with a simple formula

Cultivating a culture of saving will help you achieve financial freedom through the interest you earn on your savings.
Cultivating a culture of saving will help you achieve financial freedom through the interest you earn on your savings.

July marks the second part of the year which, among other things, gives us an opportunity to gauge our progress towards the goals and objectives we set at the beginning of the year.

This month is also National Savings Month, an initiative started in 2001 by nonprofit organisation the South African Savings Institute (Sasi).

The campaign aims to raise awareness of fiscal planning and saving, as well as keeping citizens informed about investments and savings.

Research indicates that most South Africans have a poor savings culture. The reasons range from economic issues to bad financial decisions and a lack of discipline.

But what are savings and why are they important? Savings are income that is not spent. Because a person does not know what will happen in the future, money should be saved to pay for 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 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 that purchase.

When you save so that you can pay for purchases, not only will you not pay interest, but you also earn interest because the money sits in a bank account waiting to be used.

We can improve our savings culture by adopting simple and practical formulae.

These can be customised for each individual and avoid the pressure to keep up with the Joneses, the Khumalos and the Motsepes.

  • The net-worth formula

The first practical formula is your net worth. If you add up the value of all of the things you own and subtract all your debts, what is the number you get?

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 persists.

  • 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 contribute to your savings and investments each month. Add any additional payments that you pay toward debt.

Once you have the monthly total, divide that amount by your total income (the total monthly amount that 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. 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.

  • Final Thought

Taking a piece of paper and a calculator can improve your attitude towards savings.

The formulae described above are practical and can be adopted by everyone.

These methods should help you track your progress and will also assist you in cultivating a savings culture.

  • Sekese is a certified financial planner professional and member of the Financial Planning Institute. Visit www.fpi.co.za
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