By Cue Sibiya
When we finally graduate and start earning a living, there is no shortage of advice on how to navigate the journey of money; everyone from grandparents, parents, teachers and financial institutions has advice to offer. While the advice may sometimes differ, there is one indisputable element of building wealth that everyone will agree on – start saving as soon as possible.
Kuben Chetty, Head of Transactional Savings & Investments at Standard Bank says that your first few years of working will set the stage for your future. “When you start out in the working world, your salary may be small at first, but getting into the habit of saving will condition you to keep saving. The day will come when you will want to stop working, or at least take your foot off the accelerator, even if you love what you do. To do this, you will need a fair amount of money invested to provide you with a liveable income. Knowing how and when to save as your career and income progresses is therefore critical.”
While many people save, only a small percentage gets it right. The first rule of a successful savings strategy is to understand that you can’t do it alone; you need experts to help you develop a long-term savings plan.
Mr Chetty suggests that if you work for a corporate, you should become familiar with your company pension or provident scheme. It may seem tedious to work through the documents that the HR department may hand you, ignoring how your company plan works may cost you money. For example, if you buy a house, the bank will require you to have life insurance. You may already be paying for cover through your company, but by not knowing this, you may invest in another policy you don’t need.
If you start saving now, you will not need to save large amounts in the future. The following example shows the benefits of starting your savings plan when young:
|Mary invests R1 000 per year from the age of 22 until the age of 29 (earning a 10% return)||John invests R1 000 per year from age 30 (earning a 10% return) and keeps investing every year until the age of 65|
|At age 40 Mary will have R35 891||At age 40 John will have R20 384|
|At age 50 Mary will have R93 091||At age 50 John will have R70 403|
|At age 65 Mary will have R388 865||At age 65 john will have R294 039|
|Mary will have invested a total of R8 000||John will have invested a total of R35 000|
In other words, even though John invests R35 000 he never catches up with Mary.
Mr Chetty says, “While this is a great example of how starting early gives you a head start, it is important to remember the effects of inflation. You need to increase the amount you save each year by at least the inflation rate. In order to give you a clear picture of how inflation affects your pocket, we have to look to the future: let’s assume that food costs rise by 7% per year on average over the next 10 years, and your take-home pay rises by 4% per year.
If you are currently spending R2 000 per month on groceries and your take-home income is R10 000 per month, your grocery bill will equal 20% of your take-home pay. Ten years from now, the same groceries will cost you (at 7% inflation) R4 020. If your salary increases at 4% per year over the same period, your take home pay will be about R14 908. This means that your identical household shopping would then represent 27% of your take-home pay. So the impact of this is that you will end up paying more money on basic goods and your standard of living would take a knock.”
The above scenario carries huge significance for everyone who is saving money for their own home or retirement. If you save R500 per month and only achieve a 4% net return against inflation of 7% per year, you are actually going backwards in terms of buying power. This is, of course, the worst case scenario, but what it illustrates is that when you save, you have to be aware of the effects of inflation on your money.
“While most experts agree that it is never too early to start a savings plan, you have to be careful about the types of investments you choose,” says Mr Chetty. “While young people tend to move around a lot and often decide to go overseas. It is better to stick to flexible investments in the first few years. It’s no good signing up for a ten year endowment and then moving to London a few months later, for instance. It can be done, but it is a big responsibility and your income may be erratic. It is better to stick to short-term deposits, money market accounts and unit trusts for the first few years of your working life.”
When you have decided that you are going to settle for the foreseeable future, consider investing in a retirement annuity (RA). An RA is a great way to save if you are on a fixed salary, because you get a tax deferment of 15%. In other words, if you earn R5 000 per month and save 15% of your salary, you will only pay tax on R4 250.
“Whichever way you decide to save, you will see the results if you are consistent and have the right help from the outset,” says Mr Chetty. “Start now so you can have peace of mind about your future, and achieve the lifestyle you are working towards.”