5 Steps Towards a Sustainable Savings Strategy
Clyde Parsons, Chief Innovation Officer at BrightRock
Step 1: Get a grip on your spending
The first step towards a sustainable savings strategy is to understand where your money goes to and to cut unnecessary expenses.
Start by drawing statements for the past three months on all your accounts – including your credit card(s). While you go through your bank statements, consider the following guidelines recommended by experts, which sets out what a typical household spends as a percentage of their budget in various categories:
35% on household expenditure: this includes spending on food, communications, entertainment, security, domestic wages, travelling costs, water, electricity and school fees.
25% on financial services: this includes long-term life assurance products, short-term insurance, medical aid, pension contributions and longer-term savings. If you’re contributing to your company pension fund this would be taken off before your salary is paid into your bank account so you need to adjust accordingly.
35% on debt repayments: You shouldn’t be spending more than this percentage on debt – the less the better. This includes your mortgage (or rental), car repayments, credit cards and store cards.
5% on emergencies: this is money allocated specifically for emergencies and not long-term savings.
Try to restructure your expenditure accordingly. Start by looking into what all your debit orders are for. How about those added services that overlap with what you already have with your short and long term insurers? Is there a way to cut costs on pay television and internet access in your household? All the little things add up and chances are there are quite a few services you don’t need ─ or never use. Cancel them.
Step 2: Make sure you’re properly insured
Nothing makes as big a dent on savings as unforeseen expenses that could have been covered by your short and long-term insurance policies. Ask a financial adviser to review this for you.
By how much has your insurance premiums increased over the past few years? Bear in mind cheap premiums aren’t necessarily sustainable. Some policies can start of relatively inexpensive bu increase steeply later. Review your cover regularly, and ensure your cover is – and stays – relevant, so you’re only ever paying for the cover you need.
That said, never skimp on your insurance either. If you have debts to honour and a spouse and/or family to provide for, you need to be covered for death and disability. Question the flexibility of this cover. Does it change as your needs and responsibilities change? And check out the provider’s track record for claims pay-outs.
Step 3: Start an emergency fund
Although the risk of unforeseen expenses is significantly reduced by adequate cover, you will still have unforeseen expenses that you will have to budget for – that’s where your emergency fund (not your overdraft or credit card!) comes into play. It needs to make provision for any budget shortfalls like household emergencies, unexpected car maintenance and shortfalls in your medical cover.
Set an initial target of two to three months’ salary. This could even help with bigger setbacks, like losing your job – set a substantial target and work towards it over the long term. Experts suggest that you prioritise your emergency fund before settling your debts.
Step 4: Tackle your debt
Once you’ve laid the foundation to pay for emergencies without using your credit facilities by securing at least R10 000 in your emergency fund, you need to start working towards paying off your debt by prioritising high interest debt over lower interest debt.
Just think of it this way: The interest paid on an average credit card debt of R10 000 adds up to more than twice the cost of R10 000 on your mortgage over five years. It might be a good idea to consolidate your debt towards the debt-source with the lowest interest rate. Once that is done, lower the limit on your credit card – or even better: Snip it.
Step 5: Work on your longer-term savings strategy
Surprise: You already started saving money when you created your emergency fund!
Once your emergency fund can cover at least one month’s salary, it might be a good idea to start working on savings for your retirement and savings for luxuries like travel – starting with your retirement. If you don’t have a retirement benefit as part of your salary package, ask your financial adviser to look into a retirement annuity, which is tax deductible.
It’s also worthwhile looking into tax-free savings accounts, which allow you to save a maximum of R36 000 per year (and R500 000 in your lifetime) in a specially designated fund or account – ask your financial adviser to incorporate this benefit into your savings strategy.