Commit to future saving
Looking at your monthly budget, you may think that there is really no room for savings at present. Don’t let that stop you from achieving your goal – commit to future savings now. Perhaps once you have paid off a short-term debt, such as a clothing account, you could channel some, if not the entire amount, of the monthly instalment into a savings plan.
Alternatively aim to cut down your expenses over the next three months until you have enough to start funding your savings. This could mean reducing your cell phone account or cutting down on take out, but before you know it you will have your savings plan on track.
Another way to achieve this is to make sure that your savings policies have automatic annual increases attached to them. This will mean that each year on the policy anniversary, the premium will increase by a set percentage. Try to aim for a percentage that is slightly higher than inflation to make sure that your real rate of saving is increasing; a round 10% is always a good bet. You won’t even notice the small increase, but it can make a big difference in the future value of your savings.
Pay yourself first
Make a commitment to pay yourself first every month. This means that the first “bill” you pay every month is your savings. Leaving it to last, to see what is left over, after the other bills have been paid, is a recipe for disaster.
When the time comes for your annual increase, make sure that you consider your savings when you plan how to spend it. This is a great time to meet with your financial adviser and review your financial needs. Putting aside a portion of your increase into your savings is money you never had in the past, and you won’t miss it.
Consider taking even a small percentage of your annual bonus each year and use it to “top-up” your retirement savings. Think of it as a step towards funding your “bonus” once retired.
Save for a specific goal
Identify a specific goal and set aside separate savings to meet this goal. Not only will this keep you focused on maintaining your savings, but it will also motivate you as you watch your savings grow. Saving for short to medium term goals can be done very simply in a savings account or via the money market. However when your goal has a time horizon of more than 5 years, make sure that you discuss options such as endowment policies, unit trusts and other savings options with your financial adviser. These savings instruments can offer good tax savings as well as take into account your risk appetite.
Let the taxman fund your savings
Do not under estimate the amount you will need to save for retirement. Too many people put off saving for retirement believing the myth that they can start saving closer to retirement age or that the accumulated funds in their pension or provident fund will be sufficient.
One of the many advantages of a retirement annuity is that your contribution is tax deductible up to certain prescribed limits. This means that SARS is actually helping you fund your retirement savings. Coupled with the fact that there is no tax payable by the fund in which your retirement annuity is invested in, which provides you with better returns on your money, and the fact that the first R315 000 on retirement is tax free, makes a retirement annuity a very tax efficient savings tool.
Saving is addictive
Watching your money grow is an exciting thing. Once you start to see the benefits of compound interest or growth on growth, you will be a saver for life.