By Michael Kirkpatrick, Alexander Forbes Business & Distribution Enablement specialist
With Savings Month upon us, South Africans are called to action to think about how and why we need to save. Starting to save can be quite intimidating for many people as they don’t know where to start, and the world of savings and investments can be complex and confusing.
Here are my top three savings concepts that everyone should familiarise themselves with before they start saving:
Savings or investment objectives:
In the financial planning world, we speak about the client’s objectives – what the money is going to be used for, and when. Financial professionals use this information to advise you on the best solutions and products to help you achieve these goals. Importantly understanding this yourself is a precursor to making the best possible decision when it comes to buying any financial product.
- Compound interest
Once you start saving or investing, the money should receive return a return in the form of interest, year on year. Importantly it receives ongoing interest not only on the actual money you’ve put away, but also on all other returns/interest received over time. Therefore, the longer you save the more you benefit from this compounding effect.
- Inflation rate
A widely published economic statistic, the inflation rate represents the increase in the prices of goods and services over time. As an example, bread in the mid-2000s cost between R3 and R4, whereas today it will cost you between R14 and R16. This is a fundamental economic concept as it impacts the real value of your money in the future and which you need to be mindful about when you are saving. Ideally when you save, you want the interest or investment return you receive over time to be the same or higher than the inflation rate, otherwise what your money could buy is reducing over time.
It’s equally important to also understand the concept of compound interest when it comes to taking out debt – the money you have borrowed to purchase goods and services. This can take the form of a home loan, car finance, personal loans, store cards or even person to person lending. All this borrowed money needs to be repaid, as well as the interest attached to it.
This is where the compound interest part comes into play – the cost you are paying to the company/person who lent you the money. What do they get out the deal, otherwise why would they loan you their money? For the person who is saving, compound interest builds your wealth over time, but for a borrower it is a destroyer of wealth.
Use Savings Month as a time to reflect on your own financial situation, your goals and aspirations and if you need to speak to someone about how to start saving or restructuring your finances, contact a certified financial adviser to assist you.