It seems as if 2018 has gone by extremely quickly. We are already halfway through the year, and it is a suitable time to look within. It is time to reflect, reassess, and where necessary change the financial goals you set for yourself at the beginning of the year. The South African Savings Institute declared July as ‘National Savings Month’, to promote a culture of saving. It may seem a bit strange to be concerned about saving in the middle of the year, but it is necessary to understand the importance of saving, regardless of the significantly higher rate of price increases we are going through.
Where do you start?
We all aim to put away a certain amount of money every month and then somewhere along the way we lose sight of that goal, and then stop trying altogether. The change from being a spender to a saver begins with one’s attitude. You must start to look at savings as a reward rather than a punishment; that way it makes the journey to wealth creation much easier.
Achieving your long-term financial goals depends on two complementary skills: fiscal discipline and investment discipline. Fiscal discipline means putting together money to invest, while investment discipline involves building an investment portfolio in order to achieve your investment objectives. It is important to remember that to be a successful investor; you first have to be a successful saver. Saving is the first and most important step and investing your savings may help you achieve your goals more easily.
• Take advantage of compounding
Investing is made significantly easier with the power of compounding. When your money earn returns (e.g. interest and/or dividends), the principle of compounding allows your money to earn even more money. Over time, this effect grows, and your money grows at an increasingly faster rate. The power of compounding offers a wonderful advantage to those who start investing early. Compound interest is an investor’s best friend.
• Build a financial safety net
Our brains are naturally wired to prioritise our short-term happiness; as a result, some people completely avoid thinking about potential negative events, like emergency expenses, ill health or retrenchment. However, not thinking about these events is not likely to make them not happen. If there is one lesson to take from the recent rise in the prices of goods and services, it is that shocks to the financial system can have upsetting effects on your income and personal expenditure. A financial safety net can protect you against unexpected lifestyle changes and increases in the cost of living. The effects of not saving may be that you are forced to use a loan or to tap into your retirement savings during an emergency or a loss of a job.
• Be patient and disciplined
Most people have inadequate savings not because they do not care about their future well-being but mainly due to behavioral reasons. There is a human tendency to choose a small instant reward today over a larger delayed reward. Eating fat cakes today and postponing dieting for tomorrow, or watching TV instead of studying for an exam, or buying a dress that may go out of fashion instead of paying your debt are typical examples. If you have an extra R500, instead of dining out you can put that money into a unit trust. Small behavioral changes like these can make a big difference over the long-term. Of course investing does not guarantee financial security, but we believe it is a better way to prepare than not attempt at all.
Why is this important?
Imagine that your personal life is a business. Are you profitable? If you are neglecting your monthly repayments and buying expensive things on credit, consider how you would react if one of the companies in your investment portfolio were doing the same thing. What about a company that managed to go a whole lifetime without ever having cash in the bank to finance future expenses?
There is an exhaustive list of benefits of saving, but after a certain point it is almost more important to stop thinking and begin putting money away. There are various ways to save and your options are naturally influenced by your circumstances. Remember: if you want to be an investor, you will need money. Managing your money carefully is one of the best ways to get some money.
Owen Nkomo
Chief Executive Officer
Owen is the founder of Inkunzi Wealth Group and has over 14 years of industry experience. Prior to founding Inkunzi Wealth Group he held various leadership roles at Deutsche Bank, JPMorgan Chase and Citi. He has an Honours degree in Investment Management.