Saving is not optional
21 September 2016
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On mobile, on digital, on demand, this is Old Mutual Live Money Coach. Hello and welcome, my name is Chris Gibbons. Once again we’re focusing on the question of savings. Should you save? Why? And if so, how much? We’re joined now by an expert in the field, the CEO of the South African Savings Institute, Gerald Mwandiambira. Who is also a professional chartered financial planner.
Gerald, welcome to Old Mutual Live Money Coach, thank you for your time. First, we talk about the importance of saving. But how do we explain that to someone who doesn’t earn a great deal and can barely pay the bills?
Gerald Mwandiambira: I think the most important thing to first explain is that savings is something you can only do when you do have an income. I think if you don’t have an income it’s very difficult, if not impossible to save. Saving should really be something which someone who has a current income can do. Essentially the principle of saving is putting away something which you could consume today, for use tomorrow.
The benefits of saving
CG: What are the benefits then of saving?
GM: The main benefit of saving is that it gives you confidence in terms of financial planning. Because at the end of the day life is full of many boxes and tricks and surprises. You need to have a situation where you have something in your arsenal to help you on that rainy day.
The first purpose of saving is really to gain control of your finances. Have things such as an emergency fund. So that if an unexpected financial obligation should come, it doesn’t affect you. It gives you peace of mind in terms of your longer term planning, in terms of your retirement etc. Saving is really saying that I don’t have to consume everything I have today. I can put something aside for tomorrow.
CG: This is for the person who lies awake in the middle of the night saying: I don’t know how I’m going to pay my bills. That’s the person who needs to save.
GM: Essentially, yes. The first purpose is survival; you save to survive because it gives you financial control of day to day bills. You can’t have a scenario where you don’t know how am I going to live beyond today. The second one, as I said, is an emergency fund. The emergency fund gives you security. Security in terms of, if something should happen, I can cope.
The third one, future financial planning, it gives you confidence and freedom to basically know that next year I can plan a trip abroad and next year I can spoil myself. I’ve got things I have to look forward to. Often if you don’t save, it means you don’t have goals. If you don’t have goals, it means you don’t have dreams. If you don’t have dreams, it means you’re living a fairly miserable life. So saving is a component of giving you happiness because happiness is a psycho-social need.
If you don’t save, you actually could possibly not be happy. When you are saving, you can actually interact socially and know that you can cope with the challenges of the world today. The last purpose of saving, which I probably put to the table right now, is to create wealth. By using less than you’re collecting today, you’re actually getting wealthier. If you manage to create wealth through your life, you can actually also have the final goal of leaving an inheritance for your children.
How much should we be saving?
CG: Gerald, what amount of money should you be trying to save?
GM: That’s a tricky question, but from a financial planning perspective, they do say that a number of at least 15% of your income should be saved. If you look historically, if you manage to save 15% of your income, and manage to get returns of up to 20%, you’d probably be able to save for your entire retirement.
But now what’s happening is that the returns on the markets are not as great as the good old days, so you need to actually save more. A number I saw the other day, possibly, is you need to be saving between 20-25%. If you can get a 10-15% return, you should be okay for the long term.
But ultimately we need to realise this: We’re living longer and often the years you are retired can actually exceed the years you are working. Which means that you could actually be retired for another 30 years when you actually worked 30 years. Which means without any gains from investment, you need to be saving pretty much half your salary. But that’s for those who get no return whatsoever. Saving, I would say a safe number, 20-25%.
CG: That’s a big number. Before you save, should you pay off your debts first?
GM: Debts are not an alternative to saving. I think a lot of people think, let me get rid of the debt and then I can start saving. I simply put this to the table: Your greatest asset at any one point, if you’re employed, is your income. If you lose your income, it doesn’t matter how well you’ve been paying your debts, your debts stay with you. You actually have no safety net. Savings should always be happening. You should always be creating a safety net.
Obviously when you have debt your safety net amount, which you put every month, cannot be as great as when you don’t have debt. Because you have to service the debt. But you should be saving pretty much all the time while you’re servicing any debt obligations.
CG: You’re listening to Old Mutual Live the Money Coach edition, on demand, visit dogreatthings.co.za. I’m talking to Gerald Mwandiambira who is the CEO of the South African Savings Institute. Gerald, is there a right way to save or a wrong way?
Doesn’t matter which way – just save!
GM: Definitely not, there is not right way or wrong way. Certain things work for some people which don’t work for others. I think the main thing is to understand your own money personality and what works for you. Essentially, if you are achieving the net goal of putting away something you could have consumed today, you are saving.
Some people like to use spreadsheets, some people like to write down budgets and keep track manually. Some people like to just have it heavily automated in terms of stop orders, debit orders etc. I think there’s no right or wrong way. As long as you attain the end goal, I think that’s the more important thing to focus on.
CG: You mentioned budget, I was going to ask you, what role does having a budget play in your savings decision?
GM: Well, before you can save you need to understand the state of your finances, ie, your cash flow. The budget is the first step because the budget lays out your monthly cash flow. You can actually have a snap shot of how much money you have at any particular point, which you can allocate perhaps to saving.
Also, the budget then also helps you to visualise or see any wastage or any money which you’re using, which is pretty much falling through the cracks or is unaccounted for. The budget is the first step because that’s the snapshot which gives you your shot of, this is where I am in terms of my finances.
Once you have a budget, you can then start allocating money towards saving, money towards debt servicing, money towards daily expenses, money towards any other obligation. Which you may have at that particular point. But without a budget you’re pretty much working blindly.
Don’t delay – start now!
CG: Obviously, final question, the younger you get into the savings habit, the better.
GM: Oh yes Chris because time is the best friend to the saver. Time is the best friend to anybody. Because when you’re looking at saving, when you’re looking at investing, when you’re looking at creating wealth, there’s this concept called: The time value of money.
Which means that money which you could have used today, invested, gets time to grow and you get interest on interest and money grows over time. When you look at your particular wealth or worth right now, you should not look at it in currency, in terms of rands and dollars and cents. What you need to do is look at it in terms of time.
Because how long can you live, Chris, on your standard of living, without earning another cent. That shows how wealthy you are. Many people, they get shocked, right now the Old Mutual Savings and Investment Monitor says people are down to two-month savings cover. Which means that after two months, the average South African is bankrupt.
How long can you live without earning money? Once you then work out how much you need to live longer and longer, then you start creating wealth. Ultimately, time is the best friend to anybody who is saving and the sooner you start, the less you have to save over time. It’s important for us to realise that it’s not how much you’re saving, but rather how long you’re saving. The consistency and how much effort you’re putting into your saving because ultimately wealth is measured in time.
CG: There we’ll leave it for today. This has been another edition of Old Mutual Live Money Coach, my name is Chris Gibbons. With me on the line from Johannesburg has been the CEO of the National Savings Institute, the South African Savings Institute, Gerald Mwandiambira. Gerald, if anybody wants any more information, where would they go?
GM: If you want any more information, the South African Savings Institute is on savingsinstitute.co.za, or we do have a Twitter hashtag which is @SASIsavings.
CG: You can also pick up plenty more information from Old Mutual’s own website and social media, on Twitter, @OM_OnTheMoney, or on Facebook, On the Money Financial Education Programme. Gerald, thanks for having been with us. Remember, please feel free to get in touch any time if you have any questions for me or topics you’d like covered on Old Mutual Live Money Coach, feel free to send them direct to me at firstname.lastname@example.org, I’d be delighted to hear from you. Until the next time, thank you for listening. Old Mutual Live, on mobile, on digital, on demand.