We have all heard the term ‘saving’, and know it as something we all need to do. We know we need to do it, but most of us don’t. In this article, I discuss the 4 things people tell themselves when it comes to saving and why these are mostly false.
1. I need to make more money before I save
We think that in order to make saving worthwhile, we need to be saving a large amount. While it is true that you will earn more on a larger amount, not putting anything away means you earn a big fat ZERO anyway. You know that Micheal Jordan quote “You miss 100% of the shots you don’t take”, well the same applies to saving. We tell ourselves that once we make more money, we will start saving and everything will be ok. I hate to break it to you, but this way of thinking almost never works, because as soon as you earn more money, you will most likely become a victim of lifestyle creep. You know that problem you experience when your spending starts to match your earning and instead of buying that shirt on sale, you now buy it at full price. That my friends is lifestyle creep.
For the most part, we see saving a small amount as pointless. Some of us are embarrassed by only being able to only put away let’s say, R500 per month. We also avoid seeing a financial advisor because we are so terrified they will judge us and our habits. It’s like being scared to go to the doctor when you are sick because you are worried he will think you are gross. I can’t speak for others, but I got into this business because I want to help people lead better lives. Being a business owner and just normal, everyday human, I get how stressful money can be, but I know that being clever with your paper means less stress in the long run.
2. I need to save towards something
You really don’t. Investing is a way of making your money work for you and it’s never a bad thing. Imagine if you started saving with no goal in mind, and then 5 years later, figured out that thing you wanted to start saving for. Wouldn’t it be wonderful, if instead of having to start from scratch, you could just buy the thing that you had your eye on? Saving is great, in fact it can provide a great source of security when faced with a crisis. When that day comes the gratitude you will feel towards your past self for being so forward thinking will be overwhelming.
Example: My parents have always been avid savers. A couple of years ago, our family business hit a bit of a cash flow issue as the economy went into recession. Although we had value in our assets, we weren’t very liquid i.e. we didn’t have physical cash on hand. Long story short, my parents were able to loan the business money to pay for things like salaries from their investments, and ultimately save us from a sticky situation (and yes, the business did pay them back so it’s all good).
3. Banks are my only savings options
Let’s face it, saving through your bank is convenient and extremely easy to manage. Not only this, but you can access it when you need it. However, not only do these savings accounts tend to offer low interest rates than more formal investment strategies, but the ease of access leaves you susceptible to impulsive financial decisions.
4. I can start saving later
Yes you can start saving later, but saving later means less time to save. Most financial gurus and head honchos at major corporations advocate for saving early. Time in the market is a term used most often. As Warren Buffet (one of the richest dudes around) likes to say; “My wealth has come from a combination of living in America, some lucky genes, and compound interest.”. Although we don’t live in America, and probably don’t have genius-level genes, we can reap the benefits of compound interest. Compound interest is interest paid on both the principal and on accrued interest. For those of you squinching your face trying to understand what that means exactly, let me break it down for you;
1. You decide to put an amount in a savings account. Let’s say R200 with 12% Annual interest rate (1% per month).
2. At the end of the month you earn 1% interest on that initial R200 amount. So you earn R2.
3. The next month you will earn interest on your initial amount + interest earned. So you will earn 1% interest on R200 + R2 which means you will earn R2.02 on your now R202 and so on.
This means as time goes by you will gradually earn more and more interest because you have a larger amount to earn interest on. So effectively, after 1 year you would have made +-R25 on your initial R200 investment. On a R500 initial investment, you would make +-R63. On a R100 000 initial investment, you would make +-R12 683, are you starting to see how the rich get richer?
Although saving can be scary, intimidating and “something I will do later”, it is a fundamental component of a solid financial plan. Saving is called being financially responsible and WILL inevitably save your bacon in the future. As we can see through my compound interest example, investing in a unit trust or collective investment scheme (with potentially higher interest rates) as opposed to saving through your bank (with lower interest rates) can see your initial investment ultimately make more money for you. If you would like to sit down and discuss your saving options, give me a call and we can craft a plan for you. Conversations are free *wink.