Financial Education

let your money grow

If you want to build your wealth, you need to get into the habit of saving a portion of your salary every single month.

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No matter how much you earn, it’s only the money you don’t spend that can grow over time to give you more security and freedom.

You likely have many different savings goals, and only so much to save each month. So, if you want to build financial health and wealth, what are the savings goals to prioritise first?

Saving for emergencies

No matter how carefully you plan, life will still happen. Whether it’s a big repair, a medical emergency, or a temporary job loss – at some point, you’re going to need extra money quickly to handle something unexpected. One option is to use a credit card or a personal loan, but credit is expensive and will make it harder to save for your other goals.

To prepare for emergencies, it’s recommended you save enough to cover between 3 – 6 months’ household expenses. So, if you need R5 000 a month to cover all of your expenses, you need to save between R15 000 and R30 000 for emergencies. It will take some time to build this up, but as it grows, you’ll find that these savings give you peace of mind and confidence, because you know that you can handle what life throws at you.

Saving for retirement

This is the longest of your long-term goals, as it will take many working years to save enough to retire comfortably. If you haven’t started yet, now’s the time!

If you contribute to a retirement-specific saving product, you will also qualify for certain tax benefits. Learn how to make the most of these. There are many free, quality resources available online and in the media that you can use to educate and empower yourself to prepare for retirement. You could also speak to an FSCA-registered financial adviser.

Ordinarily, money in a retirement-specific product cannot be accessed until you are older than 55. If your employer contributes a retirement product on your behalf, you will be given a chance to withdraw your retirement savings if you leave the company. This can be very tempting, but will cost you a lot in tax, and will significantly set you back in terms of reaching your retirement goals. So rather transfer these savings to another retirement product. Keep saving consistently, and never withdraw these contributions until you retire, even when changing jobs.

Why does time matter?

Giving your long-term savings time to grow can be just as important as the amount you save. This is because of the power of compound growth. So how does this work?

When you save money in a savings account, for example, you earn interest. If you leave the interest and the money you deposited in the account, then something exciting begins to happen. You’ll keep earning interest on the money you put into the account, and also on all the interest you have earned. This is called compound interest – interest earned on interest.

Example

Let’s say you put R1 000 in an account earning 10% interest a year, calculated annually. After a year you’ll have R1 100.

If you leave the full R1 100 in the account, at the end of year 2, you’ll earn R110 interest. You’ll now have R1 210 in the account.

If you leave the money there, even without adding more money, after 20 years you’d have R6 720. After 30 years, you’d have R17 450 – all from R1 000!

The longer you leave your money saved, the bigger and faster it will grow. This is why it's so important to start saving for retirement as soon as you can. If you have enough time to save for something – compound interest can make seemingly impossible goals achievable.

 

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