5 savings myths you need to let go of
Every July (National Savings Month) we are reminded how important saving is, but by September most of our good intentions have fallen by the wayside. How can we prevent that from happening this year and commit to financial resolutions that stick?
The first step is letting go of some common savings myths. Successful savers do not fall prey to these common myths that lead many of us to delay – or give up on – saving.
Myth 1: Saving is about what you earn
While we all like to believe the ability to save is linked to earning more, we all know some high-earning individuals who live pay-cheque to pay-cheque. The reality is that saving is not so much a factor of what you earn, but a factor of the difference between what you earn and what you spend. Anyone can save, and the first step is to take a long, hard look at your expenses and see where they can be curbed. As Warren Buffet famously said, “don’t save what’s left after spending, spend what’s left after saving.”
Myth 2: Saving is for retirement
Realise that you will not only need savings one day, when you retire. You could need it tomorrow (when you need to cover medical expenses out-of-pocket), next month (when the wheels on your car need to be replaced), next year (when you want to take that holiday) or three years from now (when you get retrenched). Without a safety cushion to fall back on, or a nest egg for your big-ticket items, you are far more likely to overspend and incur expensive debt.
Myth 3: The bank is your best friend
Your money should always work for you. Unless you are outpacing inflation, you are effectively losing money and any savings that are left accumulating in an ordinary bank account will not be keeping up with inflation. In the short term, this effect is less pronounced, but in the long term it can be devastating. Be sure to invest in a savings vehicle that matches your investment horizon. In the short term, stock markets are volatile and you could lose money. In the long term, shares and listed property are the only asset classes that beat inflation.
Myth 4: You can catch up later
Much has been written about compound interest, and it has even been called the eighth wonder of the world. Unfortunately, compound interest really needs time to work its magic. By putting off saving until you “can afford it”, you are losing out on one of the most powerful forces in the investment universe. The sooner you start, the better, even if the amount seems small.
Myth 5: Saving can wait when “life happens”
Saving should be a mindset, rather than something you do when the time is right. There will always be “good reasons” to postpone saving and we are often side-tracked along the way. Most of us blame misfortune (losing a job, not getting that raise) or market corrections for our failure to arrive at the financial position we’d hoped for. But while most of us fail – South Africa’s savings rate and provision for retirement is worryingly low – there are some that succeed. The difference is that they make saving a non-negotiable part of their everyday life. When you achieve a savings mindset, you will find a way to save no matter what curve balls life throws your way. It may seem like a sacrifice today, but it could make a big difference to your financial security in future.
Stay committed
Are You Saving Or Investing?
The difference between saving and investments
To provide the lifestyle of your dreams requires that you save and invest. They have different purposes, but both are crucial to ensure you reach your financial goals in the short- medium and long-term.
Saving and investing are fundamental to financial security. At its most basic, saving is the act of putting money away in a safe place with the intention of using it in the future. Investing involves putting your money into investments – such as shares, funds and property – with the hope that your money will grow.
If you’re trying to accumulate a smaller amount for a short-term goal, then a Savings account is probably the way to go. Alternatively, if you’re trying to save for a large, long-term goal like retirement, an investment account is more in line with your needs.
SAVING VS INVESTING
Here’s what you need to know in order to choose the right product for your needs:
What’s the difference between Savings and Investments?
A savings account is typically no-risk. You earn interest on the money you save; your initial capital is guaranteed and it’s more easily accessible if and when you need it. This type of account enables you to save money for a specific purpose, such as a dream holiday, within a short period of time.
Investments are aimed at wealth building. They involve greater risk, but also have the potential for higher returns than a regular savings account. Investing is the process of using your money to buy an asset that has a good probability of generating an acceptable rate of return over time, making you wealthier in the long term. It makes sense to have a well-diversified portfolio that helps spread your risk – as well as the potential to deliver returns – across a wide range of investment classes. Some examples include stocks, bonds, unit trusts and direct investment in property or other assets.
SAVING VS INVESTING: THE PROS AND CONS
Both saving and investing come with pros and cons. Where you decide to put your money will depend on your reasons for wanting to grow it. Here are some of the most important elements of both to help you make decisions about which options are best for you:
The pros and cons of a Savings account
Pros:
A savings account offers you easy accessibility to your money. A notice deposit protects your savings from impulsive withdrawals as you are required to provide notice of your intention to withdraw cash. A fixed deposit is a type of savings account that lets you choose the period of investment, offers a fixed interest rate for the full period of the investment, and also protects you from making withdrawals on a whim.
These types of savings accounts are low-risk, as they are stable and don’t fluctuate with the stock market. While you may not enjoy the same levels of interest, you have the peace of mind of knowing your capital amount is secure, and how much interest your money will earn.
Cons:
Interest rates on savings accounts are lower than on more high-risk investments
Saving takes a lot of discipline and commitment. Easy access to your funds may lead to spending your savings on impulse buys. With longer-term investments such as unit trusts or a retirement annuity, you do not have easy access to your money.
Considerations for a Savings account
Here are a few questions to ask yourself when opening a savings account:
What are your objectives?
These may include goals like:
An emergency fund for rainy days
A deposit for a car or house
Saving for a holiday, new appliances or a car
Short-term education costs, such as text books or sporting equipment
Taking advantage of Tax-Free Savings account options.
What is your timeframe and tolerance for risk?
A savings account is a short- to medium-term savings option, with low risk. It has low risk because your capital stays in the account and slowly earns interest.
Will you need to access the money?
With a savings account you have access to your funds either immediately, or within an agreed timeframe, in case you need to withdraw the money for a specific purpose.
The pros and cons of an Investment Account
Pros:
Investment accounts typically provide potential for greater returns than savings accounts, over longer periods of time
An investment account allows you to make decisions regarding how to allocate your funds in the account, based on your appetite for risk, and your investment criteria.
Cons:
Investment accounts are subject to market volatility. The value of your investment can easily be affected by an economic crisis or market problems
There is the potential for loss of capital
Investments accounts are typically subject to higher fees
A minimum lump sum deposit or regular debit order is required for an investment account depending on the fund manager
The past performance of a fund doesn’t guarantee its future performance, which means you’ll need to weigh each fund according to the timeframe of your investment, your risk profile and the objectives of the investment.
Considerations for Investments
Here are a few questions to ask yourself when taking out an investment account:
What are your investment objectives?
Paying for your children’s education, such as high school or university costs
Building a retirement fund
Building future wealth.
What is your timeframe and tolerance for risk?
Investments accounts typically require a medium- to long-term period of investment. The younger you are when you start investing, the more aggressive your strategy can be, because you’ve got plenty of time to ride out inevitable rough patches. As you get older, you will need to look at investments that are less risky and more conservative.
When will you need to access the money?
An investment is typically long-term, such as a retirement fund that is invested over decades. For more medium-term needs, such as paying for your child’s education, you can look at options that will allow you to withdraw the money when you need it.
If you’re unsure or need more information and advice, please give me a call Warren Basel on 0824905182 or email warrenb@oraclebrokers.com for a no obligation financial planning consultation
