July has come and gone, and so we head into the home straight of 2015. Soon December will be upon us, when we all are guilty to some extent of over spending during the silly season. January suddenly arrives and this is when we need to tighten our belts and see the month through as we wait for the next pay cheque to bail us out once again.
This is a common cycle that can be easily averted by practicing the basic fundamentals of good financial management, for example, drawing up a proper financial plan, working within a budget and saving at least 15% of our income.
Do not save what is left after spending, but spend what is left after savings”. Warren Buffet
July was the Month of Savings
As we are all aware, August is also women’s month, in recognition of all those women who marched on the Union buildings in protest against the Pass Laws imposed on Women. The focus for the coming months will be on health issues namely organ donor awareness in August and cancer awareness from in the months of September October and November respectively.
Did you know, the South African institute of Savings (SASI), declared July of every year, the month of savings?
This is no surprise, as research has shown that South Africans are poor savers. Excuse the pun but we have one of the worst savings rates as a percentage of GDP in the world if compared with China, India and even other African countries like Ghana.
In 2008 South Africans only had a gross savings of 15.4% of the GDP, compared to China with a gross savings of 50% and India at 30%. A recent study shows that South Africans on average allocate 2% of household spending to savings and investment. Therefore only 6% of the working force in South Africa will retire financially independent. The other 94% will depend for financial assistance from the state as well as family and friends.
Tax Free Savings Plan For South Africans
On the 1st March 2015,the Minister of Finance introduced the tax free savings plan to the nation. The investment vehicle allows you to invest a minimum of R300 per month, up to a maximum of R2500 per month or R500,000 during your life time.
The growth within the fund and the maturity proceeds are fully tax free. Legislation ensures that this product is completely transparent, with a reduced costs and fees structure. This is a great initiative to incentivise us to start saving, and to hopefully instil a culture of savings in the minds of all South Africans.
But do incentives work?
An extract taken from the book FREAKONOMICS states, “An incentive is simply a means of urging people to do more of a good thing and less of a bad thing”. It is important for one to see beyond the incentives and to realise the importance of financial discipline as key in creating wealth and achieving financial independence in your twilight years.
Work with a Budget (Financial Plan)
It all starts with a plan and a budget. This may sound boring, but the discipline of living within a financial structure is good practice. It is a way of planning for the future and teaching the next generation how to deal with financial crises that may arise in life.
1. Reduce credit
Live with the least amount of credit, in other words ”don’t spend what you don’t have,” and save on the interest levied on the credit taken.
2. Set financial goals
Map out your short, medium and long term goals, and structure your savings to meet your financial goals. Do not get distracted by frivolous spending on unnecessary items for short term gratification. See the bigger picture and plan ahead, although you do not have to cut out luxuries from your life entirely. Just plan carefully.
3. Start saving early
The benefits of starting early cannot be underestimated, thanks to compounding interest, compared with the cost of delay. Studies show that by postponing your retirement saving by 5 or 10 years could reduce your retirement income significantly. However, the earlier you start saving irrespective as to the size of the contributions, the benefits of compound interest effectively allows you to earn interest on interest on interest.
4. Build an emergency fund
Set aside three times your monthly salary in an account, in the event of an unexpected financial crises, for example retrenchment. It may at times seem like a very large amount to save but with discipline you can slowly achieve the required level over time.
There are many great ideas and tips on how to plan for financial independence and wealth creation. The basics are always important – draw up a financial plan, live within your budget and start saving. These are good habits you can start from the day you earn your first pay cheque. By taking action now and you can achieve your financial freedom.