July Is National Savings Month

A Savings Institute (SAIS) chairperson Prem Govendor stated that “South Africans still rely on the state or a neighbour to bail them out of their financial woes.”

Household savings, as a percentage of disposable income, fluctuated between 2.7% in 1991 and -0.2% in the first quarter of 2012, a clear indication that savings and investment is not top of mind for many South Africans. Debt servicing hit a high at 81% in 2008 and has remained high. South Africa’s gross saving rate was 20% of GDP in 2011/12, compared to China’s 54%, India’s 34.7% and Russia’s 24.7%.

Where To Start

Invest systematically; save over the long term

A wise investment strategy is the first building block needed to provide for a comfortable retirement.

A simple formula is to align your investment choices to your investment objectives. It requires a changed mindset. Ideally, you should not base your planning on what you think you can afford or save, but rather on what you need to invest. Even if you start with a small amount, you can always increase it over time and slowly build your investment capacity. The foundation of any successful retirement plan is for you to know your desired income and capital upon retirement.

There is scope for short term savings where you need quick and easy access to your money, but longer term savings must take priority. The best way is to follow a process of systematic investing over the course of your working life. If you work in the formal sector, you are probably a member of your employer’s retirement fund, which would help to some extent, but membership of such a retirement fund is no guarantee that you will be financially secure in retirement. People who are not members of any employer-sponsored retirement fund are left entirely to their own devices. It is important to approach a qualified financial advisor to assist in reaching your retirement goals and not rely on your own trial-and-error efforts or on financial “wisdom” provided by family and friends.

The time-tested approach is to start as soon as possible. If starting to save early is step one, then investing your savings is step two. Make sure that you expose your money to growth assets such as equities and property and consider housing your investment in an investment medium such as a retirement annuity for the sake of tax-and-cost-efficiency.

The significant tax concessions afforded by government means that an investment housed in a retirement annuity can grow faster than most other investment vehicles.

It is also very important to understand the power of compound growth and why you must give your investment time to make full use of this wonder.

Irrational investment decisions, mostly driven by our own emotions, are the primary destroyer of investment value. It is critical to exercise patience and to stick to your investment strategy.