Cutting costs is not enough – you need to put your money to work

Reducing your day-to-day living expenses in an attempt to save is a futile exercise unless you actually put the saved amount to work, either by reducing debt or by investing this money.

Niel Fourie, Public Policy Actuary at the Actuarial Society of South Africa, says the relentless increase in the cost of living and the constant threat of tough economic times is causing consumers to take a hard look at how much they spend every month.

As a result many consumers have successfully changed the way they shop and spend and have actually managed to reduce their living expenses. Unfortunately, however, this is where it ends for most consumers, notes Fourie.

“Instead of putting this saved money to work, consumers end up spending their savings thereby rendering the whole cost cutting exercise useless.”

According to Fourie implementing a successful savings and investment strategy will require you to take two key steps: first, you have to map out your wasteful spending habits and identify ways of reducing those costs; secondly, you need to use the saved money to reduce your debts or commit the amount to an investment.

Step 1: Reduce spending and achieve savings

Since July is savings month and also the start of the second half of the year, Fourie encourages consumers to start their personal savings and investment journey by logging all spending not considered essential for the month. To keep it simple this means you don’t need to log your regular grocery shopping, but only little luxuries like going to the movies or ordering take-away meals.

Below follows an example of real life expenses and optional alternatives logged by one household. You can apply the same approach to find ways of changing your household’s wasteful spending habits.

Fourie points out that the household in the example below managed to save R870.73 by finding more cost effective alternatives, but without sacrificing the actual “treat” element.

Family X – Record of little luxuries and viable alternatives

Step 2: Turn savings into investments

Fourie says the reality is that the household in the example above will in all likelihood end up spending the R870.73, unless this money is committed straightaway.

“The long-term reward for putting the saved money to good use is enormous,” says Fourie.

If you have short-term debt like credit card debt or store cards, you would be foolish not to pay those off first. Short-term debt is your most expensive debt and you should use every spare cent to whittle it away as quickly as possible.

Once that is done, however, you can really start making your saved money work hard for you. Say, for example, you take R500 of the R870.73 saved to increase your monthly mortgage bond repayment from August. If you have a R1.5 million mortgage bond over a term of 20 years, you would reduce your bond term by three years and save a whopping R300 000 in interest by paying an extra R500 every month (adjusted by inflation every year).

Fourie says if you are one of the lucky few with no debt to repay, you will be amazed what R500 per month can achieve in a good investment over the long-term.

The graph below shows the growth of R500 invested monthly in a unit trust portfolio returning at least 10% a year after costs.

Fourie points out that while investment performance is usually not guaranteed, one thing is for sure: You will be better off over the long-term by saving and investing your money than spending it on unnecessary things.