Finding the ‘why’ behind your money and why you should save

Saving is an afterthought for the majority of South Africans – because, for many battling unemployment or the effects of the pandemic and struggling to make ends meet, it is simply out of reach.

Our savings track record proves this, with one of the lowest savings rates globally: research by the World Bank found that the country’s most recent gross savings rate is under 15 percent of GDP – well under the worldwide average of 25 percent. This is matched by an equally poor household savings rate, hitting 0.5 percent in the fourth quarter of 2020.

“Many South Africans feel that saving is something is outside of their budget, and only do it if there is money left over at the end of the month,” says Andiswa Mojapelo, Client Success Lead at Momentum Velocity Club. “

The pandemic only made this worse – but, against this challenging economic backdrop, this makes it more important than ever to save because it has brought into focus the importance of being prepared for emergencies and life’s curveballs.

The first step is to make saving a fundamental part of the household budget. It needs to be considered an expense item in the budget, and paid as any other monthly expense or debit order is. “This makes it critical to look at your budget in its entirety to ensure that you can accommodate savings,” says Mojapelo.

Central to this is living within your means. A widely accepted budgeting rule of thumb has been the 50:30:20 principle. According to this, you should spend 50 percent of your income on fixed costs and essentials such as rent or a home loan repayment and levies, car repayment, and groceries; 30 percent should go towards wants such as entertainment, take-aways or eating out, or hobbies; and 20 percent should then be saved or go toward paying off debt.

Embracing the 65-15-20 principle

“However, we have amended that to the 65-15-20 principle at the Velocity Club to better reflect the financial reality of lots of South Africans,” says Mojapelo. “Under this rule, you should use a maximum of 65 percent of your net income (after tax) to pay for your needs. Use another 15 percent of your net income towards wants, and finally, put 20 percent of your net income into savings including long-term savings such as a pension or retirement annuity.”

But with many South Africans typically finding that there is too much month left at the end of their money, sticking to this rule can be difficult. Recent research by employee financial wellness solutions provider Floatpays, for instance, showed that up to 76 percent of South Africans regularly ran out of money before the end of the month – with as many as 57 percent running out of money before the month was halfway through.

How then can South Africans save?

o “Find your ‘why’ – let your financial goals lead your savings,” says Mojapelo. “Saving isn’t easy, but if you have specific goals that you know you are working towards, this will act as an incentive and help you be disciplined to save towards creating and building these goals. Discipline also comes with consistency – so, to break it down simply, if you earn R5, don’t consider it an income of R5. Think of it as R3, with R2 automatically reserved for saving.”
o Compartmentalise savings: create ‘pockets’ of savings for your different goals. Have a pocket for holiday savings, for example, and a pocket for property savings, as well as another pocket for emergencies. This makes it less likely that you will dip into your savings other than for their intended goal.
o Shift the way you think away from waiting for the ‘right time’ to save – such as when you’re earning a higher salary. “There is no right time. It’s not about the amount you earn, it’s about what you do with it. The time to start training your saving muscle is now: your expenses aren’t going to change, so make your budget accommodate your savings. Start now with what you have and live within your means,” says Mojapelo.

Ultimately, saving is a mindset. “Think of savings as paying future you – you are paying yourself to create your future, help meet your financial goals and aspirations, and build your legacy,” says Mojapelo.