‘Saving’ – it’s the boring buzzword accountants and financial planners use, but 20-somethings? Not so much. After all, saving means less money to spend, right? Wrong – well, kinda. The sooner you start saving for things like retirement or a rainy day fund, the more money you accumulate in the long run.
And while retirement might seem forever away, playing catch up in your 30s and 40s is a much harder task than siphoning off small amounts of cash now. As in now – from your pay cheque this month. Here’s why.
Interest Is Easier To Benefit From Now
Even saving a hundred rand a month now will mean you earn interest faster. Put it this way: if you put away, say, R500 a month from your pay cheque each month in your 20s, by the time you’re in your 50s, you’ve benefited from up to 30 years of accumulating interest. That’s the interest on your monthly R500 earning its own interest, over and above the interest being earned on your monthly contribution. So even if you stashed a small fortune in your 40s, you’ll almost never be able to catch up with the interest you would have earned if you’d stashed 20 years before.
It all boils down to compound interest: that’s when your interest earns its own interest over time. Confused? Take a look at these stats:
- If in your 20s you put R15,000 into an investment, in an account paying you 5.5% compound interest, that R15,000 will have organically (no added money or effort on your part!) have grown to over R57,000 just 25 years later (when you’re about 50).
- But if you invested the same amount (R15,000) 10 years later, when you’re 35, that amount will only have grown to just over R33,000 when you turn 50. That’s a whopping R25,000 you’ve missed out on – just because you’ve missed out on the compound interest growing over time.
- Saving that R15,000 in your 20s can be broken down to putting away just R125 a month, every month. Set up a debit order, and you won’t even miss that money!
Bottom line: the later in life you start saving, the more it costs you to reach the same savings goal for later life. Remember, compound interest is essentially you making money without having to sacrifice extra cash later on.
Saving Sooner Means You Miss Your Stashed Money Less
It’s hard to miss money you’ve never really had. And it’s even harder to pull back on your spending when you’ve gotten used to having that cash to burn. So don’t get used to it in the first place! When you get your first pay check, a new raise or a new job, make a plan to increase your saving amount each month – before you’ve decided on all the fun things you plan to buy.
One of the easiest ways to do this is to set up a debit order that comes off your account straight after pay day. Then budget your month’s spending after this amount has come off. When you get that raise? Up your saving amount accordingly. No, not so that you still don’t have any spending money, but in line with the increase. So if you got a 10% increase, add 10% more to the monthly saving debit order you have.
You’re Not Actually Losing Money…
One of the common misconceptions about saving is that you’re saying goodbye to money you’ll never be able to enjoy. But the truth is any money saved is still yours, and for sure still yours to spend – just not right now.
It’s easy to hate the idea of not being able to spend now – we’re a generation of instant gratification, after all – but there’s also something incredible about enjoying something you’ve spent time saving towards. So whether you’re saving for retirement, a car, a house or a rainy day (FYI: it’s ideal to save for all of them!), switch your mindset to see saving as earning more money for yourself in the future. It’ll make letting go of the cash you stash right now a little easier.
Rainy Day Funds Keep You Rich
You’ve got a great salary, great lifestyle and you’re on top of your credit card repayments and then – bam! – a car crash wipes out your vehicle, or a big medical bill takes you by surprise. Rainy day funds – saving pots you only dip into in an emergency – are almost the only way to stay rich when disaster strikes. Having one will also do the world of good for your stress levels (having a plan B rocks!).
Technically, experts suggest you have about three months’ worth of your full living expenses (rent, car repayments, living costs, medical aid payments) stashed in a money market or similar account. That’s generally how long it can take for you to recover from a financial blindside, like losing your job or replacing a burst geyser.
Work out what three months’ of living costs is for you, then split this over, say, 24 months to see how much per month you need to stick into your rainy day fund for the next two years to reach this goal. If the monthly amount, try splitting it over three years instead.
Add this monthly amount to your debit order list, and then rest easy knowing you’re empowering yourself to be able to stay financially free even if life throws you a curve ball.
Money markets are good pots for this kind of saving, since you can normally access your cash in them quite quickly – as you would need to if you’re having an emergency (ask these kinds of questions before you choose a fund to save into).