Getting into the habit of saving early will condition you to keep saving. The day will come when you’ll want to stop working, and to do this you’ll need an adequate amount of money invested to provide a liveable income. So, knowing how and when to save is critical.
If you work for a corporate, become familiar with your company pension or provident scheme, because ignoring it may cost you money. For example, if you buy a house, you’ll need life insurance. You may already be paying for cover through your company, but by not knowing this, you could invest in another policy.
If you start saving now, you won’t need to save large amounts in the future. For example:
Mary invests R1 000 per year from the age of 22 until the age of 29 (earning a 10% return)
John invests R1 000 per year from age 30 (earning a 10% return) and keeps investing every year until the age of 65
At age 40 Mary will have R35 891
At age 40 John will have R20 384
At age 50 Mary will have R93 091
At age 50 John will have R70 403
At age 65 Mary will have R388 865
At age 65 john will have R294 039
Mary will have invested a total of R8 000
John will have invested a total of R35 000
Also remember the effects of inflation: let’s assume food costs rise by 7% per year over the next 10 years, and your take-home pay rises by 4% per year. If you currently spend R2 000 per month on groceries and your take-home income is R10 000 per month, your grocery bill is 20% of your take-home pay. In 10 years, the same groceries will cost you R4 020. If your salary increases at 4% per year over the same period, your take-home pay will be about R14 908, meaning your identical household shopping would represent 27% of your take-home pay.
This scenario shows that if you save R500 per month and only achieve a 4% net return against inflation of 7% per year, you’re going backwards in terms of buying power.
Think carefully about the investments you choose. If you’re moving a lot, stick to short-term deposits, money market accounts and unit trusts. When you settle and have a fixed salary, consider a retirement annuity (RA) that will give you a fixed tax deferment.
Ultimately, whichever way you decide to save, you’ll see the results if you’re consistent and have the right help from the outset. Start now so you can have peace of mind about your future.
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