Saving versus credit: It’s all about balance ?

Did you know that South Africa has an overall savings rate of only 3%, which is compounded by the changeable economic environment? Currently there are 25 million credit-active consumers, while household debt as a percentage of disposable income is at around 72%. This means that for every rand earned, nearly three quarters is spent on debt - a clear indication that as a nation we are prioritising spending over saving.

Saving is a mind-set that takes some discipline, but it is worth it in the long run. Savings is not only about putting money away, but ensuring you get the best growth through interest or returns on your savings. It’s never too late to start saving, here’s how to get started:

Ask yourself: are you are happy with where your finances are right now? What do you want your future to look like? Depending on your life stage it could be anything from providing an education for your children, travelling the world, or retiring comfortably. Begin with the end in mind when plotting achievable financial goals and set a deadline so that you have a rigorous saving plan in place. Whatever your financial situation, it is important to look over your savings strategy every few months to ensure your plan is making the most of your money. You may also want to shop around for a registered financial advisor who can make recommendations based on your individual savings goals and life stage.

When considering buying a big-ticket item like a house or car, it is likely you will need a loan. However, instead of financing the full amount on credit, it is preferable to save as large a deposit as possible. This will reduce your monthly payments and allow creditors to look upon you more favourably when granting a loan, hopefully at a better interest rate. Lastly, should your circumstances suddenly change, it will put you in a better financial position to quickly sell the asset.

In general, when considering savings options, higher risk investments will have higher potential returns, but also greater potential losses. Investing in the JSE All Share Index, for example, typically gives around 10% to 15% better returns than a bank-account based savings.

A factor to consider when making risk based savings is your age. Generally, as you get older and approach retirement your savings should carry a lower risk. When you are young, however, you are less likely to have major responsibilities, like paying for a child’s care and education, so a more-aggressive higher risk investment portfolio could be appropriate. The argument being that when you are young you have time to ride out the dips and turns of the stock exchange.

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