Most of us don’t need convincing that saving is a good idea, but when it comes down to it we often struggle to get started or stick to a plan.
Before we give practical tips to help getting you into the habit of saving, let’s discuss some of the main reasons that all of us should be saving.
Medical emergencies, car breakdowns and unexpected household maintenance are examples of times when we might need to draw on savings.
To pay for things in the future
Big expenses such as your child’s education, holidays, cars or even the deposit for a new house are easier to bear when you can draw on savings.
To generate enough wealth to live comfortably in the future
In order to give yourself the best chance of enjoying your retirement, you need to save early, save often and save a lot.
For most of us one, or even all, of these reasons to save will resonate. We understand why it is a good idea to save and yet we don’t.
The most common excuse we hear when it comes to people explaining why they haven’t started saving is that they simply can’t afford it. Times are tough and increases in the prices of basics from electricity and petrol to food can make it feel impossible to save.
Many of us only know that at the end of the month, there is seldom any money left and that makes it hard to see a way forward.
This leads us to tip #1:
1. Track your spending
This is actually the simplest and easiest way to get a handle on your own personal finances. Before creating the budget to which you plan to stick, track your spending over one month so you can get an idea of where you stand. It’s easiest to track your spending if you do the majority of it electronically (e.g. with a debit card and/or debit orders).
Go through your bank statements at the end of a month, identifying each item of spending. If you are a heavy cash user, try to keep track of your spending by making notes on your phone. There are a number of apps designed to help you do exactly that.
Try to put your spending into broad categories such as “groceries”, “debt repayments”, “petrol”, “entertainment”, etc. The first time people go through this exercise often results in fairly surprising results for them.
Using the categories you create, you should also split your expenses into “necessities” and “other”. “Necessities”, of course, include debt repayments, utilities such as electricity and water, rent, food, etc. “Other” spending includes those expenses that are not necessities and may therefore be more easily reduced, or even removed, over time to make space in your budget for saving.
Ideally, the process of tracking your spending should become a habit and something that you do every month, looking for spending patterns and trends, as well as assessing your ongoing progress.
2. Understand your spending habits
Once you have an idea of where your money is going, try to analyse where you might be able to get some quick wins. For example, you may not realise exactly how much that daily cappuccino is costing you each month – cutting it out may seem like it will never make a difference, but that’s exactly what it will do.
Once you have spotted a handful of cash guzzlers, set yourself some small goals to try and reduce those areas of spending each month. By keeping track of your spending as a habit, you can see if you are achieving these goals or not.
3. Create a budget
Once you have an idea of your spending habits, you can set yourself a budget, which you should try to stick to. The best hint when creating your first budget is to not be too ambitious.
It may be tempting, when you are setting your budget, to remove all “unnecessary” spending, resulting in a theoretical surplus in your income, which can then be saved. The reality is that it will be nearly impossible to go cold turkey on unnecessary spending; if you fail to stick to your very first budget, you’re more likely to give up on the process altogether, so make it achievable.
When setting your budget, include some allowance for luxury spend, entertainment spend, as well as an allowance for “unforeseen” spending in the month. This way you won’t have to feel guilty when you spend this money, and can hopefully stick to the budget you created. The trick to spending on unnecessary things in your budget is to stick to the limit you have imposed in your budget.
Hopefully, after the budgeting process, you will have some disposable income, which you can then allocate to savings.
4. Set a savings goal or two or three
The easiest way to create and stick to the habit of saving is to have a specific savings goal. It becomes very difficult to save when you are simply throwing money into a savings fund without a compelling reason for doing it.
Goals should be measurable and have timeframes attached to them. For example, if you want to go on an overseas holiday, you should get a rough idea of how much money you will need to save in total and decide how long you want to save for.
You can then use these answers to figure out how much you need to save each month to reach your goal.
By picturing the purpose of saving, it becomes easier to sacrifice some immediate unnecessary spending.
When it comes to saving for retirement, it’s a good idea to set specific rand goals, which you can aim to achieve in the short term. For example, you may want to set a goal of R25 000 saved for retirement by this time next year.
5. Pay yourself first
A common mistake people make when trying to save is that they aim to save only what is left over at the end of the month. Your savings should come out of your bank account immediately after you have received your income. In other words, pay yourself first and remove the temptation to spend that money.
It is human nature to want to spend what we have, so by removing the money upfront, it becomes slightly easier to be disciplined with your spending over the rest of the month.
Another useful hint is to put your savings somewhere where it is a bit of an inconvenience to access. Do not simply save within your bank account since you will inevitably spend it.
And finally, if possible, set up a debit order to pay yourself first. That way it is automated and happens before you have a chance to talk yourself out of it!
Note: Of course, if you do have money left over at the end of the month, save it.
6. Deal with debt
You may hear advice that paying off expensive debt before saving is a good idea. On the numbers alone, this is normally excellent advice. However, it doesn’t always help to incubate the habit of saving.
If you allocate all your savings towards paying off debt, you will hopefully see that you owe less and less money each month. This may sound funny, but you are actually getting yourself into the habit of removing a negative rather than building a positive.
Obviously, the net result to your financial position is similar, but you’re focusing on the wrong thing and dealing continually with debt might simply become overwhelming in itself.
We would rather advocate that you do a bit of both. That is, pay off your most expensive debt faster and at the same time save something in a savings vehicle of sorts (our assessment calculator can assist in figuring which debt is most expensive).
Seeing your savings grow over time is a really gratifying experience and this is more likely to encourage your savings habit.
Another tip: When you do manage to pay off debt, reallocate the funds that you were spending on that debt to savings.
7. Save new income
When you get a salary increase, attempt to save a significant proportion of that increase. If you do this consistently over time, you will find that you can actually save a decent proportion of your total income quite painlessly.
In addition, when you receive a windfall, for example a tax refund or a bonus, you should aim to save a decent chunk of it.