From unit trusts to savings accounts and endowment policies, South Africans have a myriad of savings vehicles to choose from and yet the harsh reality is that we do not save enough. According to the South African Savings Institute (SASI) ‘when compared to its peers, South Africa’s national savings rate is still dismal.’ SASI goes on to say that ‘the World Economic Forums 2011/12 Global Competitiveness Report ranks South Africa 72nd in the world for its gross national savings rate equivalent to 20% of GDP. This is well behind BRICS country peers like China, ranked 2nd with savings equal to 54% of GDP, India at 15th with 34.7%, and Russia at 44th with 24.7%.’ How do you know if you are saving enough? Grab a piece of paper, a quiet moment away from the family and consider a few what-if scenarios.
What-if scenarios will help you work out if your finances will stand up to the worst case financial scenarios that life could throw your way. For example, consider the following:
How long would you and your family be able to survive if you or your partner/spouse were retrenched?
Would you be able to pay for major repairs to your car without reaching for your credit card?
If a family member fell ill, would your savings be able to pay any medical expenses not covered by your medical aid?
Can you afford to send your children to university or college?
Would you be able to afford the insurance excess if your car was damaged or stolen?
If one of the family pets fell ill, would you be able to pay the vet’s bills out of your savings?
Your answers to the above questions should give you some idea of whether you are saving enough money each month and if you have enough money put away for emergencies.
There is no golden rule for how much you should be saving every month. It depends on your age, your financial obligations and your income. Experts recommend that you save at least 10% of your monthly income but we recommend that you speak to a financial advisor to calculate your own personal savings requirements.
No matter what your age or income, you should be savings towards:
An emergency fund: 3 6 months worth of living expenses to cover unexpected costs like car and household repairs, medical bills and retrenchment. Remember to top up your fund as soon as possible if you are forced to take money out of it. Speak to your financial advisor about how best to invest your emergency fund. Unit trusts are a good option as you can withdraw money at any time without incurring any penalties.
Your retirement: Once you have accumulated an emergency fund you need to turn your attention to your retirement savings. Again we recommend that you speak to your financial advisor about how much you should be saving and what investment vehicles you should be using, for example a retirement annuity or provident fund.
Savings goals: set savings goals and save towards them every month, for example a new lounge suite, a holiday overseas or university tuition fees.
What were the results of your what-if scenario? Are you saving enough every month? If not, speak to your financial advisor today and start planning for your financial future.