The rule of thumb when it comes to saving

We often hear that South Africans are not saving enough, and that only 6% of South Africans will be able to maintain their standard of living after retirement.

But how do you practically become a better saver, asks Jan van der Merwe, head of actuarial and product at PSG Wealth.

Research by Trading Economics shows that, among the G20 countries, South Africa ranks the lowest in household savings rate.

At the beginning of 2019, the ratio of household savings to disposable income was at 0.15%. Among working urban households in South Africa, 40% of people have no formal retirement savings.

Household savings as a percentage of disposable income over previous two years

What is the savings benchmark (or rule of thumb) of saving?

The amount you should be saving will always depend on your goals, the time you have at your disposal and of course your ability to save, said van der Merwe. “But while each person’s saving decision is unique, a simple rule of thumb provides a handy starting point to at least get you thinking along the right lines.”

The rule of thumb according to PSG Wealth, is to allocate at least 15% of your pre-tax income to retirement savings. After you have done this, you can then consider the following spending guidelines for your after-tax income:

  • 60% for necessities (housing, food, utilities)
  • 30% discretionary (entertainment and luxuries)
  • 10% into discretionary savings (e.g. for education, emergency fund, holidays)

The right answer will be different for everyone, and a financial adviser can help to find the right savings plan for you, van der Merwe stressed.

“It can be challenging to make the necessary lifestyle adjustments if you are currently saving below the recommended levels. The first step is setting up and sticking to your budget; delaying saving until you have ‘enough’ money is sure to end in failure.

“You are far more likely to succeed if you prioritise investment, and commit your money to your long-term goals before you are tempted to spend it elsewhere,” van der Merwe said.

Start by making incremental changes to your lifestyle and continue increasing your commitment until you attain your ideal savings level. Over time, these small adjustments are unlikely to be noticed, but the ‘sacrifices’ you are making gradually and consistently add up, helping you grow your nest egg.

The graph below shows how quickly your savings could add up for different amounts.

The key is to make a start as soon as possible, and to continue to build on that once you have a firm foundation in place, van der Merwe said.

Read: The tax benefits of giving to charity

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The rule of thumb when it comes to saving