Every year expenses seem to outpace salary increases, and rather than making ends meet, South Africans see them drift ever further apart, says Emma Heap, Managing Director of Retail at 10X Investments.
She notes that beyond the official inflation statistics, there is the reality of additional expenses consumers are faced with each month, in terms of school fees, medical aid rates, rents and property levies, electricity prices and the food bill.
“Consumers face the reality of retiring and having to put even more money away towards retirement,” she said
“Due to rising cost of living many South Africans don’t save at the recommended rate of 15% of income, and even that may no longer suffice. Rising life expectancy means we may require a bigger nest egg; at the same time, future investment returns are likely to be lower than in the past.”
Heap notes that one forceful way of doing so is to apply (Warren) Buffett’s Rule: spend what is left after saving, rather than save what is left after spending.
“In other words, first contribute adequately towards your retirement, then make do with what is left.”
The big question is how to go about doing this? Heap provided some tips and guidelines on how to reign in your spending habits without diminishing your lifestyle.
Reduce your fixed expenses
This includes items such as property rates and levies, school fees, domestic help, car and bond repayments, insurances and subscriptions.
While trading down could itself prove quite costly and potentially disruptive, there are a few things that could be considered, said Heap.
“Your biggest expense is the interest you pay on your bond. If you have been in your property for some years, why not request fresh quotes from other lenders, or revisit the matter with your bank?”
“Your risk profile may have improved since you applied for your initial home loan, which could translate into a rate cut of between 0.5% and 1% pa. That’s an annual saving of between R5,000 and R10,000 on a R1 million bond, which you could apply towards your outstanding capital or your retirement fund.”
Other options highlighted by Heap include shopping around for cheaper insurance, switching from full-time to part time domestic help, moving to a less expensive medical aid or settling for a second-hand car when making your next motoring purchase.
Cut your consumption expenditure
“You always have to budget for electricity, water, food, clothing, fuel, and mobile services but these expenses have both a fixed and a variable element. Try cutting back on your usage and look for more cost-effective alternatives,” said Heap.
On example she provided was using a blanket instead of a heater in winter or take shorter showers and switch off your geyser at night.
“Remember, for every rand saved monthly, and kept saved for the next 30 years, can result in an 840-fold payback come retirement.”
Avoid interest on short-term debt
According to Heap, paying interest on short term debt – be it on a bank overdraft, credit card or unsecured loan – does nothing for your lifestyle as the facilities temporarily allow you to live beyond your means.
“But once you are maxed out, the opposite happens – your disposable income shrinks because of your monthly interest bill. It’s a one-time indulgence that you keep paying for (at very high rates) until you settle the debt.”
Curtail your impulse buys
According to Heap, one sure fire way of saving is to avoid impulse purchases that we later regret.
“Make up a shopping list before you go out, and stick to it. If you see something you really want, first give yourself a cooling-off period, then put it on the list.”
“To establish a savings discipline, save up for the item over a few months. Instead of spending R600 immediately, set aside R200 for three month before you purchase the item.”
Break your habitual spending patterns
“Impulse buys are just one of the indulgences we weave into our every-day life. Others include cigarettes, alcohol, designer coffee, bottled water and take-outs.”
“Much like ‘movies are not the same without popcorn’ you may feel that your work day is not complete without a coffee run. So you end up paying a hundred rand a week for cappuccinos, despite your employer providing free coffee,” she said.
“Again, that’s R5,000 you could pay yourself every year. Double that by taking a sandwich to work rather than using the canteen.”
“And if the average smoker or drinker cuts down by just one packet and six-pack per week, they would save around R400 a month, giving them R336,000 more money in retirement.”
Cut your retirement fund costs
“There are also huge savings to be had within your retirement affairs. By simply choosing to go direct, without the assistance of a broker or financial adviser, and investing in an index rather than a managed fund, you can save yourself up to 2% pa in fees.”
“Over a lifetime of investing, this alone could boost your retirement savings by up to 60%,” said Heap.