Grabbing a cup of coffee on the way into the work is a routine act for many South Africans but it’s a guilty pleasure that can make a major difference to your wealth, according to investment actuary Hildegard Wilson and the Actuarial Society of South Africa (ASSA).
Wilson, who is a member of the ASSA’s Investment Committee, notes that with rising costs of living, increasing your savings can often seem like a pipe dream but is still obtainable by making minor changes.
As part of the awareness surrounding Savings Month (July), she crunched some of the numbers to demonstrate how cutting out just one guilty pleasure a day could make a major difference to your current wealth.
“The numbers prove that there is hope, and that you can reach your goals without compromising your overall standard of living,” she said.
“With the power of compounding, where growth on your investment earns additional growth, these kinds of small breadcrumb savings can turn into large amounts over time.”
Scenario 1 – Cutting out a daily cappuccino
“If you were to buy a medium daily cappuccino every weekday at a cost of R24.90 each, your caffeine habit would be costing you R498 a month,” said Wilson.
“Say you now decide to give up the cappuccinos, scrounge around for another R2 in your monthly budget, and commit to investing R500 in a South African Multi Asset High Equity unit trust portfolio every month instead.”
“SA Multi Asset High Equity portfolios delivered average annual returns of 8.2% in the 10 years to the end of March 2017.
“While this figure is historic and offers no guarantee of future performance, if your investment were to achieve an average 8.2% annual return, you would have just over R37,180 after five years and R93,130 after 10 years.”
Scenario 2 – Quitting smoking
“In this scenario, if you were a conservative smoker who smokes just three packs of cigarettes a week at a cost of R38.50 each, this means that you would be spending R462 on cigarettes every month,” said Wilson.
“Say you now decided to take the plunge and quit smoking. To avoid the temptation to spend your cigarette money elsewhere, you invest the R462 you would have spent in a separate savings account at the beginning of every month.”
“You stay committed to your goal, and after a year you have a total of R5,544 saved.”
Wilson noted that the money being saved by cutting out smoking would not only be reflected in how much you are saving through cutting back on buying costs.
“Since you have not smoked in the past 12 months, you next approach your life insurer to adjust your life insurance premiums to non-smoking rates based on your healthier lifestyle.”
“If you had purchased R2 million life cover as a young healthy female who smoked, your monthly premiums may cost R380. As a non-smoker, your new monthly premium could be as little as R190, saving you an additional R190 every month. This would bring your total monthly savings to R652.”
“You then invest your lump-sum and the additional monthly savings in a SA Multi Asset High Equity unit trust portfolio, which delivers the same 8.2% average annual returns. This means that you would have R56,820 saved after five years, and after 10 years you would have more than double the amount saved with R134,000.”
In contrast, Wilson noted that a young, healthy male who smoked, also with R2 million life cover, would pay life insurance premiums of around R592 every month.
“After submitting to a blood test to prove that you have quit smoking, your monthly premiums could be reduced to R294, saving you R298 every month.”
“You also invest your R5,544 lump sum in a SA Multi Asset High Equity unit trust portfolio, and top your investment up with the monthly R760 that you are saving in cigarettes and life insurance premiums.”
“If your investment achieved the same return as above, this means that you would have R64,860 after five years and R154,110 after a decade.”