A recent survey by accounting firm Deloitte revealed that 70% of South Africans were spending all their income or more income than they had every month. For the vast majority struggling to make ends meet, ambitious savings goals are often not realistic, says André Wentzel, head: Client Solutions for Recurring Savings at Sanlam Retail Affluent.
To create a long-term mindset, it is vital to showcase the impact of diligently saving a small amount each month, he said.
If you have R200 in your bank account once all your fixed monthly expenses have been paid, would you typically spend or save this extra amount? For most people, R200 probably seems too small to make a dent in their home loan or retirement savings so they end up spending it instead.
“R200 can seem like such an inconsequential sum that many people would rather use it for a few cappuccinos or to treat themselves to a takeaway dinner. But doing this means missing out on the opportunity to turn a relatively small amount into a larger long-term investment,” Wentzel said.
“It helps to be able to visualise short-term rewards versus long-term pay-backs to understand the effect of compound interest and how small sacrifices now can make a big difference later.”
To practically demonstrate this, Wentzel did the maths. Here is what would happen if a person decided to invest the extra R200 in his or her future instead of instant gratification:
1. Towards your retirement:
If you save an additional R200 per month towards retirement, this will accumulate to between R450,000 and R600,000 in 30 years, depending on what you assume the investment return to be.
For example, an 8% return will yield R479,000, and a 9% return will yield R563,000, after investment costs. (This also assumes that you increase the R200 per month in line with inflation (at 5% p.a.) each year.)
2. Towards your home loan:
On a R700 000 home loan, assuming an interest rate of prime (7%), the monthly instalment for a 20-year loan will be R5,307 per month.
When contributing an extra R200 each month, the loan will be paid off in around 18 and a half years instead of 20 and you will save approximately R50 000 in interest over this period.
3. Paying off your credit debt:
Paying off a credit debt of R15,000 over three years works out to a repayment of R525 per month (at an interest rate of 18% per annum).
An extra R200 per month means you can pay it off a year earlier, saving approximately R1,400 in interest.
What R200 could get you in the short term:
- 7 cheeseburgers
- 6 cappuccinos
- 2 basic T-shirts
Wentzel said that practical exercises like this make the longer-term gains more concrete, “The best way to switch people’s thinking from a short-term bias to a longer-term one is to better articulate long-term goals and find ways to make these seem attainable.”
People with longer-term mindsets typically have more retirement savings and are often better at managing credit, he said. Additionally, being clear on their goals means that they are frequently more active in finding ways to save and avoid expense creep.
Here are Wentzel’s three tips for shifting to a longer-term mindset:
- Take the time to really consider what you want to achieve financially in the next five, 10, and 20 years. Compile a list of long-term goals and order these in terms of priority. Consider the potential trade-offs you will need to make for each goal. Then chat to a financial adviser.
- Use FinTech to budget better, track your expenditure, and visualise and articulate your longer-term savings and investment goals – and monitor these. If your investments are not performing, chat to your financial adviser and make a change, if necessary.
- Pick an appropriate savings vehicle for each goal based on how long you plan to save for, the likelihood that you will need to draw on those savings before the end of your planned savings term, and your tax circumstances. Choose an amount you can afford to save consistently. You are more likely to be successful than contributing erratically when funds are available.