Drawing up a savings plan doesn’t need to be a complicated process when it comes to how to prioritise your savings. We’ve suggested using the 50/20/30 budgeting guide to help you prioritize your budgeting, but how do you plan your savings so that you cater for your short-terms and long-term financial goals? The process of figuring out which types of products to choose to best suit your financial plan, time frames and the goals you’ve set can get complicated and a little scary. When you have a formidable savings strategy, you won’t find yourself having to dig into debt in order to stay afloat. Having savings can help you to navigate financial storms with ease and peace of mind without the expense that taking on debt.
In order to be able to structure your savings and investment plan in a way that works for you, it is important to take your financial goals, your budget and work with your needs. Break your savings plan in to short, medium and long term milestones.
Your short-term savings goals
Your short term time span is three months to 3 years. Goals that fall under this category could be things like travel, buying new furniture, saving up for a deposit of a car or home. Ideally short term savings are generally easy to access. Make sure that when you’re choosing a short term savings vehicle, your contributions will not be affected by market movements. This could compromise the value of your investment especially when you need to access your money. Here, focus more on low risk, low interest types of products that have no exposure to market movements. Shop around for a product that will suit your savings behaviour. If you know that you struggle with self discipline, you might have to look at an option that will limit access to funds.
Short term savings products could include:
- Call accounts:
- Savings accounts
- Money market accounts
- Fixed deposit accounts
Shop around as many banks have different requirements for each type of account, and the are various options relating to the ease off access to funds. You can also compare bank account rates by visiting south-africa.deposirts.org.
Medium-term savings fall in the 3-5 years timeframe. Medium term savings could include saving for buying a car (cash), a big expense like a wedding or education. Whatever it is, you need to ensure that you have a product, or products that allow you to grow your money effectively.
When looking at medium term savings vehicles, consider looking at the following:
- Money market accounts and fixed-term deposit accounts for a longer term (ie, 3+ years)
- Unit Trusts
- Exchange Traded Funds (ETFs)
Unit trusts, ETFs and endowments are all products that are exposed to market fluctuations, so it is wise to factor in timing when it comes to withdrawals. These types of investments should be factored into your monthly budget and prioritised along with your essential expenses. Some of the products require you to set up a monthly debit order which is a great way to keep you committed to saving and sticking to your intention.
Long term investing
Anything over 6 years is considered long term investing. Usually when we think of long term investing, we’re thinking about saving for retirement. Long term savings could also cover saving for your child’s university education.
When saving for your child’s education over a period longer than 6 years, it’s helpful to look at investment products that are specifically tailored for education. However, you can also look at incorporating ETFs and Endowment policies into your strategy, with the view of a time frame longer than 5 years.
Retirement planning is something a lot of us leave to our employer to take care of, and we sort of coast along, hoping that what we’ll have when we retire will be enough. However, usually people save too little for retirement, and when they approach retirement age, panic sets in as they realise that they do not have enough money set aside. It is therefore important to look at who you can make extra contributions towards your retirement.
You might also want to take advantage of tax-free investment products and include these in your long term investment strategy. Look at etfs or unit trusts as they have market exposure. Using TFSAs with market exposure in your long term strategy will ensure that you take advantage of saving on tax. You should also sit down with a financial planner and go over the various retirement products out there that you can contribute towards. The sooner you start putting money aside, the better.
Emergency savings are an essential part of your savings strategy and you should think carefully about how to structure this particular aspect of your savings strategy. You can read more about the emergency fund here
The habit of saving on a regular basis can help you rely less on credit, which is beneficial for your credit score and could save you a great deal of money in the future in terms of interest rates. Nitesh Patel, Head of Customer Financial Solutions: Personal Banking at Standard Bank clarified the savings vs credit dilemma perfectly “Not all credit is bad, but the most damaging aspect of it is the funding of an unaffordable lifestyle and the impact on savings. Getting to grips with an effective savings strategy has two strong benefits, the first being a reduced reliance on expensive credit and the second is having cash available for saving.”
It is for your own benefit to ensure that you start developing a smart savings strategy NOW. The longer you put it off, the more you lose out.