Finances & Money

Saving or Borrowing: Two Sides of the Same Coin

piggy-bank-850607_640There are two categories when it comes to personal finance, namely, saving or borrowing. So in which category are you? Do you find yourself saving for that rainy day? Are you thinking about your retirement?  Or do you always swipe your credit card? Living off your credit card means you are borrowing against future earnings. You’re spending money you don’t have. Recent reports have shown that most South Africans fall in the borrow category. In fact, about half of the consumer market is either late or struggling to make their monthly debt payments. Saving means you need a paradigm shift. I’m sure you have some questions.

“Well, how do I start?”

Regardless of your income there is only one rule when it comes to saving: Don’t spend more than you earn. Now admittedly that is easier said than done for many of us. The most important aspect of this is changing the way you think about your finances, not your starting amount. Develop a habit of saving, set a monthly budget and stick to it.

The next step is to consider investments. Investing is not just for the wealthy as many people believe. If you’re saving and living within your means then it’s time to start thinking about investments. Investments help to increase your earnings over time. Consider using that bonus or salary increase to invest in a unit trust (mutual fund) instead of using it to increase you standard of living. Think about making a monthly commitment by investing via a monthly debit order. With this option you can set up an annual increase up front, which will gradually increase you contribution.

“When should I start?”

Starting early is the best thing you can do for yourself, but it is never too late to start. Say you want to save R10000 in 10 years. Assuming a return of 10%, you could reach your goal by saving R50 a month if you begin today. If you delay saving by 24 months then you need to save 40% (R20/month) more to reach the same objective.

Less time means that the cost of you delayed start is quite pronounced. Waiting 5 years to save the R10000 means you need to save R130/month. That’s more than double the amount than if you started now!

“Any tips on shifting to a lifestyle of saving?”

Here are the top 5 tips to achieving that paradigm shift.

  • Start saving as soon as possible. The best way to benefit from compound interest is to start early.
  • Reduce your debt and avoid creating new debt.
  • Save before spending. Expenses are what is affordable after saving. Not the other way around!
  • “The debit card test” Unable to pay for it with a debit card (or cash on hand) then you should reconsider the purchase.
  • Avoid negotiating with yourself and fix the annual percentage increase on your investment contributions.

It won’t be easy. Giving up something never is. But this commitment and sacrifice will lead to great returns in the future. The best way to get returns on your investments is to be well informed. Thing about your goals, consider you finances and what your timeframes are. This entire process can be a bit daunting, but don’t fret there is help. If you’re feeling a bit overwhelmed why not visit a reputable financial advisor to help you put your new plan in place.

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