You may have asked yourself why it’s so important to save money. If you have enough to pay for everything you need, why should you worry about putting something aside each month?
There are a variety of reasons to begin or continue saving money. Different people save for different reasons, but in general, having savings will benefit you in the future, whether you’re avoiding hardship or going after the things you want. It makes saving easier if you have a clear goal or purpose for the money you are saving.
Here are some key areas to save for.
Is there something you’d like to buy but can’t afford right now? Maybe you want to take a trip, do some home renovations or are anticipating a large expense. If thinking about how much it will cost (and how you’ll pay your credit cards off afterwards) sends shivers up your spine, keep reading. There are ways to save money successfully, and it all starts with a plan.
What are sinking funds?
You may be wondering what a sinking fund is. Simply put, a sinking fund is money that you save each month towards a one time or irregular predetermined expense.
Sinking funds work like this: Every month, you’ll set money aside in one or multiple categories to be used at a later date. With a sinking fund, you save up a small amount each month for a certain block of time before you spend.
Sinking funds work great for things you don’t want to pay for in a single month’s budget, like:
- New tires for your car
- Gifts: Anniversary, birthdays & Christmas
- Vet bills
- Wedding expenses
- Plane tickets
- School books and supplies
- Clothes for a special occasion
- Home remodels
You can create a sinking fund for any financial goal, dream or expense you have!
Benefits of Sinking Funds
No matter what your money tendencies are—spender or a saver, nerd or free spirit, experiences or things—everyone can benefit from a sinking fund.
Want to take your family of four on holiday for a week? There goes R30,000. Need a new roof? That’ll be R50,000. Then there are Christmas gifts, or a down payment for your home, or that home renovations.
Spending money can be fun or not fun at all. But at the end of the day, no matter what you’re spending your money on, it all comes from the same place. And every swipe of your debit card can leave you and your bank account feeling defeated.
All of that changes when you add sinking funds to your budgeting routine.
With a sinking fund, you can:
- Save for anything and everything under the sun. Get as specific as you like to make sure you cover every need and want on your list.
- Plan for big, extravagant fun. This makes my spender heart so happy. Upgrade your kitchen, take the trip of your dreams, invest in your hobbies, or give generously. Make room for fun by telling your money what to do, month after month.
Saving strategically means fun purchases will actually be fun, and frustrating expenses won’t be a big deal.
Building an Emergency Fund
Wouldn’t it feel great to have a buffer between you and the curveballs life throws at you—a cushion that helps you sleep soundly because it turns a major life crisis into just a slight inconvenience? Why? Because you had your safety net in place!
What is an emergency fund?
An emergency fund is simply money you’ve set aside for life’s unexpected events. We’re talking about true emergencies here, like a car wreck, a hospital visit or a leaky roof. Suddenly seeing that flat-screen television go on clearance or walking past a shoe sale doesn’t qualify as an emergency. Sorry, you guys!
If you have debt, I recommend saving a starter emergency fund of R10,000 first. Then, once you’re out of debt, it’s time to build up those savings and build a fully funded rainy day fund of three to six months of expenses.
When should I use my emergency fund?
When a sudden expense pops up, it can feel like an emergency—but that might not be true. Here are three questions to ask yourself to determine if you need to tap into your emergency savings:
- Is it unexpected?
- Is it necessary?
- Is it urgent?
The more you answer yes, the more likely that situation you’re in is an emergency and justifies using money from your emergency fund.
As the name indicates, your emergency fund, also known as emergency savings, is to help you weather unplanned life circumstances and emergencies. Having a stash of cash to fall back on when “life happens” means you won’t have to rely on credit or rack up debt to resolve your situation.
Save for Retirement
Having retirement savings in place is your ticket to retiring from work and possibly early retirement if you plan it right! Saving for retirement takes time but also having an effective savings strategy is key. A good rule of thumb to know if you have enough in your retirement savings portfolio is to multiply your annual income by 25, and the total is the amount you need to retire. For instance, if you want to withdraw R300,000 per year (R25,000 per month) from your retirement savings, you multiply that by 25, which equals R7,500,000.
Have a long term financial plan in place
Just like budgeting before retirement, you will need to be sure you have a long-term financial plan in place when you consider retiring from work. A common mistake among retirement planning is not considering inflation on the cost of living, healthcare, and more.
By planning for inflation, you can prepare for rising living costs and have a financially successful retirement.
Being savvy about your long-term financial plan for retirement can prepare you for inflation of living expenses and paying taxes on your income.
Can I retire yet? Here’s how to tell
There are many things to consider when asking yourself, can I retire yet? You need to be sure you are financially ready to cover your essential living expenses. You also need to have enough funds to retire comfortably. Maybe you want to travel and see new places after you retire. You need to be sure this fits into your retirement plan, and you are financially equipped to do so.
Save to Invest
Once you’ve earned money, make that money work for you! You can do this through investing.
While investing in the stock market is the most well-known form of investing, there are other ways to accumulate assets. You can invest in real estate, set up an index tracker fund, and maxing out any pension fund matches you get at work.
The investing world can be complex, so do your research. The best thing is to start simple.
What is investing?
Investing is when you either create or buy an asset, something that you’re going to hold for a longer-term period and benefit from the growth in value of the asset and the income it generates.
This again applies across all the asset classes. For example, in shares, such as your index tracker fund, you buy the fund with the intention of keeping it in your life and it helps expand your wealth by growing in value and generating income in the form of dividends. In investment property, you buy a property, renovate it to add or creating a development, but instead of selling you hold onto it to increase your asset worth by its increased value and the income it generates in rental.
When you’re growing your wealth, you want to be doing this. Because generally, for most of us who start this journey a bit late, just earning active income and putting 10% into the asset pot isn’t going to be enough. You need to increase your returns on your investments through things like leverage and savvy tax savings and add more into the pot through trading activities.
How to get started accumulating wealth
If you want to create wealth, take a look at your spending habits. Create a budget using the 50/30/20 rule. Look at ways to invest your money wisely, such as paying off high-interest debt, saving, investing, and diversifying your funds. Basically, you want to make sure your money works for you.
Most importantly, It’s all about combining these steps into a financial plan that works well for you in order to accomplish your financial goals.