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Savings with the End in Mind

'If you need wisdom, ask our generous God, and he will give it to you. He will not rebuke you for asking. But when you ask him, be sure that your faith is in God alone. Do not waver, for a person with divided loyalty is as unsettled as a wave of the sea that is blown and tossed by the wind. ' James 1:5-6

We continue from yesterday with more practical tips on how we can build financial resilience, As you continue to glean from the tips below, allow God to give you wisdom in how these tips would be relevant for your own situation. Not every household has a cookie cut solution, but each tip has a guiding Principle that can be used wisely within your situation.

Make Precautionary and Big Item Purchase Savings

Short term goal saving encompasses creation of an emergency fund and saving towards big/small item purchases. Creating an emergency fund allows one to have a savings buffer that can be used to maintain their current living standards in the event of their household income falling or unexpected increase in expenses without selling other assets, generally a three to twelve-month buffer is recommended depending on each household. Depending on the amount, a bank account can be a good vehicle for holding such a reserve, other an investment in a cash portfolio would be an alternative where longer term reserves (12 months) are considered.

The same can be done for saving towards the purchase of large items or in some cases small items whose costs cannot be met from a monthly salary. This is a better option than taking on debt which might be costlier and so have adverse effects on the future income of households.

Households vary in their ability to save and the largest determining factor is their income relative to meeting basic expenditure needs and other financial commitments, but creating a habit of saving is never about having a higher income but promoting a habit regularly saving even small amounts over a period of time.

Some organisations promote or sponsor savings vehicles that liquid at the end of the year and thus avail a form of bonus to their employees at the end of the year. There are also a number of options such as savings groups in the form of stokvels which make good starting points for short term saving in a collective manner. Whether these are merry go-round saving schemes or those that distribute to members at the end of the year, they still provide some form of cushion for big item spending or increased spending during festival season and limit impact of regular household incomes.

Create Retirement Saving and Invest for the Future

The average South African employee retires on a pension income that’s around 30% of their last salary according to the Alexander Forbes Member Watch list. Then according to National Treasury, only 6% of South Africans can afford to retire comfortably – i.e. have saved enough to replace at least 60 - 75% of their income at retirement. These findings echo various economic research findings on the low household saving as reflected through income to savings ratio of South African households. These statistics show that retirement can be a huge event for most South Africans with a significant drop in income leading to well below desirable or used lifestyles. Unless one is deliberate in their planning, they may lead very uncomfortable life in retirement.

The government has put in place policies that help incentivise households to accumulate savings, but most existing schemes tend to favour already well-off individuals e.g. tax concessions or tax relief on pension contributions can have huge benefits to high-income earners where tax reduction strategies are fully utilised. There are also tax free saving schemes that have been instituted to further promote savings; however, it is still possible that the intended low-income earners are still not incentive to take advantage of these vehicles.

However, the tremendous advantage or power these vehicles can have whether it’s saving towards tertiary education, children endowment or supplementing retirement savings. In retirement, savings in a tax-free savings can provided non-taxable income stream that will supplement income drawdowns from a post retirement vehicle

The retirement planning conversation should not be left to the very last minute, but rather this should be a continuous conversation that starts as soon as one is employed. And constant adjustments made as earnings change and also taking advantage of tax reliefs offered on retirement savings and these currently are up to 27.5% of taxable income to an annual cap of R350 000. According to the current tax law, contributions that have not had a tax benefit at contribution stage, will have the relief at or in retirement and so still provide increased the much-needed cash flow in retirement.

Have adequate insurance

The death or ill-health of a breadwinner in a household leads to household income being cut and leaving a gap that will never be fulfilled. In some cases, retirement and other savings may not be sufficient to replace such an income loss. It is prudent to buy:

· adequate life insurance to protect dependants against the loss of a breadwinner’s income

· disability insurance to provide continued income after an accident or illness

This category should also include insuring household goods, buildings and cars against events that may lead to unplanned increased expenses that squeeze household incomes.

Do proper estate planning

An estate plan aims to protect and preserve your assets so that:

  • they are distributed effectively to intended beneficiaries

  • the impact of taxes is reduced

  • assets don’t need to be sold unnecessarily to pay for cash flow, expenses or tax

You can be better prepared to face life’s future storms by taking steps that will help you to achieve better financial resilience outcomes. This is a continuous, deliberate effort of planning and commitment to a plan. In this way, you can be cushioned from unforeseen storms that put pressure on the s health of households.

Get Thrifty

Being thrifty means finding ways to either get rid of items one no longer uses or buying used items inexpensively as ways to improve one’s financial standing. There are a number of weekend markets, online stores, second-hand stores, garage sales etc. where one can dispose of their used goods to realise or improve their cash flow from old items or clothes.

Furthermore, one can join a number of groups that share news on specials, best buys or value for money deals etc. whilst others enjoy advantages of bulk buying through stokvel groups. All these practices can lead to saving and building towards financial resilience over the long term.

The above are just but a few examples of the many ways one can be thrifty.

Financial Literacy

The final nugget is on empowering oneself with understanding of personal financial matters to help them appreciate conversations and also understand some of the basic financial concepts. According to research, financial literacy has an added benefit of increasing one’s propensity to save and also take on a bit of reasonable risk to achieve long term investment goals. This again should be a deliberate effort to self-educate but there is also a fiduciary duty on the part of service providers to help cover the financial literacy gap in South Africa.

(c)2022 adapted from creating financial resilience by Joseph Phiri

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