CAPPUCCINOS, manicures or the occasional movie aside, the first step in shaping your financial future lies in addressing the three expenses that could be absorbing more than 60percent of your disposable income, says Yanga Nozibele, an investment associate at Cannon Asset Managers.
According to the most recent Statistics South Africa Living Conditions Survey, the three major costs weighing on South Africans’ budgets are housing and utilities (32.6 percent), transport (16.3 percent), and food and non-alcoholic beverages (12.9 percent). Together, these three costs account for some 61.8 percent of all household expenditure. For many, this percentage is likely to be even greater once spending on furnishings and household maintenance, and miscellaneous services such as home and vehicle insurance, have been factored in.
By contrast, South Africa’s household savings rate, or the percentage of disposable income that is put towards savings, reached -0.1 percent in January. In other words, for every R100 earned, the average person is spending R100.10, meaning that most consumers are not only failing to save any money at all, but are continuing to live beyond their means and falling into debt, says Nozibele.
“Given their enormous influence on budgets, finding ways to reduce or minimise these expenses could therefore mean the difference between living a life burdened by debt and becoming financially independent and retiring comfortably,” she says.
“For example, just three years ago, I was in a position where I had no meaningful assets or investments to my name and was essentially living hand-to-mouth. Despite it having been a few years since my career had kicked off, I had acquired nothing other than a car, which was actually a liability, and some needless debt that I had taken out when I was young and naïve. And all that I was doing with my salary was paying for expensive rent and petrol costs.
“Then one day I was talking to a friend who had found themselves in a similar position, and we realised that if we downgraded our apartments and moved to a cheaper neighbourhood for a year or two, we would be able to save enough money to pay off our debt and save towards a deposit on our own home.
“So the following month I moved to small flat in a more affordable neighbourhood, where I was able to save an extra R6000 in rent every month. I also made a number of other changes to my lifestyle, such as leaving my car parked at work and catching a taxi instead, saving an additional R1200 in transport costs.
“Two years later, I was completely debt-free, and had saved enough to make a down payment on a house, as well as to buy some decent furniture. Sometimes, just small sacrifices snowball into large gains.”
The difference R1 000 can make
To demonstrate the impact that even small lifestyle changes can make, Nozibele offers the example of a 25-year-old who saves an extra R1000 every month by opting for a cheaper flat, a more affordable car, or by reducing his or her grocery spending, consistently investing this money each month instead of living a more lavish lifestyle.
Being financially savvy, this Supersaver also understands that in order to maintain the same buying power of his or her money over time, he or she will have to increase his or her savings amount every year in line with inflation. The Supersaver therefore boosts his or her monthly contribution each year to keep pace with an assumed inflation rate of 5percent a year.
By the time of his or her retirement at 65, the Supersaver would have contributed a total of R1.48 million. However, assuming that the Supersaver’s investment achieves an inflation-adjusted return of 8.5 percent every year after fees, his or her regular monthly savings would have grown to more than R7.55m in today’s value, thanks to the potent combination of compounding and time.
Compounding occurs when your capital and the growth achieved on your capital earn additional interest.
Turn spending into saving
Nozibele has the following tips for cutting back on living expenses and turning spending into saving:
* If your rent is high, consider moving to a smaller home or a more affordable neighbourhood. You could also sub-let a room or rent out your spare room for some extra income.
* Weigh your options carefully before buying - it may be more cost-effective to rent for a while longer and save towards a larger deposit in order to reduce the size of your mortgage.
* Depending on where you live, you could cycle to work. This will not only reduce your travel expenses, but it also has some great health benefits. If cycling is not an option, you could carpool with colleagues or friends who live and work in the same areas as you. Alternatively, you could consider using public transport if available.
* If your car is a fuel-guzzler, weigh the costs of switching to a more fuel-efficient vehicle. You will also be able to save money by keeping your current vehicle after you’ve paid it off, and by revisiting your car insurance premiums every year.