Making a number of small financial changes can have an enormous impact on your retirement saving, says Yanga Nozibele, investment associate at Cannon Asset Managers.
Nozibele provided the example of a 25-year old who saves an extra R1,000 every month by opting for a cheaper flat, a more affordable car or by reducing their grocery spending, consistently investing this money each month instead of living a more lavish lifestyle.
“Being financially savvy, this person also understands that in order to maintain the same buying power of their money over time, they will need to increase their savings amount every year in line with inflation,” she said.
“The ‘supersaver’, therefore, boosts their monthly contribution each year to keep pace with an assumed inflation rate of 5% per annum.
“By the time of their retirement at 65 years, they would have contributed a total of R1.48 million.”
However, assuming that the this person’s investment achieves an inflation-adjusted return of 8.5% every year after fees, their regular monthly savings would have grown to more than R7.55 million in today’s value, thanks to the potent combination of compounding and time, said 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 or becoming financially independent and retiring comfortably,” said Nozibele.
South Africans struggling to save
According to Nozibele, saving rates in South Africa reached -0.1% in January this year.
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 in fact are continuing to live beyond their means and falling into debt.
She suggested that South Africans looking to build up savings or pay off debts should make lifestyle changes where they can – big and small – to turn spending into saving. She used her own life story as an example of how to achieve this:
“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,” she said.
“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 a small flat in a more affordable neighbourhood, where I was able to save an extra R6,000 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 R1,200 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.”