The beginner’s guide to saving money

If you reach for your credit card whenever an unexpected expense comes up, you’re in good company.

According to one report on average, people are spending more money than they earn. Shocking, right? But hardly surprising. Credit is convenient, and you don’t pay actual money until later.

But, convenience aside, you shouldn’t have to borrow money in an emergency. Even on a tight budget, you can - and should - start saving money and creating a financial cushion for yourself.

Firstly, for emergencies. If your car breaks down, or your dog gets ill, you’ll need a good chunk of money up front.

If you pay for everything on credit, your debts can quickly spiral out of control. Besides, living hand to mouth is stressful. You’ll sleep much easier knowing there’s money to fall back on if something comes up.

Secondly, for yourself. Whether you want to take a well-deserved holiday, put down a deposit on a new home or build up a retirement pot, putting money aside is how you’ll get there. If you can save R800 a month for 30 years you’ll end up with a nest egg of around R394,000 – even with an interest rate of only 2%

Saving money is a habit. You need to do it regularly for it to stick. This doesn’t require a ton of effort — you can easily set things up so some of your money is saved automatically every month.

Step 1: Open a savings account

Keeping your savings separate discourages you from dipping in. Plus, most savings accounts pay interest, so you’ll earn money by simply keeping money in the account.

Opening a savings account should be fairly straightforward. The vast majority of banks offer a range of them; and they tend to have fewer costs involved than cheque accounts. Savings accounts tend to have higher interest rates than cheque accounts so they may be better for saving.

Step 2: Decide how much you want to save

This all boils down to your personal preference and financial circumstances. Some people say you should save 10% of your earnings, but obviously this isn’t possible for everyone.

At the end of the day, the most important thing is to actually start saving something, even if it’s just R150 a month. You can increase the amount once you’ve built up your habit.

Step 3: Set up a standing order

Once you’ve decided how much to put away each month, set up a standing order. Your money will be transferred automatically, so you won’t be tempted to skip a month or forget about it.

For best results, set the standing order to go out on payday. This is sometimes called ‘paying yourself first’. It helps you start viewing your savings as just another deduction, like your taxes and national insurance.

Once your standing order is set up, you don’t have to do anything.

Depositing cash in a separate bank account each month is a quick and easy way to start saving.

However, bank accounts have downsides too. Interest rates can be low, or only apply to a relatively small sum. You’ll also have to pay tax on your interest. So, once you’ve racked up a reasonable amount of savings, it makes sense to start looking at alternatives.

Fixed deposits

If you’ve already got a sum of money to start off your savings journey, a fixed deposit could be worth looking into.

These allow you to make a single deposit which is invested for a fixed period. This can be anything from one month to five years.

The majority of fixed deposits will offer a fixed rate of interest. This means it cannot change over the course of your investment. Some banks also offer ‘linked deposits’, so the interest rate you get will change to reflect national interest rates (although it cannot fall below a set minimum.)

Fixed deposits offer relatively high interest rates but the main disadvantage is that you can’t dip into them before the term ends. Even if you need the funds for an emergency, it’s likely that you’ll be charged a penalty to withdraw your money.

Tax Free Savings Accounts (TFSA)

TFSAs were created in 2015 to try and encourage more people to start saving up their money for the future. Unlike normal investments or savings, any interest, dividends or capital gains that you acquire from your tax free savings investments will be completely tax free.

You’re allowed to invest R30,000 a year into a TFSA, but bear in mind there is a lifetime limit of R500,000. There is also no minimum monthly contribution; how much you invest, and when you invest, is up to you.

There are a number of TFSA providers offering different approaches. If you want a more managed solution, then you’ll probably have to pay more than if you manage your own portfolio. As with any investment there can be risks involved so it’s worth shopping around and comparing accounts from different banks before diving in.

If you want to frequently withdraw money from your savings, then a TFSA may not be the best bet. Every time you withdraw money from your TFSA you use up part of your annual and lifetime limit. Investing in a TFSA will yield the most benefit in the long run. This means they are probably not the best solution for shorter-term savings goals.

If you need that extra push, there are also apps for that. Apps are a great way to make your saving easy and automatic. Do keep in mind, however, that many of them charge fees.

Here are a few to look out for:

22seven

22seven from Old Mutual, links to your bank accounts to help you track all your spending automatically. It can also help create a personalised budget making it easier to set aside money specifically for saving.

Stash

Stash detects when you make purchases with your debit, cheque or credit card and collects the spare change.

It will round up your purchases to the nearest R10 and then invest the digital spare change. This can make things easier if you always forget to set aside money but it can take a while for any returns to be seen.

While it’s all well and good to look out for better returns, you should still keep some savings in a bank account. This will make them readily accessible should you need something extra for a rainy day.

More importantly, don’t put all your eggs in one basket. Dividing your savings amongst different vehicles spreads risk and helps you get the most out of them.