How to save wisely

2003-06-17 12:39
Lynne Gidish

Ken Macpherson, independent financial planner and the Financial Planning Institute's Financial Planner of the Year 2002 (Gauteng Region) and Chris Busschau, senior manager: executive support of Standard Bank Financial Consultancy, share their knowledge.

1. Get rid of debt
When you borrow money from banks or micro-lenders, you end up paying high interest. Always try to pay more than the required instalment each month to eliminate debt faster and avoid the months or even years of interest you'll otherwise pay.

2. Avoid paying companies to get you out of debt
If you're in fi nancial difficulty as a result of debt, contact all your creditors to discuss your problem. You'll usually find them quite amenable to making an arrangement for you to repay them at a manageable rate every month.

This is better than approaching a debt consolidator or other business to act on your behalf, as you'll almost always wind up paying them fees and interest over and above your debts!

3. Buy a house
Owning your own home is one of the best investments you can make. By buying instead of renting a home, the money you pay each month pays off your own bond, not someone else's.

4. Pay off your bond
If you have a 20-year bond on your home, you'll end up paying about two to three times the original price of the house in interest charges. So make a point of paying extra into your bond account each month – use as much as possible of your bonus too. Your bank will calculate how much you'll save in interest and time to repay.

5. Buying a new car
Driving around in a smart new car does wonders for one's ego. Unfortunately, cars grow "old" with use and while the initial joy wears off, the monthly instalments don't. As with buying a house, you pay a fortune in interest charges, so always pay more than the required instalment. Rather try to purchase a good second-hand car – it looks and feels good, is a lot cheaper and you'll pay much less interest.

6. Save and invest
Instead of blowing your entire salary each month on an outfit or shoes, save, save, save!

7. Money in a bottle
US fi nancial guru Suze Orman's advice to break a note each time you make a purchase – yes, even for a loaf of bread! – and empty your change into a bottle every night certainly adds up when it comes to saving money. Save silver change only – use the coppers to tip hard-working security guards who look after your car.

8. Savings accounts
Make sure you manage to save up to three times your monthly salary to pay for unexpected expenses like car repairs and medical fees and to replace household goods that "pack up". Banks offer a number of savings options: be sure to check out both interest rates offered and bank charges. A minimum deposit is usually required in order to avoid bank charges, so make sure these charges don't amount to more than the interest you earn.

8. Fixed-deposit accounts
These are ideal to save money towards a car, kids' education or a dream holiday. Agree to invest your money for a year or longer in order to receive a higher guaranteed interest rate.

9. Notice deposit accounts
These allow you to deposit money for an indefinite period, with the facility of giving 32 days' notice when you decide to disinvest. Interest rates on these deposits fl uctuate as rates move in the marketplace, but will be set for the 32 days once notice has been given. You'll also have more access to your money than with a fixed deposit.

10. Money market accounts
These enable you to participate in a mixture of wholesale fixed-interest investments – usually only available if you have large amounts to invest – and to benefit from the more attractive rates applicable. They provide higher returns than savings accounts and capital is accessible.

11. Unit trust funds
Usually recommended for longer-term investing (five years and more). There are hundreds of different types of funds available, the most popular being equity (shares) or managed funds (shares, bonds, property and cash). Over the longer term, they've given higher returns than interest-bearing deposits, but there are market risks involved, so discuss your options with a knowledgeable advisor before you invest.

12-16 Life assurance company products
Financial advisor Shannon Clark from Hallmark Financial Services offers the following savings tips:

Income protection policies: protect you from loss of income resulting from illness, temporary or permanent disability. The contributions to these policies are tax-deductible, which means the SA Revenue Service is effectively subsidising the contribution.

Life and disability policies: save you and your dependants from suffering a lower standard of living should the unexpected happen. There are benefits that can be added specifically for women (eg, for pregnancy-related diseases), so you don't deplete your savings to fund these unforeseen events.

Endowment policies: are investment policies if you have an investment horizon of at least five years and offer a tax-free lump sum pay-out. They're excellent investments for goals such as saving for a child's education.

Retirement annuities are personally owned pension funds and are one of the most valuable personal savings tools. Contributions are tax-deductible and are protected assets (which means they can never be taken away from you by a creditor). At retirement you have the option of taking one-third of the value as a lump sum (of which at least R120 000 will be tax-free), while the remaining funds will be used to purchase a pension.

Preservation funds are important tools to be utilised when you resign from company pension or provident funds. They allow for the tax-free transfer of your fund benefits to a personal retirement savings vehicle.

Image: Fairlady/ Jacques Stander