It’s March and many of us are wanting to plan
that next holiday or mini-break.
Let’s try to turn the yearning of planning a holiday or mini-break
into something positive.
Planning your next holiday may not feel as though it could be a reality,
but it can teach us an important lesson about managing our money
– and using our cash more productively to pay for things we really want.
The debt-savings asymmetry
South Africans are no strangers to debt, and many, including SA seniors, have started 2019 with our credit cards charged to the max. That’s fine, as long as you meet your repayments and don’t let debt get out of control. But even in the best case, having to pay off debt prevents you from doing more with your money. Smartgoal-based saving not only can help reduce your debt burden, it also gives you more bang for your buck.
This may sound painfully obvious: of course, it is better to save than to get into debt. But why? It’s easy to get this wrong, to have some vague moral worry about living within our means, rather than a practical sense of the tangible benefits of strategic saving.
What’s the difference between putting aside money each month ahead of time to pay for a holiday, or paying each month after the holiday? The real difference comes in when we put our money to work, rather than simply meet our debt repayment obligations for no additional reward.
The best you can hope for when repaying your debt is not to incur any penalties or charges. And if you miss a payment, you are subject to further interest charges.
Goal-based saving has the opposite consequences. Placing an equivalent amount in a high-interest savings account earns you interest. Instead of simply serving to meet an obligation, the cash you set aside now works for you, earning you additional returns on the wealth you put aside.
Even if you incur no penalties when paying off your debts, there is an opportunity cost above the already considerable expense of that dream vacation. By taking out debt, you lose out on the chance to put your money to work for you.
Strategic goal-based saving
Here’s a savings suggestion for 2019/2020 (it’s never too late to start!) : choose a savings goal and commit to setting aside a fixed amount each month in order to save enough to pay for that goal. Allow yourself 12 months. Saving for a holiday makes sense because you have a year to earn returns on your cash investment. Having a set timeline also enables you to choose a fixed-term account that offers a more competitive interest rate.
The upside is that when it’s time to spend that cash, not only will you save yourself from having to take on all, or some, of the debt you need to finance that holiday (or whatever), you will also have earned additional returns, meaning you’ll have even more cash than you set aside.
This may sounds frivolous: shouldn’t you be putting any extra cash into your retirement fund or to pay for your grandchildrens’ education?
That depends on your overall savings strategy. Saving for that luxury cruise should only be a small part of your long-term savings and investment plan. However, any time that you save yourself from incurring debt for inevitable expenses, you are working to stabilise and grow your wealth. After all, are you really being financially prudent if you dutifully put thousands into your grandchildrens’ university fund every month and then blow through your Visa, Mastercard and American Express each holiday season? An overall savings strategy should involve a realistic account of your real life spending patterns.
Choosing the optimum savings account
Goal-based saving can be a great motivator to save consistently and can also help you focus on the most effective means getting the best returns: how much can you afford to set aside, how quickly will you need access to that money? Use the My Treasury Savings Optimiser to take the guesswork out of finding the best savings account, and then try to save consistently. All that’s left after that is for you to decide what is top of your bucket list. Don’t worry though – you will have 12 months to make up your mind!
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