We all know that we should be saving money in order to prepare for the future. And while “saving money” sounds like it should be a relatively easy thing to do, it does come with some important questions: How much should you have in savings? Are saving and investing the same thing? And how do you get started?
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Below, we answer these and other important questions so that you can feel confident in your savings strategy.
Why do I need savings?
If you make a decent salary or wage, always pay your bills on time, never rely on your credit cards, and still have spare money leftover in your bank account each month, it might be tempting to think that you don’t need to be saving money. Why open a savings account if you’ve got plenty of money to go around? The simple answer? Because we can’t predict the future.
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While you may have a high-paying job now, there’s no guarantee that you’ll always have that same high-paying job. As we’ve seen with the coronavirus pandemic and the economic havoc it’s caused, bear markets and recessions can come on with shocking speed, forcing companies to lay off thousands of workers and restructure their operations. Without adequate savings, millions of South Africans are finding themselves reliant on unemployment benefits to survive, even as these benefits don’t can never replace a quality salary.
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While the potential for job loss is a major risk, and a major argument for why individuals should have savings, it isn’t the only one. Saving money allows us to put aside the excess that we have now in order to prepare for the uncertainty that the future holds.
How much do I need in my savings account?
Unfortunately, there is no hard and fast answer to that question. How much you want to have in savings ultimately relies on a number of factors, including what it is that you’re saving for. Two ways you can think about this is to split your savings into your emergency savings and then anything you’re saving for specific goals.
Creating an emergency savings fund
An emergency savings fund is exactly what it sounds like: A savings account that holds money specifically to help you cover emergency expenses. Most financial experts recommend that you should aim to create an emergency fund that eventually holds enough to cover three to six months’ worth of basic expenses, in order to help you get through periods of job loss.
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Not sure how much that translates into in terms of dollar amount? Follow the steps below to determine how much you should have in your emergency savings fund:
1. Audit your spending
To understand how much you should be saving, you first need to understand how much you spend each month on essentials. Sit down with your previous month’s statements and take a look at where you spent your money. If you have a Xhuma account you can simply tap on budgeting & analytics to view all the necessary info instantly.
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For the purposes of your emergency fund, you want to pay particular attention to what you spend on essential expenses from rent and utilities to transportation costs to recurring medical expenses, groceries, debt payments, childcare expenses, insurance, etc. You can exclude anything that is optional, such as entertainment or take-out. Don’t forget to include expenses that you pay once a year or once every six months, such as car insurance or property taxes.
2. Adjust your budget
Update your budget to include a savings component that covers emergency expenses. In Xhuma it's as simple as creating a new Emergency savings category and adding it to your budget in 2 taps in app.
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Most advisors state that you need to try reach 3 months worth of expenses in your emergency fund in case you lose your job or become unemployed. You can easily view this amount by using the budgeting and analytics on your Xhuma account in a couple of taps.
3. Remember you can start small
While that number may seem intimidating, remember that you can start small. Aim first to set aside R1000. Then, gradually build your savings up to R5000, and then R10,000. Having this much money set aside will help you cover most common unexpected expenses that you might encounter like a car repair or unexpected medical bill, and should be relatively easy for most of us to reach. Once you’ve got R10,000 saved, continue adding to your savings until you reach the recommended amount.
Saving for short-term goals
When it comes to other, elective savings, how much you choose to save will ultimately depend on your goals. Choosing a timeline for when you want to make a purchase and a budget of how much you expect to spend can be an excellent means of guiding you in answering this question.
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For example, if you’re planning on going on a vacation in five months, and you know it will cost you R20,000, you can divide R20,000 by five to determine that you’d need to save R4,000 per month to hit your goal.
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That's why we created Vaults with your Xhuma account to allow you to save towards as many targets or goals separately and to keep track of all these financial goals intuitively.
How is saving different from investing?
While saving and investing both involve you setting aside money for the future, they are different in important ways. It’s important for you to understand these differences so that you can be sure you’re taking the most appropriate course of action for your particular goals. These differences include:
1. Risk
Saving money rarely involves risk as you have access to it through withdrawal options.
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Investing, on the other hand, does involve risk. Shares offer the potential for high returns, but can also lose value—though, historically, the stock market has trended up significantly, there have been regular periods of volatility. Even investments that are considered relatively safe and steady like bonds involve taking on some risk that could cause you to lose money. (That’s why it’s important to check bond ratings.)
2. Potential for growth
While savings accounts are safe, they also typically offer very little in terms of growth potential. Yes, you will earn at least some interest on the money you hold in a savings account. But for the vast majority of savings accounts, this will be less than two percent, and even high-yield savings accounts were topping out around 3 to 4 percent in 2020.
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Investing, on the other hand, typically offers a much higher potential for growth. This potential is typically linked to how much investment risk you’re willing to take on. Generally speaking, the greater the risk, the greater the potential for reward.
3. Timeline
Because of the risk involved in investing, it’s typically best suited for helping you reach your mid- or long-term goals. The further out you plan on needing your money, the more likely you will be able to recover from the market volatility or fluctuations that are inherent in investing in shares.
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The virtually nonexistent risk associated with saving, on the other hand, makes it better suited towards short-term goals, when you don’t have a lot of time to recover from potential market declines, or when you don’t know when you will need to access your money (such as in an emergency).
4. Accessibility
Even a high-yield savings account that requires you to visit a branch in person to access your money is likely to offer more accessibility compared to investing.
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In order to access the money held in an investment account, you will need to sell those assets, which takes time. You may also find yourself needing to pay a penalty or taxes, depending on the type of assets you’re selling. Tapping a retirement fund before you are full retirement age, for example, may involve paying taxes and penalties.
When should I tap my savings?
When it comes to tapping your emergency savings, it’s important to remember that the money should truly only be used for emergencies. These might include:
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An unexpected trip to the doctor or dentist
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Replacing a broken pair of glasses
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An emergency visit to the veterinarian
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A critical home or car repair
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Unexpected travel for an funeral or to care for a loved one
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Replacing a piece of equipment you need to do your job (such as a laptop for remote workers, or a camera for a professional photographer)
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Covering your living expenses during a period of unemployment, which causes you to lose your job
Generally speaking, money that you are saving for other uses (like a vacation, etc.) can be used for other needs so long as you understand the tradeoff you are making. If you decide you would rather use the money you’ve been saving for a new camera to instead fund a vacation, that’s fine. Similarly, if you’ve been saving to go on vacation but now find yourself unable to leave the country, you can feel okay in using that money elsewhere. General savings can also be used to cover an emergency, should one arise.
Saving for the unexpected
An easy way to think about saving is that it’s an insurance policy against an unknown future. By saving money today, you can feel confident that you will be prepared to weather whatever challenges the world throws at you. The first step in reaching this goal is to determine exactly how much you should be saving to begin with.
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This article contains the current opinions of the author, but not necessarily those of Xhuma. Such opinions are subject to change without notice. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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