THE IMPORTANCE OF HAVING SAVINGS

According to the latest research, South Africa is rated amongst the world’s worst savers. Our savings only constitute 20% of our GDP even though we have a well-developed financial services industry. GDP is the total value of a country’s production in a particular period; it is used to indicate the growth of a country’s economy. Our savings rate is below that of other emerging economies such as China which saves 52% of its national GDP. Based on these findings clearly we are not a saving nation.

There are two types of savings, compulsory savings and discretionary savings. Compulsory savings are compulsory to the investors, for example, a pension fund; whereas discretionary savings are voluntary, an example is a bank account or a private share portfolio.

How do we overcome this dilemma?

It is recommended that you pay yourself before you pay anyone else; one needs to put away 10% of their monthly income as savings. The right personal financial decisions need to be made at an early age in order to realise the benefits of a compound interest which is interest on interest. This is an effective way of saving because it enables an investor to earn better returns in a long term. For example if a worker starts saving from the time they enter the job market, they can have a window period of between 35 and 40 years.

The list below shows the best and worst ways to spend money:

BEST | Emergency Fund, Investing for retirement, Insurance or assurance, Build up discretionary funds

WORST | Retail credit, Luxury vehicles, Get rich quick schemes, Pension fund withdrawals Factors to be considered before one invests

1. Find a reputable financial advisor Before you embark in an investment journey, you need to partner with a reputable financial advisor (FA). The FA will gather information about the current financial situation of the potential investor in the form of assets and liabilities, and income and expenditure statement, a concept known as a financial needs analysis (FNA). Assets and liabilities determine the net worth of the potential investor whereas income and expenditure statement also known as budget determines the amount that will be available in the future for investments.

2. Diversify Diversification means that you do not put your eggs in one basket. An investor must spread the risk by investing in different asset classes because it is seldom that all types of investments will perform badly at the same time. For example, bonds do well when stocks (shares) are not doing well.

3. Understand the risk and return concept Before any financial commitment it is impossible to realise a return on any investment without facing a certain degree of risk. Risk is the chance you take that the results on a particular investment may turn out to be different from what is expected. Even though risk in a portfolio is unavoidable it is therefore controllable.

When it comes to your long term financial future the biggest risk of all may simply be to do nothing.


AUTHOR: LEHUMO CAPITAL (FOR KASIBIZ MAHALA)

For more information please contact: www.lehumocapital.co.za

0117834700 – nonzuzom@lehumocapital.co.za

Lehumo capital is an authorised financial services provider our license number is 44133

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