Start saving: Don’t be fooled
As it is savings month in July all the media is promoting savings. However, very few teach the truth of saving. In some circumstances, paying is spending. No, I’m not talking about buying two items for R350 iso R400 and thinking you saved R50. If you could have gone without one item, you wasted R150. If you didn’t really need either you wasted all that money. Don’t get caught like this!
Mike wants to start saving: Advice on extra cash
Someone asked for financial advice. Lets call him Mike. Mike decided to get rid of debt, but wanted to start saving as well. Unfortunately he has so much debt he can only pinch off R100, but couldn’t find a viable way to invest his money.
It is highly commendable that he decided to take control of your finances. Yes that is what he is doing! It is the imperative step to secure a financial future.
There truly aren’t many cost effective ways to investing R100 per month, there are for sure wiser things to do than spending it on rubbish. He can open an isolated savings account and accrue his savings until it is enough to invest, though it will be a slow process.
There are a few unit trusts that will accept small amounts, but it might not be his best choice.
Spend to start saving – Huh?
A better option might be to use the extra R100 to pay off your debts and shrink te repayment period notably.
Look at this convincing example:
An unsecured loan of R30 000, with an interest rate of 20% per year over five years. Excluding any additional charges or credit life insurance premiums, this loan will require payment of R768 per month to cover interest and capital repayments.
If Mike increased the repayment to R868, by adding his R100 per month, the loan will be repaid ten months less than the five years. A saving of R2 680 in interest. After repaying that loan hê can add all of R868 t0 another loan or bond.
This compares to investing the R100 for 50 months in a fund that generates 8% per annum yielding a return of only R876. This proves that repaying debt provides better returns than investments, because the interest rates on loans are usually much higher than the rate on investments.
Once he have paid off his debt, Mike can invest the full amount he was spending repayments and have a much wider array of investment options.
Now make another wise decision! Decide to get decent Insurance for all your valuables that you worked so hard to acquire!