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It is estimated that for every R100 earned, the average South African is spending R100.10, according to Yanga Nozibele, investment associate at Cannon Asset Managers.
This means that most consumers are not only failing to save any money at all, but in fact are continuing to live beyond their means and falling into debt, explains Nozibele.
"Given their enormous influence on budgets, finding ways to reduce or minimise these expenses could, therefore, mean the difference between living a life burdened by debt or becoming financially independent and retiring comfortably," she explains.
She tells of how, three years ago, she had no meaningful assets or investments and was essentially living hand-to-mouth.
"Despite it having been a few years since my career had kicked off, I had acquired nothing other than a car, which was actually a liability, and some needless debt that I had taken out when I was young and naïve. And all that I was doing with my salary was paying for expensive rent and petrol costs," she remembers.
One day she was talking to a friend in a similar position, and they realised that if they downgraded their apartments and moved to a cheaper neighbourhood for a year or two, they would be able to save enough money to pay off their debt and save towards a deposit on an own home.
"So, the following month I moved to a small flat in a more affordable neighbourhood, where I was able to save an extra R6 000 in rent every month. I also made a number of other changes to my lifestyle, such as leaving my car parked at work and catching a taxi instead, saving an additional R1 200 in transport costs," she says.
Two years later, she was completely debt free, and had saved enough to make a down payment on a house, as well as to buy some decent furniture.
The difference that R1 000 can make
To demonstrate the enormous impact that even small lifestyle changes can make, Nozibele provides the example of a 25-year-old who saves an extra R1 000 every month by opting for a cheaper flat, a more affordable car or by reducing grocery spending and consistently investing this money each month instead of living a more lavish lifestyle.
The 25-year-old also understands that, in order to maintain the same buying power of the money over time, one would need to increase the savings amount every year in line with inflation.
By retirement age at 65, the person would have contributed a total of R1.48m. However, assuming that the investment achieves an inflation-adjusted return of 8.5% every year after fees, the regular monthly savings would have grown to more than R7.55m in today's value, thanks to the potent combination of compounding and time.
Compounding occurs when your capital and the growth achieved on your capital earn additional interest.
