Save thousands by ditching just one guilty pleasure

2017-07-01 06:00
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Cape Town - By quitting a daily cappuccino you could save nearly R40 000 within five years and more than R90 000 in a decade, says investment actuary Hildegard Wilson. 

A member of the actuarial society, Wilson has crunched the numbers to demonstrate how South Africans can accumulate wealth by simply cutting out one guilty pleasure a day.   

“With the power of compounding, where growth on your investment earns additional growth, these kinds of small breadcrumb savings can turn into large amounts over time,” Wilson says. 

With a R40 000 lump sum, you could make a serious dent in repaying your short-term debts, or top up your rainy day fund, your children’s education fund or your retirement nest-egg.

“You could even use a portion of your savings to fund an overseas holiday for you and your partner as a reward for sticking to your savings plan.”

To motivate South Africans to take a hard look their spending habits during July, which is Savings Month, Wilson analysed two scenarios to show the impact that cutting just one small expense from your budget could have.

Scenario 1: Cutting out the daily cappuccinos

If you were to buy a medium daily cappuccino every weekday at a cost of R24.90, your caffeine habit would be costing you R498 a month.

"Say you now decide to give up the cappuccinos, scrounge around for another R2 in your monthly budget, and commit to investing R500 in a South African Multi Asset High Equity unit trust portfolio every month instead."

South African Multi Asset High Equity portfolios delivered average annual returns of 8.2% in the 10 years to the end of March 2017.

Although this figure is historic and offers no guarantee of future performance, Wilson points out that if your investment were to achieve an average 8.2% annual return, you would have just over R37 180 after five years and R93 130 after 10 years.

Scenario 2: Quitting smoking

In this scenario, if someone is a conservative smoker who smokes just three packs of cigarettes a week at a cost of R38.50 each, this means that he or she would be spending R462 on cigarettes every month.

"Say you now decided to take the plunge and quit smoking. To avoid the temptation to spend your cigarette money elsewhere, you invest the R462 you would have spent in a separate savings account at the beginning of every month.

"You stay committed to your goal, and after a year you have a total of R5 544 saved. Since you have not smoked in the past 12 months, you next approach your life insurer to adjust your life insurance premiums to non-smoking rates based on your healthier lifestyle," Wilson says.

"If you had purchased R2m life cover as a young healthy female who smoked, your monthly premiums may cost R380. As a non-smoker, your new monthly premium could be as little as R190, saving you an additional R190 every month. This would bring your total monthly savings to R652."

If she invests her lump sum and the additional monthly savings in an SA Multi Asset High Equity unit trust portfolio, which delivers the same 8.2% average annual returns, this means that she would have R56 820 saved after five years, and after 10 years she would have more than double the amount saved with R134 000.

"By contrast, if you were a young, healthy male who smoked, also with R2m life cover, your life insurance premiums may cost you R592 every month. After submitting to a blood test to prove that you have quit smoking, your monthly premiums could be reduced to R294, saving you R298 every month." 

Say he now invests his R5 544 lump sum in an SA Multi Asset High Equity unit trust portfolio, and tops his investment up with the monthly R760 that he is saving in cigarettes and life insurance premiums.

"If your investment achieved the same return as above, this means that you would have R64 860 after five years and an overwhelming R154 110 after a decade," Wilson says.

* It's National Savings Month. Do you have a successful savings plan or story to tell? Share it with us now and help others to also become Savings Heroes. For more on savings visit our special Savings Issue.

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