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How to navigate the money choices we must make

by | Apr 25, 2024

How do we live today without being careless about tomorrow, asks Pieter Albertyn, Head of Product Solutions at Momentum Investo.

How to navigate the money choices we must makeIn his State of the Nation Address, President Cyril Ramaphosa used the example of a child called Tintswalo to illustrate how far our democracy has come in 30 years. He mentioned that when she grew up, she started earning an income, which meant that she could save and live a better life.

That is our hope for all South Africans. But the reality is that there are many challenges in our young democracy. We all know that we should be saving part of our income to live a better life, but where do we start? How do you know how much to save, and for what? How can we, in our personal lives, avoid the scary debt levels that government has gotten itself into?

What makes this difficult to answer, is that each of us has our own goals and dreams and ideas of what success means.

Let’s consider these three people:

The 30-year-old single mother

Dheshni is a 30-year-old single mother. Her biggest concern is to make sure she saves enough for her son’s education, but she still  wants to enjoy a nice lifestyle without compromising on the good things in life.

When she graduated from uiversity, she received quite a nice car from her father, and wouldn’t like to downgrade when it comes time to replace it.

Her friends don’t have cheap taste, and though things like ethics and contentment are values that resonate with her more than material goods, she does still want to spend time with friends over a nice glass of wine and restaurant dinner.

The 44-year-old husband and father of three

Kagiso is a 44-year-old husband and father of three. He and his wife saw life as a party when they first got married, and they still love a good party. But they have learnt responsibilities, and have managed things so that they can give their children a good education while not wanting for much.

What worries them are their extended families and the needs they will have. They would hate living the good life while their parents or a less fortunate sibling struggle.

The 52-year-old singleton

Michelle is a 52-year-old singleton who loves to travel. Her father was a bit of a miser and from him she learnt to save diligently. She can’t always afford the fancy trips some of her friends suggest but tries to save up before she gets onto an aeroplane.

She doesn’t want to make her sister dependent on her but does want to help her by putting her nieces through university. She pretends it’s a loan but won’t let them pay back the money.

Navigating their money choices

Dheshni, Kagiso and Michelle all want to live a good life while also contributing something to those close to them.

Michelle followed the thumb-suck rule of saving 18% of her gross income (before tax) for retirement when she started working. So did Dheshni, but then her son was born and she had to cut back on her retirement annuity contributions.

Kagiso and his wife only woke up at the age of 30 to the fact that they had to save for their retirement, which means they will have to save a lot more per month if they want to be in the same spot  as if they had started 10 years earlier.

The magic of compound interest ‒ earning interest not only on what you invest, but also on the growth you earn on your investment ‒ is what makes your money grow exponentially.

Our actuaries have calculated* that if Dheshni continues as is, she will be in trouble. If she saves only 9% of her salary of R32 000 per month (her starting salary was R15 000), she will run out of retirement money by age 77. If she increases her retirement contributions back to 18% of her salary, she will be able to retire comfortably.

Regarding replacing her car, if she saves for it upfront, she will spend 40% less per month as she will not have to pay for financing costs. If she starts saving R1 000 a month in an investment for her son’s university studies now, that equates to only 3% of her income. If she did not save up for the R500 000 university degree, she will be spending around 14% of her income to cover his university fees. This shows the power of using compounding to pay the bills.

Kagiso earns R60 000 a month now (his starting salary was R11 000), but because he only started saving for retirement at 30, he must now save 31% of his salary to ensure a comfortable retirement. If he continues to only save 15% of his salary, his retirement funds will only last until he turns 74 if he retires at 65.

Kagiso and his wife chose a name for their family savings: The Addams Family Emergency Kitty. If they invest R50 000 once-off into a linked investment, their family can withdraw R4 400 per year without reducing the initial investment.

As for Michelle, even if she lives far beyond 90, her retirement money will last. The diligent savings from her starting salary of R3 000 until her current one of R50 000 will pay off.  Her nieces are currently 13 years old, and by saving R6 000 a month now in an investment for five years, she will have enough to cover their university fees. If she did not save ahead, she would be spending R14 000 if she pays it monthly during their studies.

Each of us differs. Because we are so scared of making mistakes with our money, choosing how to invest, and how much, may seem intimidating. That is why using a financial adviser to navigate the maze of options is a great idea. They can calculate how much our needs will cost us, what influence inflation will have on our savings efforts, and what we must sacrifice now to reach our dreams tomorrow.

*For each of our personas the actuaries assume they started working at 22; inflation of 6%; education inflation of 8% (current cost of university at R55 900 per year); salary growth of 8%; retirement annuity growth of 12%; other savings growth of 9%; and that they will replace 75% of their income when they retire at age 65.

This article first appeared in City Press.

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Maya Fisher-French author of Money Questions Answered

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