Standard Bank’s Head of Marketing Jacquiline Pack, believes that the best way to create a savings culture is to first create a debt-free culture. “The great irony is that debt isn’t always a bad thing. Without it most families could not afford to buy a house or a car. And, in a sense, a bond, particularly, is a type of savings because it enables ordinary people to make an investment in an asset whose value will always increase,” said Pack.
“The thing to remember about debt, though, is that it’s extremely expensive. So, it really doesn’t make sense to start saving until you are debt free. When you compare the cost of the interest on debt with the interest on savings, you’ll always find that the cost is higher than any gains from the savings,” added Pack.
She suggested using a thirteenth cheque or a bonus to start a savings account while you’re still struggling to pay off a debt. For example, a credit card, a bond, or a car means that you’ll end up with a net loss. You’ll be paying out more than you’re saving.
“In the case of your bond, it’s always better to put extra money into it, so that you both reduce your debt faster and arrive more quickly at a point where your investment in property is going to give you significant returns. Having money in your bond also gives you access to extra cash – at a fraction of the cost of a short term loan,” Pack continued.
“That’s not to say that you can’t get some fun out of your bonus. Simply do it when you’ve paid off or paid down your major debt. Assuming, then, that you’re as nearly debt free as modern living allows, how would you invest a thirteenth cheque so as to get the best possible return?” she questioned.
“The way you save depends on your appetite for risk. The rule of thumb is that the higher the risk, the higher the returns. Putting your money into a notice or fixed deposit account at a bank is the safe way to go, because banks tend to be extremely conservative in the way they invest their clients’ money. So, you won’t lose your money, but you’ll get a comparatively low return on it.
“Also, the longer you invest your money the higher the rate of interest will be. A fixed deposit of 12 months, for instance, will provide better interest than an account that allows you to give 24 hours’ notice of your need to withdraw funds.”
Investing on the stock market, in the form of unit trusts, is a riskier approach because shares often respond unpredictably to any shift in local and global economies. You can lose value as fast as you can make very considerable gains.
Buying retail and government bonds, which are issued by organisations wanting to raise funds to expand their operations or fund projects, is less risky than investing in the stock market. It also provides a higher return than general bank savings accounts. Although the returns can be substantial, the downside of investing in bonds is the need to commit your money for as long as five years.
While there are many different ways of investing your bonus, it’s worth remembering that, by simply putting into a bank savings account an amount of N$500 a month at as little as 5% annual interest – and increasing your monthly payments by 5% each year – would, in ten years, give you N$106 000.
“The magic of compound interest works very hard for those of us who are a bit risk averse!” she said.