Everyone has a wish list, but few of us know how to get what we want.
Whether it’s a wedding, a deposit for a car or a house, a holiday, your kid’s education or your retirement – these are all financial goals.
If you set your goals – with the amounts you need to achieve them and by when – you can work out what you need to save to achieve them and how to budget for those savings.
Then automate your savings, sit back, and watch your dream become real.
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#knowyournumbers
(Full transcript)
So, you’ve got big dreams.
But the money to make them real ... is well, a little scarce.
And you don’t really know how to fix that.
Time to get to know your numbers.
Take the first step
Name your goal – a holiday, a deposit for car or a house, or a wedding. A picture – may make it more real and remind you that you are committed to that goal.
Then work out the numbers.
What would that goal cost you in today’s rands.
Take the second step
Set the date by when you want to achieve your goal.
Take the third step
Work out how much you want to save each month.
Use our Savings Goal calculator to work out how much you need to save to achieve your goal.
You’ll need to enter the target amount, whether you have saved anything already, the target deadline and … the hard part … the interest or returns you expect to earn.
To do that it is worth understanding just a little about the numbers.
If your goal is a short-term one – one you want to achieve within a year or two - you will probably need to save in a bank account or a money market fund. In this investment, your capital is safe, but you won’t earn more than a few percentage points above the inflation rate.
If your goal is three years away, you may be able to take a little more investment risk and earn a higher return - like two percentage points above inflation.
A longer-term goal of five years or more could earn you inflation plus 5 or 6%.
An annual increase in the amount you can save in line with inflation will help make your goal easier to achieve – you can use the long-term inflation average of 6% for South Africa.
The calculator will work out how much to save each month.
Often, the results will suggest that you save an amount that is just too high.
If that is the case, revisit your goal. Could you scale back your target amount? Or increase your time horizon?
Rework the numbers until you see a realistic amount.
Step 4 – Find the money
Now take a look at your budget. If you don’t already have a plan on how you spend your money, use the Smart About Money Budget Planner.
Consider which expenses are less important than your goal and give them a trim.
Create space in your budget to save.
Step 5 - Find a savings or investment product
Your time horizon and the returns you need to earn will dictate whether you need a savings product or to invest in something like a unit trust or exchange traded fund.
If your goals are long term, you can also use a tax free savings account or a retirement annuity for retirement savings. And if your tax rate is high, an endowment may be appropriate.
Step 6 - Automate your savings
With your savings or investment account set up, the last step is to automate your savings using an automatic transfer or debit order soon after you get paid.
That way you don’t have to remember to make the payment, and the money will leave your account before you are tempted to spend it on anything else.
Now all you need is a little patience while your savings work for you and grow into something as big as your dreams.
