Have an Emergency fund

It’s always a good idea to have an Emegency Fund available where you can quickly access money. You never know when something is going to happen. Think of how you would cope with a car service which costs 3-times what you expected, or if you needed to be admitted to hospital but your medical insurance requires you to pay upfront. Perhaps your washing machine suddenly stops working, or a power failure causes everything in your freezer to go bad. You could even have your credit card blocked and be in a difficult spot for a few days.

It’s just useful knowing that you have something saved for that rainy day. And, it is a great stress relief knowing that you are sorted for emergencies.

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How much do you need?

Circumstances are different for everyone so you need to make this decision yourself. Think about things that may have happened in the past where you suddenly needed extra money. Also think about things that could happen.

This is certainly not an exact science, rather just a ball-park figure which would make you feel comfortable and less stressed. Having something is better than nothing, so if you really can’t figure out how much to aim for, just set a low limit and see how it goes.

Type of account?

The three important factors about the account you use for this Emergency Fund are:

The purpose of an Emergency Fund is that you can access the money immediately. Anytime, day-or-night. Imagine needing to draw cash at at ATM at 2am – would you be able do so? Even if it involved using your online banking to transfer money between accounts; as long as it can be done quickly.

If you have a home loan from a bank, it could be very helpful to stash this extra cash in that account. Provided of course that the home loan account allows for withdrawals or transfers. Doing this would allow you to save interest on your debt, and this is often high. If you’re not sure contact your financial institution.

Have you considered keeping all your savings in one account and simply tracking the various goals in a spreadsheet? Have a look at how to use Savings Pockets to simplify your life.

How to start?

The best way to start anything is just to start! You don’t need to have enough money or know exactly what you’re doing before you start; just make the conscious decision. A few guidelines though would be:-

  1. Decide on your number. How much would you like to have saved in this fund?
  2. Decide which bank account to save it in – investigate the options but remember to keep your life (and admin) as simple as possible.
  3. Create a budget if you haven’t already.
  4. Set yourself a goal to save the necessary funds.

Once you have started you will see that circumstances may change, or you may need to use your fund sooner than expected. That is all fine, just relook at this often and be sure to be working towards this.

How to calculate the interest you can earn

calculateHere’s a quick explanation on how to calculate the interest that you can earn on your savings (or pay on your debt).

Let’s use an example of R1,500 (don’t worry about the currency – the maths is the same) and you deposit it in your bank account that earns 3.5% interest.

First thing to note is that the interest rate is always given as the annual rate (unless very specifically detailed otherwise). If you use a calculator (or a spreadsheet such as Excel) and do the following : 1500 x 3.5% the answer you get is 52.50.

Thus R1,500 invested for 1 year at 3.5% interest will earn R52.50. That’s easy!

To calculate what the monthly interest is, simply divide 52.50 by 12 and you will get R4.38 (rounded up) interest for 1 month. You could be more accurate and divide 52.5 by 365.4 (number of days in the year) and then multiply by the exact number of days in the month (e.g. 30).

E.g.  52.5 divided 365.4 multiplied by 30 = R4.31 (a very slight difference to the first answer we received)

So, if you invest R1,500 for 1 year at an interest rate of 3.5%, the interest at the end of the year would be R52.50. However, banks and all financial institutions calculate interest on a daily basis and pay it out monthly. If you withdrew each months interest (and leave the original amount of money in the account) then you would effectively earn “simple” interest – just as we calculated above and you would have R52.50 (assuming no fees or charges)

However, if you leave the interest that you earn each month in your account, then the bank would calculate the next months interest on your original amount plus whatever extra interest is already in your account. So each month you would earn slightly more. This is what is called “compound” interest.

In this case the difference is not great, but the larger the starting amount is, and the longer time you keep reinvesting the interest, the larger the difference is! In fact, after a few years, compound interest can be really large. Remember of course that we are assuming that no fees or charges apply.

CompoundInterest

This example may seem simple, but there is no need to complicate things!

Is it better to Save or to Pay Off Debt?

Screen Shot 2017-06-17 at 1.51.16 PMIt’s easy to feel pressured to have a savings account or some type of investment. Is it better though to be saving or to be paying off debt?

Let’s have a look at some ways to calculate the answer…

Interest Rate

Generally speaking (and almost always) the interest that you earn on savings is far less than what you would pay on debt. Let’s look at an example…

You bank account may give you 4 – 6% (as an example) and fixed-term savings accounts may give you a bit more. Unit Trusts or other investments will probably be even more although they vary each month but you can get a general idea of the growth by looking at an investment summary sheet.

Debt – whether on store accounts or credit card is often charged a much higher interest rate. Add to that “fees” and penalties and all sorts of made up costs. Store accounts are designed to trick you because they often offer 3 or 6 months interest free debt, but remember that they charge you other fees each month (club fees or Special Member fees). And, if your debt is not paid within the interest-free period, they hit you with very high rates.

Thus; find out the interest that you would earn if you save your money and find the interest that you are charged (look for your account where you are charged the highest interest). That should give you your answer. Most of the time it is better to pay off debt!

Tip: If you have a home loan that you can access (pay extra into and withdraw when you need it) then you can save money by paying off your loan. If you pay extra into your loan account you will earn interest at the rate of your loan (currently in South Africa home loans are offered at around 12% interest). This is a good way to save for emergencies but at the same time you are paying off debt.

The Cost of Debt

Let’s look at a simple example of how much debt can cost you. If you have 1000 and you put in in a savings account for 1 month with an interest rate of 4.5% you would earn 3.75 interest. If you owe 1000 on a loan and the monthly interest rate is 20% you would pay 16.66 in interest.

Thus, if you “save” your 1000 for the month it is actually costing you money! You will have to pay 16.66 interest on your loan and yet you only earn 3.75 on your savings. You have to pay 12.92.

In this example, if you choose to save the extra money, it is actually costing you money and not saving at al!

Risk

Did you know that is most cases (if not all) the creditor (person or company you owe money to) can call up your debt at any time and insist that you pay it immediately. This is especially true for banks who can call up your home loan. This would put you in a terrible situation and could be disastrous to you and your family.

Debt always comes with a risk and therefore it is better to pay your debt as quickly as possible! Being in charge of your money means that you minimize risk by knowing and understanding the consequences of what you do.

Peace of Mind

Having debt causes stress. It’s not nice knowing that you owe someone money and especially if you are struggling to pay it. The consequence of not paying your debt can be dire and this all adds to your stress levels.

If you have the choice of saving 500 in your bank or paying debt off you should consider the peace of mind that you could “buy” yourself. Having no debt would be a wonderful feeling so if you can get to that state by slowly planning, budgeting and working towards being debt-free this would bring great relief to life.

Summary

It is probably a good idea to have a small amount of savings that can be used for emergencies; but generally speaking it is far better to pay off debt rather than save. If you have any spare money at the end of the month work towards paying off your debt!

Have a look at this article on paying off your store cards and apply that principle to any forms of debt that you may have.

Why Save?

This site is all about saving, budgeting and in general taking charge of your money. But saving is hard and requires you to make sacrifices. Is it really worth the effort? You might think that it’s silly to work so hard and then not spend your money; surely that’s why you work and earn money in the first place!

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Well, to start with, you need to find balance as you do need to enjoy life and spend money on things that can bring you joy. You need to spend time with loved ones and have fun. There is an old saying “all work and no play makes Jack a dull boy”. We don’t want to become dull (and possibly cantankerous) simply because we focus so hard on saving that we forget how to live. To help you find this balance you definitely need to create a budget and a plan.

There is of course the concept of “living for today and enjoying each day to its fullest” but at the same time we need to look at “the bigger picture”. Saving is your tool to reach your goals and dreams. This is something that is completely in your control and the amount you save, the goals you make and the success is all up to you!

Many people feel that they simply don’t earn enough in order to reach any goals and thus don’t even bother trying. If you seriously look at what you earn and what you spend, you may find that there is actually more than you think. Unless you can find a way to earn more money, you should certainly be looking at where your money is disappearing to.

Here are some reasons why you should save (make your own list of keywords to get you started).

  • Better retirement plan
  • Less stress knowing that you have some money saved in the bank
  • A debt-free (thus stress free) life
  • Your children’s education
  • Your dream trip overseas
  • Your health (being able to afford better choices)

Why not start right away with your first goal?

What is Financial Freedom?

I’m sure that if you search the web you’ll find lots on this topic with everyone having their own specific definition of what Financial Freedom is. The basic meaning however will always be the same.

Financial Freedom is when you have enough money to live without needing to actively work each day. (There will always be some level of work in order to manage your finances and investments).

Imagine quitting your job and having enough money to live for the rest of your live! Did you read about how to measure your wealth? Well financial freedom is the ultimate goal.

 

A new way to measure your wealth

mansionMost people measure their wealth by looking at the value of their house and cars and other things they have. They see value and wealth in their “stuff”. Of course, you can include the value of your pension fund and other investments you have. This is definitely a valid way to measure your wealth (provided of course that the assets you’re taking into account are actually paid off), but I’d like to propose a new way to measure and track your wealth.

It all comes down to one simple question. How many months could you survive without a job? Another way to look at it is to remember that you could be retrenched or fired very easily – whenever your current employer decides that they no longer need you. How long can you survive without any income?

How to calculate this?

Firstly, you need to know what you monthly living expenses are. For this you need a budget. You can manipulate your budget a little as not having a job would definitely cause you to priorities your spending and you would almost certainly immediately stop all frivolous spending. Don’t forget about your debts as you would still need to be paying these! So know how much you need each month to service debts and survive?

Then, how much money do you have available? Think of any savings you have, or money that you could access. Only take into account money that is actually your own. By this I mean that you could possibly access a lot of money from your home-loan, or you could take a personal loan; but that is simply debt. How much money do you have that is your money and that you can access now? Some retirement and pension funds have rules about what age you can access the money at, so think about your situation right now. Don’t forget any other income you may have that would not be affected, such as rental, commission, royalties, etc (At this point we’re not looking at selling assets in order to survive, rather just look at cash and investments)

 

This excise could help you to relieve some stress if you see that you would actually survive many months without your income, but at the same time this could highlight to you if your finances are in a terrible state. Perhaps you won’t be able to survive even just one month.

When you lose your income, it doesn’t really matter what house you live in, what car you drive or how many diamond rings you have. These things can’t find you food on a day-to-day basis. Having lots of debt makes the situation worse and you could really end up in an awful situation!

The results:

Whatever stage you may be at, set yourself a goal to improve your situation.

0 months  –  This should be a HUGE WARNING sign to you to take charge of your financial situation immediately!

1 – 3 months – You are not in a great situation, but there is a little leeway should something happen regarding your income. Your situation is definitely not good.

4 – 6 months – You are probably better off than most people but don’t feel too comfortable here as things are still not great. You would most probably survive a job loss as you have some time to find a new job, but it would be a stressful situation!

6 – 12 months – If you are in this bracket then you should feel some relief that you could survive some tough financial circumstances. You are in a good position but don’t think about early retirement or that year of travel yet.

More than 12 months – well done, you are on your way to financial freedom! Don’t forget to keep checking your situation regularly and set goals towards the ultimate goal of Financial Freedom.

 

Awesome quote from the Dalai Lama

One of my favorite quotes is this:

The Dalai Lama was asked what surprised him the most; he said,

“Man, because he sacrifices his health in order to make money. Then he sacrifices money to recuperate his health. And then he is so anxious about the future that he does not enjoy the present; the result being that he does not live in the present or the future; he lives as if he is never going to die, and then he dies having never really lived.”