I am constantly looking at how and where I spend my money and deciding whether what I am doing is worth it or not. There needs to be balance between enjoying live but at the same time living well within ones means and achieving ones financial goals. All it takes to be conscious about what you spend. I have come across times though when I think I am saving money when in fact I am not.
Hosting people vs Going out
The first instance is the fallacy that entertaining at home is cheaper than going out. This can be true, but not necessarily all the time. It is great to host friends and family and one should enjoy every moment of it; life is too short not too. I am definitely not implying that one should not host people in your home, but the point of this post is about saving money. If you specifically decide to host people at your home instead of going out (in order to save) then you need to ensure that you do actually spend less money.
Think of the average restaurant bill that you would be paying if you went out, and now look at what you are about to spend in order to host your friends. Flowers, candles, snacks, wine, groceries, dessert, etc… It is easy to go overboard and spend more than you would have. (Especially if you’re married to a chef, which is the case for me.) The point is not to be stingy though. If you wish to save money then calculate the costs of going versus what you would like to spend when entertaining and chose the cheaper option.
A picnic vs lunch out
As with the first example, if you decide to go on a picnic in order to save money (rather than an expensive restaurant), then be sure to do some calculations. It’s funny how in our minds we convince ourselves that because we’re taking the cheaper option, we can now spend more. A bottle of bubbly, expensive cheeses, some tapas, etc… It’s really easy to spend more on the picnic than in a restaurant.
The point of these examples is that if you choose to do something in order to save some money, keep that in mind and be sure to actually save! Don’t let yourself be tempted to buy the more expensive items to compensate for the cheaper option. You will actually end up spending more.
Now, take the money you calculated you would save and immediately transfer it into your savings account! Do it now before you find something else to spend it on!
You might manage to save a few extra bucks every month, but what do you do with it? The obvious answer is that you put in in your bank account. But then what? Don’t you find that it somehow gets spent anyway – just on other items? Either planned expenses such as a vacation, or maybe a car service. Things seem to just come up.
Use one account
So let’s think about this logically… the first issue is where to save the money. In order to keep our admin as simple as possible, don’t open a new bank account or investment account. Rather have a look at what you already have, and identify the account that offers the highest interest rate along with competitive monthly fees. It’s also important to consider how quickly you can access your funds. Imagine having a large emergency savings fund which you cannot access without giving 30 days notice; that could be a disaster!
If you have a home loan consider using this as a savings account as this will generally offer a good interest rate. (The interest you earn will reduce your debt). Banks have different rules for these types of accounts though so find out what your options are.
You may consider using an investment such as a Unit Trust – just consider when you may need to access the money. Are your savings goals short or long term? How quickly can you access the money? Also, is it possible that you may lose some of your capital if markets change and rates change? Generally speaking, for short-term savings goals a bank account or home loan account are the best options; but do your homework.
Keep a spreadsheet
Now this is where people often fail as they do not keep track of the money they are saving. This is really easy and should not take more than 15 minutes each month (if that!).
Create a spreadsheet where you specify the amount of money in your savings account that is allocated to various goals. You can simply have a total amount as shown, or you can create details of the amount you save each month (consider whether you will continue updating it each month; is it worth the effort?)
This may seem like extra admin that will complicate your life but it really is not! The process is simple:-
- During the month (at any time) transfer money into your savings account.
- At the end of each month, update the account balance in your spreadsheet and reallocate money to the various goals ensuring that it all balances at the end.
- When you need money, look at what is available and decide accordingly.
You can now know how much money is available to spend and how much is allocated towards goals. It’s almost silly how obvious and easy this is. Now it’s up to you to do it!
In this article we looked at the effect of extra payments into ones home loan (mortgage bond). That’s all good and well, but what if you don’t have a loan? Or perhaps you would rather invest in a Unit Trust or Interest Bearing bank account.
Microsoft Excel has a simple formula called “FV” which will help you to calculate the future value of your investment. This does not account for changing interest rates or complicated scenarios, but it will give you a simple tool to give you an idea of how your money can grow.
To start with a simple example, let’s save 600 each month for 10 years (120 months) at an interest of 6%. The answer as you see is 98,327.61.
That’s pretty easy. Let’s quickly look at the input parameters:
Rate: This is the interest rate per period. Generally speaking, financial institutions will quote an annual interest rate. In this example it is 6%. To get the monthly interest rate we simply use 6%/12. If we change the example an decide to make quarterly payments we would need to use 6%/4.
Nper: This is the number of periods (in total) for which we will make a payment. If we wish to pay monthly, this is the number of months.
Pmt: This is the amount we wish to pay each period. This figure cannot change over the lifetime of the investment. But, see further down how we can circumvent this potential problem. Excel expects the payment to be a negative figure as payments out of your account would “minus” from your account. You will see that if you use a positive figure, your answer will show negative. The figure will be the same though. (If that is confusing, try it yourself)
Pv: The present value. If you are adding money to an existing bank account, use Pv as the present value in the account. If this to calculate a new investment leave it blank or type a zero in the box.
Type: This is to specify whether the payment is being made at the beginning of each period, or at the end. This will affect the interest that you earn. By default Excel will assume you are paying at the end of each period.
So, in the example above we assumed a constant 600 payment each month for 10 years. But what if you decide to pay 10% more each year? For that we will need to spice things up a bit. See how I have calculated the Future Value for 12 months at a time. I then use the answer as my Present Value for the following year. The monthly payment is simply increased by 10% in each row.
I love coffee! The very thought of drinking less makes me quiver with fear. But, sometimes one must take the emotion out of decisions and just look at cold, hard facts.
In a previous article on being more conscious with cash, I discussed how I buy 2 coffees each day, along with a breakfast and lunch. I’m not good at planning meals to bring to work but I have decided to spend slightly less. The savings I calculated was only R150 per week, but I’ve decided to look at how this could affect my home loan (mortgage bond) if I pay R600 extra per month.
These figures may not make sense to you if you use a different currency and your countries interest rates may be significantly different. I’ll post something soon about how you can do these calculations yourself.
The calculations can get messy so take note of the following assumptions:
Home Loan Value: R1,500,000
Interest Rate: 11% (annual)
Total Loan period: 20 years
For this example I will assume 2 years of the loan are already complete, and that up to now no additional payments have been made. Also, the R600 p.m. will remain constant (with other words I won’t save more in years to come)
This may all sound complicated, but the end result is simple to see. If I pay R600 p.m. extra into my bond until my bond is paid off I will:
- Save a total of R236,000 (rounded to nearest thousand)
- Pay the loan off 22 months earlier
That’s pretty amazing don’t you think? Considering that I am making this extra saving by cutting down on my weekly coffee/food expenses at my office. In fact, it was quite easy to find the extra R150 per week. Imagine if I actually analyze my expenses properly and relook at my insurance policies, health care, mobile phone contract, bank charges, etc. Imagine the savings I can make then!
What if you don’t have a home loan?
That’s really not a problem. If you invest this money in either a unit trust or interest bearing account for the next 15 – 20 years you will have quite a large lump sum. We’ll look at how to use the Future Value formula in Excel to calculate this.
It’s so easy to pay for things with your credit card, or to use one of the many “cashless wallet” apps that are becoming available. These things really do make life easier and far more convenient, but at the same time it makes us less aware of how much we’re actually spending. We can use our card or phone as a magic wand to just pay for things and only a few weeks later when we look at our statements (if we even do) can we see how much we spent.
Since I’ve been tracking my expenses I’ve very quickly identified an area where I can save some money. I’m generally quite rushed in the mornings so don’t eat breakfast at home, and I’m certainly not organized enough to pack lunches for myself. And also, I’m a coffee addict and purchase 2 flat white’s each work day. I know it seems obvious that I should organize my life so that I can pack breakfasts and lunches, but that’s definitely not going to happen in the next few weeks. I’m two weeks away form getting married and life is chaotic. I’m not ready to make changes to my routine quite yet; there’s just too much happening.
I’ve decided to come up with a very easy solution, and something which my Dad taught me when I was still in school. Firstly, I need to work out how much I’m currently spending. Don’t worry too much about the costs or currency, you can do this calculation yourself.
2 x coffee = R40
Average spend on breakfast = R30
Average spend on lunch = R60
Total (average) daily spend = R130
Total (average) weekly spend = R650
* Note that I am just using averages to make life easier. No need to over-think this.
Now for the wonderful trick. Looking at the figure of R650 it seems quite steep. I can easily do with 20% less, and in fact I have rounded down to R500 per week. I have drawn the cash and keep it in my desk draw as all these expenses relate to when I am at the office.
Now that I have actual cash to work with, and an actual budget, it’s quite simple to stick to. Either I buy cheaper meals, drink less coffee or perhaps every now and then I bring food from home. Seeing how much cash I have left in the envelope each day motivates me to stick to the budget.
I know that saving R150 a week may seem minimal and almost pointless, but I’ll soon write an article explaining the value of this! The money can be put to great use with surprising results!
So here’s your challenge. Identify an area of spending where you can use an envelope with cash instead of your card. This mustn’t be complicated admin, just one envelope for a specific area of spending along with the cash (per week or per month; whichever is easier).
Keep track of the results!
Staying in control of you money can really be hard! There are so many temptations all around where we can spend money and it’s difficult to decide when we need something or when something really will add value to our life. Of course there’s lots we really do need, and then there is stuff that we think we need but probably don’t. And sometimes it’s ok to simply spoil ourselves, but how do we decide and when do we say “yes” or “no” to spending?
I think we all know a lot of good habits that we should be implementing, and we probably have heard all the usual “common sense” things of what we should be doing. If you’re not doing it though, do you really “know” it? Perhaps we just need reminding….
The best place to start is to know where you are spending your money! I am going to start tracking my daily expenses. I’ve done this many times where I track each and everything that I spend money on, and I do it for 2-3 months. This gives such insight into where my money disappears and it helps me decide what and how to spend my money. I usually just create a spreadsheet with columns for Date, Description, Amount, Account and Category and I create no more than 10 categories (you can of course create what you want but there’s no use in over-complicating things). Under “Account” I enter either “Bank”, “Cash” or “Credit Card” as this let’s me see how I spend money. I’ve seen a few free apps that can assist with this too and you really can use whatever works best.
Starting today, keep track of each and every expense you make for 30 days. Don’t over-complicate it and don’t spend days looking for the perfect app or perfect system. Just start! Even a good old fashioned pen-and-paper will do the job perfectly well.
There’s no need right now to try change your habits or to purposely save money so that your list looks good. This excise is meant to show you what you currently and normally spend money on. You can analyze the results and make decisions after the 30 days have past.
Let me know how t goes!