Savings strategy to beat inflation
Whether you're saving for a short-term goal or a long-term goal, the important thing is to start saving today; no matter how small the amount.
You may have short-term financial goals such as saving for a holiday or paying for your child’s education each year.
You also need to be prepared for emergencies, such as unexpected bills, unemployment or medical fees. In both of these cases, your money needs to be accessible when you need it.
At the same time, it’s important to save for long-term goals such as a comfortable retirement, university fees or building your wealth. This requires that your money grows to beat inflation.
Keeping your money accessible can come at the cost of the growth needed to beat inflation. For example, if you put your money in a regular bank account, you may receive a small amount of interest, but this is usually not enough to counter the effects of inflation.
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In South Africa, annual inflation is usually estimated at around six per cent. If your interest doesn’t equal or exceed this rate, the R100 that you put aside today will buy you less next year, and even less the year after that, as the cost of living increases. If you’re saving for a short-term goal, this may not matter. However, if you are saving towards a long-term goal or looking to build your wealth, it does.
So, to beat inflation over time, you need to invest in assets such as shares (equities), bonds, and so on (from registered financial institutions) that will grow in value or earn income. While this allows your money to grow, it can also carry more risk than simply keeping money in a bank account. It is possible to lose some, or even all, of the money you have invested through poor choices or a volatile market.
To counter the risks, you should firstly diversify your investments and secondly, invest over long periods of time. This is therefore a long-term commitment, and can mean that your money is not easily available when you need it.
Good financial planning requires balancing your short and long-term needs, and saving accordingly.
One approach to this is to split your savings between money that is easily available and money that is tied up in long-term investments.
Whatever approach you take, the most important point is to start now. Even if you only save a small amount each month, this can eventually grow into a worthwhile amount, but it takes time to get there.
- Information courtesy of Assupol Life.
