Sylvia Walker | 01 August 2023
Sylvia Walker is a financial planner at Andrew Prior Consultants. She spent many years in a senior management position at Old Mutual before venturing out of the corporate world. She is also a freelance finance writer and author of several non-fiction books.
With the ever-increasing cost of living, saving or investing may be more of a bucket list item than an essential part of your monthly budget. Any salary increase is quickly absorbed by rising costs, but you should not ignore the importance of having a savings or investment plan.
Saving needs to be a priority for the things you want to acquire in the short-term and investing needs to be prioritized for long-term goals and for your future.
If you receive a salary increase or, a promotion, move to a higher-paid job or start making money from a side-hustle, scrutinise your expenses carefully so that the extra cash doesn't just disappear from your bank account. See how much of the increase you can allocate towards your savings, even if it's half or a third of it. Then, when you receive your next salary increase, adjust your living costs only by what you absolutely need to adjust it by, and invest the balance.
Repeat this every year, so that you are constantly increasing the amount you save.
Amassing a tidy amount
Once you start saving this way and invest your savings for a good above-inflation return, it’s easy to keep going. Before you know it, you’ll have amassed a tidy amount of money.
Let’s take an example. Sam is 30 and earns R30 000 a month. He receives a salary increase of 5% (R1 500 a month) and after looking at his budget, he realises he needs an extra R500 a month to cover increases in his living expenses. For simplicity’s sake, we are ignoring income tax, but this example works just as well using after-tax income.
In year one, he saves R 1000 a month from his increase and lives off R30 500 (the R30 000 he was earning plus R500 of his increase).
In year two, he receives an increase of R1 575 and increases his savings by 5% from R1 000 a month to R1 050 a month and lives off the rest (R32 025).
In year three, he receives an increase of R1 653 and increases his savings of R1 050 by 5% to R1 102.50 a month and lives off the rest (R33 625).
In effect, Sam has saved a part of his increase in year one, adjusting his contribution each year in line with his salary increase (5% in this case).
Let’s assume Sam does not just save the money, but invests it for the long term, earning a return of 12% a year from a unit trust fund exposed to equities. If he maintains his plan to increase the R1 000 a month he started with by 5% each year and only ever receives 5% salary increases, by the time he’s 60, he will have around R4.6 million, based on a return of 12%.
This is all because he made a decision in year one to invest part of his salary increase. And of course, the better his salary increases, or if he moves to a better paying job, the more he will be able to plough into his investment.
Waiting for better days is not an investment
Investing wisely is an important part of the process - there are many exchange traded funds (ETFs) and unit trust funds that have produced returns in excess of 12% per year over the long term, so these projections are realistic. By investing wisely, Sam will end up with a nest egg he would never have had, if he spent his whole salary increase in year one.
Money is tight for many of us, but starting small is better than not starting at all. Waiting for better days has never been a great investment philosophy, so use what you have now, and increase it each year in line with your salary increases. Life is unpredictable and every bit you put away today is money that you will be able to pay yourself tomorrow.
