How do I set savings and investment goals?

If your dreams need money to make them happen, you should make financial plans to ensure you can achieve them.

This will involve setting a savings or investment goal that will give you a vision and keep you accountable by reminding you why you are saving.

Your dreams can be anything, but common ones are to have the deposit to buy a car or a house, fund a wedding, pay for your children’s tertiary education, go on holiday or retire comfortably.  

If you are really committed to achieving these dreams, start by setting them as your goals and follow these steps to make them a reality:

1. Record your goals

Write down your goals and think about which ones are most important to you. Defining and committing to your goals should change the way you think about your money and your habits, and ultimately it can be life changing.

2. Research the target amount you need for your goal

Do some research to find out how much money you will need to fund your goal.

For example, if it is a wedding you want to save for, get some ideas on how much the kind of wedding you want will cost. Large weddings cost more than small ones and ones in exotic locations cost much more than ones close to home. The cost of a wedding reception, dress, suit or cakes, is as diverse as humans are and depends on your choices.

Similarly, the cost of a holiday can vary from a few thousand rand to a few hundred thousand rand depending on whether it’s a week away close to home or an overseas trip for a few weeks.

Your children’s tertiary education will depend on how many children you have and where they are likely to study – you may not know if they are very young, but you can plan for them to study longer and at a higher level than you did. Read more: How can I invest for my children’s education?

Your retirement goal is in some ways easier to cost as it is based on your income level and the number of years you think you will live in retirement. Unless you are in poor health, plan for longer – the average is at least 20 years from a retirement age of 65, but remember half of us live longer than the average. Read more: How much do I need to save for retirement? and Planning for retirement and a good chance you will live to 100

3. Consider the time horizon

Think about the time you have to save for your goal.

If you are saving for a house, a car, a wedding or a holiday, you probably want to get to your goal as soon as possible. It may be helpful to pick a period and test how feasible it is (step 4), before settling on the final goal deadline.

If it is tertiary education for your children, your time horizon will be determined by their age and when they will start studying.

If your goal is a comfortable retirement, your time horizon will be determined by your age and the age at which you either must or want to retire.

4. Match the time horizon to a realistic return

The time horizon you settle on for your goal will influence the return you can earn on your savings.

If your savings goal is a short one – a year or less - you should probably invest in a bank deposit or money market fund. Long-term returns show you are likely to earn a little less than one percentage point above the current inflation rate from these savings products. This may be higher at times when interest rates are being raised to curb inflation, but generally the two move up or down together.

If your savings goal time horizon is two years, you could invest in a low-risk unit trust, like an income unit trust fund or multi-asset income unit trust, that targets a slightly higher return than what you can get from a bank deposit or money market fund.

At three years, you can consider investing in a low equity multi-asset unit trust fund that has some exposure to equities so you can get a return of around two percentage points more than inflation.

With an investment horizon of around five years, you can invest in a high equity multi-asset unit trust fund returning around 5% to 6% a year above inflation.

Only if you can afford to stay invested for more than decade and can stomach the ups and downs or volatility that comes with investing in equities, should you consider investing only in shares or an equity-only unit trust fund either locally or globally. Read more: What is my risk profile and why does it matter?

5. Calculate how much to save

Now that you know how much your goal will cost and by when you want to reach your savings target, use a savings goal calculator to test how much you need to save each month for your goal.

For example, if you want to save R7500 in two years and you can earn 8% interest, you will need to invest R273 a month.

6. Work out how to fund it

When you know how much you need to save, it is time to revisit your budget to find additional money to fund your goal. What are you prepared to sacrifice to achieve your goal? What expenses mean more or less to you than your goals? Use our Budget Planner to make your plans.

If you commit to cutting back on some expenses, remember why you are doing so – your goal should motivate you to make the sacrifice. Remind yourself often what that sacrifice is for.

You can also consider starting to save for your goal with a small amount and increase that amount each year – especially if you are expecting to increase your earnings – as you advance in your job or grow your business.

Another option is to consider working overtime, freelancing or starting a side hustle to increase your earnings. Read more: How can I save when there is more month than money?

7. Reassess and reprioritise

If the amount you need to save is beyond what you can afford, consider scaling back on your goal - focus on a less expensive car, home, wedding or holiday.

Alternatively push out the time horizon – it will take longer to achieve your goal but at least it will be attainable.

If you have debt, you will be paying your credit provider interest every month. Consider paying more into your debt to reduce what you owe and the interest it incurs.  Watch: Get real about the cost of debt and Watch: Two ways to pay off your debt. Then use our Debt Repayment Calculator.

If debt repayments mean you can’t save enough for your goals, you may want to re-prioritise those goals so that paying down your debt is top of the list. The savings you make can then be used towards your goal.

You will probably be saving for more than one goal at the same time – your long-term goals, like saving for retirement, are best achieved by saving something every month from the day you start working.

8. Identify a suitable investment and product

Now that you know what you need in order to achieve your goal, you can find a suitable investment and investment product.

The return you need, and the risk you can afford to take given your investment horizon, will dictate the investment you make.

Investments, like unit trusts and exchange traded funds, can be accessed through tax-efficient products, such as a tax-free savings account or a retirement annuity fund.

Before you use one of these products, make sure you know the rules around accessing your money and how they help you save on tax. Read more: What do I need to know about investing in a tax-free savings account? and How do retirement annuities allow me to create my own retirement savings?

9. Automate your savings

Once you have created space in your budget for savings, set up an automatic deduction to your savings or investment account that comes off your bank account soon after you are paid so you are committed to saving. In this way you can “pay yourself first” before you spend your money on other things.