Fortunately, there are a number of different financial resources for every life stage that can prevent savings emergencies and over-indebtedness.
"One of the main reasons people become over-indebted is that they do not know how to save, so they rely on credit," says Nitesh Patel, head of Customer Financial Solutions: Personal Banking at Standard Bank.
"Not all credit is bad, but the most damaging aspect of it is the funding of an unaffordable lifestyle and the impact on savings. Getting to grips with an effective savings strategy has two strong benefits, the first being a reduced reliance on expensive credit, and the second is having cash available for saving," says Patel.
A successful savings strategy consists of four elements, namely a short-, medium- and long-term plan, and an emergency fund.
Short-term savings can be defined as anything that you would usually use store or bank credit cards (the credit portion of the credit card) for. This may include new furniture, a holiday or a big-ticket item like a sound system. In other words, luxury purchases.
"Saving for luxury purchases instead of financing them achieves two things: no interest payments and if anything happens to your income flow, you can put a hold on the purchase of the item," says Patel. "In contrast, when you buy items on credit you are committed to the payment."
The products that suit short-term savings plans are bank savings accounts, call accounts, fixed deposits and money market accounts - all investments that are flexible and relatively easy to access. You should avoid investments that are affected by market fluctuations, as the value may be compromised if you need to access the funds suddenly.
Lifestyle purchases (entertainment and food, for instance) should never be financed as they depreciate (i.e. lose value), and financing depreciating assets saps wealth and prevents saving.
A medium-term strategy can be adopted for more expensive purchases. This could be a child's university education, the deposit on a home or a new car. Spend some time carefully planning how much you will need to save and then set up a systematic savings plan via a debit order from your bank account. Also remember to pay yourself first when you are paid at the end of the month - put money into your savings and then live off what's left.
The type of products you can consider are unit trusts, money market accounts, longer-term fixed deposits, SATRIX, and endowments. Unit trusts and endowments should be used for a five-year plan, because they are affected by equity markets and need more time to grow.
A long-term plan of six years and longer is mainly for retirement, but you may want to save for a child's education from the day they are born. It is advised to save at least 15% of your salary for 25 to 30 years to ensure you have a sustainable retirement income.
If you want to save for a child's education, consider unit trusts, equities or a specially structured education policy. A property purchase could also be considered a long-term investment, because it could provide an inflation-linked source of income once the bond is paid off.
"The emergency plan is perhaps the most important plan as this can stop you from dipping into retirement funds in the event of a crisis," says Patel. "The best case scenario is that you have six months' of income in an investment that can be accessed quickly to weather unforeseen financial storms."
