Cash Club: How to start saving

‘Where should I start saving?’ is a question I get all the time. People would have a certain amount they can realistically save every month, but would not know where to put it.

Today, I’m going to share a step by step process with you. Let’s use R1,000 as the amount available to save.

Step one

If you have short-term or consumer debt such as credit card or store cards, use 80% of your R1,000 (i.e., R800) and add it to your minimum debt repayment (I suggest the snowball method). Transfer the R200 to a savings account – preferably one you can’t access immediately, such as a 32-day savings account. Growing your savings may take some time, depending on your debt. Try your best not to take out new debt by using your credit cards again. If you don’t have any debt, the R1,000 can go straight to your savings account.

Step two

Read as much as you can about ETFs, what they are and how they work. Try and narrow it down to one or two ETFs you like. This process will also take time, almost as much time as step one, that’s why step one and two can run concurrently.

Step three

Now it’s time to focus on your emergency fund. This is the most important part of investing. If you managed to pay off your short-term debt (i.e., step 1), you could put R800 into your savings account. This will become your emergency fund. With the remaining R200 you can open a stockbroker/FSP (financial service provider) account. Invest your R200 into a Tax-free savings account (TFSA) and buy the ETFs you like from step two. Remember, you can invest in ETFs via your TFSA. (Side note: I like to refer to my TFSA as my Tax Free Retirement Fund.)

Step four

Let me pause here for a second. Getting to step three may take years and during that time, you may have grown your income. Please resist the temptation to “improve” your lifestyle every time your salary increases. Try to keep the same lifestyle. This will enable you to save more as more disposable income becomes available. It’s important to think of money in ratios, not rands. If the money you can sacrifice increased to R2,000, for example, R1,600 can go into your emergency fund and R400 into your TFSA account.

Step five

At this point you might wonder, “How much is enough for an emergency fund?”. Well, it’s recommended to have at least three to six months’ worth of living expenses as an emergency fund. Maybe you have two months’ worth at the moment. You can now start changing your ratios from 80/20 to 70/30 to 60/40 etc. as your emergency fund grows. Once you’ve reached your ideal emergency fund savings number, you can invest 100% of the money available to save.

Step six

This is the investment step.

Your first R33,000 per year (R2,750 per month from March to Feb) goes into your TFSA.
Your first 27.5% of your gross taxable income goes into your RA – this will also reduce your taxable income. You’ll get a nice tax rebate every tax year, which you can invest in your TFSA.
If you’re one of those lucky people to max both your yearly 27.5% RA contribution and your R33,000 TFSA contribution, you can invest the rest into ETFs, single stocks (if you know what you’re doing), stokvels with friends or you can buy me a bottle of single malt scotch.

Conclusion

Delayed gratification will serve you greatly at the end. Unfortunately, the results are also right at the end, not the beginning. Time is the biggest asset in your investment journey.

This method is not the best or the only one. It’s just one of them. The best method is the one that fits you personally. Remember, your financial health is your responsibility and yours alone.

Njabulo Nsibande is a Just One Lap user-turned-contributor and a founding member of an investment club. His “Cash Club” blog details his experiences balancing the financial obligations of a young parent with his investment aspirations.