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I know, I know, you see the heading above and you say to yourself, “I’m barely making ends meet and they want me to SAVE? Really?” Please keep reading. Let’s see if we can shift your view just a little bit.
There are three levels of saving, or three timeframes: short term for emergencies, medium term for once-off big expenses, and long term for retirement.
Let’s start with the short term. That’s the emergency column that we included in your budget, remember?
This is the first step toward a life in which you are in control, not your circumstances.
Life happens. You may lose a cell phone or a text book. Your granny may get sick, requiring you to go home urgently. You yourself may get ill, needing to see a doctor and pay for medicine.
It is a wonderful feeling when you are faced with a sudden unplanned expense and you have ready money to pay for it.
If you ringfence your emergency fund, you will be able to cope with whatever happens without going into debt or using your food money for that month. Put this fund in a separate account, perhaps a savings account with a seven-day notice period so that you get some interest. This money buys you peace of mind. DO NOT use it for other budgeted items like clothes or food.
Now let’s think about the medium term. Even if you get a job immediately after finishing your studies, you will need money to see you through the first month until your first paycheck. You will need professional clothes. You may need a briefcase of some sort, or a deposit on a place to stay.
If you put away R50 per month for the next four years, or 48 months – well, it’s almost April. Let’s make that 45 months. If you put away R50 for the next 45 months at about 6% interest (which you can get in a 32-day deposit account), you will have just over R2500 at the end. That’s probably your whole monthly budget at the moment! Imagine having that breathing space at that crucial moment. Imagine how proud you will be of yourself.
And the best thing about it will be that the interest over the period comes to more than R300. Interest will add six months’ worth of your contributions. That happens because interest is added every month. If you don’t withdraw it, you get interest on interest, also known as compound interest. Compound interest is a money superpower, and it grows like a snowball rolling downhill. The longer you leave your money to accumulate compound interest, the more astonishing the results.
That’s of course especially true when you start thinking long term, towards the day you can’t even imagine now, when you want to retire. We’ll pick that up next time.
Just before we say goodbye – if you’re interested in this kind of future-gazing, Excel has a function which works like a charm. Open a workbook and click on fx in the top left corner. Then choose FV for future value from the drop-down menu (search if it doesn’t come up immediately.) Fill in the blocks, click ok, and you have your answer. Just two notes: remember that the interest rate is usually given per year, so you have to divide it by 12 – look at the values in my calculation below. Secondly, the answer is given as a negative amount. Don’t worry, that’s academic. The figures are correct.
Happy studying and be careful with your money!
The GRAD team
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GRAD – your guide to university success is a partnership project of Ruda Landman, StudyTrust, Van Schaik Publishers and Capitec Bank.