Pay Yourself First

The truth is that if there was ever a time to contemplate what we are doing to build up our savings, it’s now.

Amid the global crisis that is COVID-19, we are being confronted by a myriad of issues. These include a reduction in – or worse, complete loss of – income. It may, therefore, seem odd to write about the importance of saving, but the truth is that if there was ever a time to contemplate what we are doing to build up our savings, it’s now.

I need to start off by acknowledging that saving is a luxury in South Africa. Most of the population face very real barriers that prevent them from setting money aside. That being said, there are many of us who could be doing better in this area. If this includes you, please continue reading.

Money In - Money Out = Savings

The first part of this equation focuses on earning an income. There is no shortage of articles and LinkedIn posts that punt the importance of “multiple streams of income” and “a side hustle”. Don’t get me wrong, it’s important to make money in order to save and build wealth. But it’s imperative to know how to manage the money you have, so that when you have more, you’ve already learnt the skills needed to preserve it. Countless people have made, inherited or won a fortune in their lifetime and have gone on to lose it all. These people are proof that making money isn’t the end of the story. Managing and keeping it is where the challenge lies. This is why it’s also important to focus on the less glamorous “Money Out” part of the equation.

There is no better time than this lockdown to scrutinise your spending habits

The two main reasons for this are:

1. During this period, money is particularly scarce.

2. It’s hard to spend money if you’re not allowed to leave the house and online shopping is limited to essential goods.

It is said that one of the best ways to get a sense of who someone is, is to look at their bank statement. Use this time to get to know yourself a bit better and figure out what’s important to you by seeing what you spend most of your money on. After you’ve done this, ask yourself if the future you would be happy with your spending habits. Why should you involve your future self? Well, because that’s whose money you’re spending. Every rand spent now is a rand (plus investment growth) not available to you in five, ten and even thirty years from now.

It all boils down to self-control

Self-control is key, not only to ensuring you are able to live comfortably in future, but also to succeed in all other aspects of your life. But why is this self-control beast so hard to tame? According to Dan Ariely (my favourite behavioural economist), it’s because our reality today is clearly defined while our future is not. We all make these grandiose promises that in the future we will be early risers, eat healthily, exercise and, dare I say, save for retirement. The problem with this is that we only ever get to live in the present, and not in the future. Which is why we tend to succumb to our temptations time and time again. All we have is now, so it’s not that there’s no better time to start, it’s that there is literally no other time to start except the present.

The time is now

The unfortunate reality is that if you are in your late twenties or early thirties and you haven’t started saving for retirement, then your future self could very well run into some financial trouble. It is estimated that only about 6% of people who reach retirement have saved enough to sustain themselves during their golden years. Stop telling yourself that you’ll think about this later when you are earning more; you’re focusing on the wrong part of the equation. Start managing your spending and saving NOW.

The first stage on this journey of saving for your future starts with opening a savings account and allocating a portion of whatever income you make to it – this is your future self’s account. Have this be the first thing you do whenever you receive an income and don’t say you’ll save whatever is left over because, spoiler alert, you won’t. It’s not going to be easy, which is why you need to rip the band-aid off. Pay yourself first. Be diligent and patient and one day you’ll look back and thank this very you.

by Senzo Maphisa

Product Specialist at PPS Investments