To mark National Savings Month, investment actuary Hildegard Wilson has crunched the numbers to demonstrate how cutting out just one guilty pleasure a day can boost your wealth over time.
Her calculations show that by simply giving up a daily cappuccino, you could save nearly R40 000 in five years and over R90 000 in a decade – and that is at relatively modest rates of return.
Wilson, a member of the Actuarial Society of South Africa’s investment committee, says that, with the rising cost of living, increasing your savings can often seem like a pipe dream.
“The numbers prove, however, that you can save without compromising your overall standard of living. With the power of compounding, where growth on your investment earns additional growth, these kinds of ‘breadcrumb’ savings can turn into large amounts over time.”
With a lump sum of R40 000, you could make a serious dent in repaying debts, or top up your rainy-day fund, your children’s education fund or your retirement nest-egg.
To motivate you to take a hard look your spending habits during Savings Month, Wilson analysed two scenarios to show the impact that cutting just one small expense from your budget could have.
Scenario 1: Cut out daily cappuccinos
If you buy a cappuccino each weekday at a cost of R25 each, your caffeine habit is costing you R500 a month.
Say you decide to give up the cappuccinos and commit to investing R500 a month in a South African multi-asset high-equity unit trust fund instead.
High-equity funds delivered average annual returns of 8.2% in the 10 years to the end of March. Although this figure is historical and offers no guarantee of future performance, if your investment were to achieve an annual average return of 8.2%, you would have just over R37 180 after five years and R93 130 after 10 years.
Scenario 2: Quit smoking
If you are a conservative smoker who smokes three packs of cigarettes a week at a cost of R38.50 each, you are spending R462 on cigarettes every month.
Say you decide to quit smoking. To avoid the temptation to spend your cigarette money elsewhere, you invest the R462 you would have spent at the beginning of every month.
You stay committed to your goal, and after a year you have save a total of R5 544. Since you have not smoked in the past 12 months, you approach your life assurer to adjust your life assurance premiums to non-smoking rates based on your healthier lifestyle.
If you had bought life cover of R2 million as a young healthy woman who smoked, your monthly premiums may cost R380. As a non-smoker, your monthly premium could be as little as R190, saving you R190 every month. This would bring your total monthly savings to R652.
You invest your lump sum and the additional monthly savings in a South African multi-asset high equity fund, which delivers an average annual return of 8.2%. This would result in a return of after five years, and after 10 years you would have more than double the amount saved, R134 000.
If you were a young, healthy man who smoked, also with R2m life cover, your life assurance premiums may cost you R592 every month. After submitting to a blood test to prove that you have quit smoking, your premiums could be reduced to R294, saving you R298 every month.
You invest your R5 544 lump sum in a multi-asset high-equity fund, and top up your investment with the monthly R760 that you are saving in cigarettes and life assurance premiums.
If your investment achieved the same return as above, you would have R64 860 after five years and R154 110 after a decade.
Wilson says that although quitting smoking may represent a much bigger lifestyle change than giving up take-away coffees, this kind of financial motivator may make it easier to accomplish. “As the saying goes, ‘If I can clearly see the benefit, I will gladly pay the price’,” she says.