One way of reducing your chances of getting into debt is to develop a savings habit. If you have some money put aside, then hopefully you can use some or all of these funds when a financial emergency arises, instead of having to borrow money. Financial commentators recommend that consumers maintain an emergency fund equivalent to three months’ expenditure, and that this fund is held in an instant access savings account.
What is a financial emergency?
A financial emergency might involve:
- Loss of employment
- Illness or accident, resulting in the need to pay medical bills and/or a temporary or permanent loss of earnings through being unable to work
- The need to fund repairs to your home, car etc.
Lenders’ customers failing to save
Many of the respondents to Wonga South Africa’s annual customer survey agreed that their failure to put money aside was a significant issue in their lives.
Wonga SA CEO Brett van Aswegen commented:
“It is imperative that consumers are educated about the various issues related to credit and to get financially fit to avoid getting into debt. Savings help prepare for unforeseen emergencies, but too many consumers don’t have the additional financial means or the discipline to save.
“We need to take collective responsibility for the financial health and well-being of consumers. Being responsible in our approach to credit provision is the first step towards ensuring a stable and sustainable credit market in South Africa.”
Another survey by the National Credit Regulator and National Treasury showed that 32% of people saved on a monthly basis, but this of course means that two out of every three people do not save regularly.
Ian Wason, CEO of debt management company DebtBusters, estimated that 50% of regular borrowers did not have the means to save, commenting:
“Half of all credit-active consumers are burdened with debt and have little or no room in their budget for savings. And those who are unable to generate savings do not have funds to fall back on for emergency expenses.”
Other reasons for saving
In addition to saving to accumulate an emergency fund, you might also want to save for reasons such as:
- Education costs
- Your retirement
- A new car
- A deposit on a house or flat
- Holidays, days out, treats and luxuries
- Family weddings
- The costs of Christmas
- Cash gifts for your children, perhaps when they reach landmark birthdays
Simple money saving tips
Ideally, you would be in a position to set up a direct debit, whereby a fixed sum is transferred each month from your current account to a savings account that pays a decent rate of interest.
However, if you are currently in a position where you are virtually spending everything that you earn each month, then consider some simple ways of reducing your expenditure, such as:
- Shopping around for the best price before you make a purchase
- Purchasing a cheaper brand during your weekly shop
- Looking out for discounts and special offers
- Looking at combined package deals, e.g. for water and electricity; or for your television, internet and telephone services
- Becoming more efficient at home, e.g. using less washing powder; and switching off appliances when not in use