Growing Your Investment by Saving Small Incremental Amounts Each Month

by | Mar 2, 2018

Whether you earn R5 000 or R50 000 a month, the only way to save is to spend less than that amount. It may be really tough to create space in an already-stretched budget but taking steps to develop a habit of saving and living within your means, is important to reaching your financial goals.

Three steps to increase your savings:

1. Set Achievable and Realistic Goals

Whether you are saving for a trip overseas or saving to live a comfortable retirement, you need to start with a goal. Without a goal, all you have is an idea that you need to save more, but there is no true purpose to your plan of putting money away. When you don’t have a clear vision of what the money is for it is much easier to spend it.  Instead of pointlessly saving, create achievable and realistic goals that give your savings a purpose and write this goal down.

2. Create a plan

Once you have developed a goal, create a plan that will allow you to achieve this goal. Review your plan annually to check that you are on track.

3. Automate Your Savings

Save incremental amounts, consistently over time. Not all of us have the financial means to invest large capital amounts at once and therefore a monthly debit order investment enables one to build up investment capital over time. Saving R1000 a month, for example, may seem like a substantial amount of money but the below example shows the significant effect that the discipline of regular saving, coupled with the power of compounding can have on the growth of your money. You can also free up your budget by making a few changes to your lifestyle.

A few small changes that come to mind include:

  • Substituting your DSTV account and switch to a more cost-effective alternative such as Netflix or Showmax
  • Switching to a cheaper phone plan
  • Make your lunch for work
  • Turn off the lights when not in use
  • Cutting back on entertainment each month
  • If you commit to investing via a monthly debit order, consider increasing the annual percentage increase upfront, as this will help you to slowly increase your contribution without having to think about it

The point is that by making a small contribution to your investments every month, soon enough, you will see the benefits of those small changes without ever feeling like you have had to drastically adjust your lifestyle.

Consider the following example:

Investor A Investor B Investor C
Lump sum R100,000 R100,000 R100,000
Debit order per month No debit order R1,000 R1,000
Escalation Not applicable 0% 6%
Market Value after 15 years R854,984 R1,492,050 R1,706,332

  • Investment growth: 15.38% this is based on the 15-year track record of the Allan Gray Balanced Fund from 1 January 2003 – 31 December 2017
  • Inflation 6%

While future investment performance is not guaranteed, this example illustrates that lots of little savings can really add up to significant savings when combined, and when done consistently over a long period of time. This also speaks to the power of compound interest, which is often overlooked when thinking about savings and investments.

Another benefit to investing monthly is that it allows you to get the average price of all the months you invest, which is called rand-cost averaging. You will get more units for your money when share prices are low, and less when they are high. Ultimately, you will end up buying at the average price for the underlying investments over time which in turn smooths out the volatility of returns. This also partially removes the element of timing the market which Resolute Wealth Management advise against.

When it comes to growing your money, time is your greatest ally. The sooner you start saving, the better. Small savings, incremental and consistent, can have a powerful impact on your investment and is a practical and realistic means of achieving financial independence.

Please get in touch with your wealth manager if you need assistance with setting up a debit order or if you would like to increase your existing debit order. We are here to assist you with financial goal-setting and can help you stay on track in achieving your goals.