Tricked you! Make savings a game
People are complicated, as soon as you add money into the equation it becomes unfathomable. Understanding how your brain behaves around the folding stuff can help you hang onto that hard earned wealth. I have always been fascinated by the addictive nature of ‘games’ and whether or not they have any relevance to real life. As you might imagine, theses have been written on just this topic. One clear reason that games become successful is that if they ‘reward’ the player – particularly if it is isn’t predictable. Those ‘rewards’ can usually be traded in for something ‘rare’ or ‘cool’ in the game. What if that notion can translate into savings? FNB’s short-lived ‘millionaire a month’ campaign dipped it’s toe in that pond (before being closed down as it was defined as ‘gambling’). What is the difference between ‘gaming’ and ‘gambling’? The line is often blurred, especially with online bingo and poker sites – but basically gaming is win-win. Gambling, not so much.
Let’s see if we can apply this to saving. One of the most important cornerstones to your wealth is having a ‘safety net’ that you can fall back on when ‘life’ happens. This should equal at least three months after tax earnings (before deductions like medical aid, group benefits). That emergency fund you hear so much about, but 90% of people ignore falling back on credit cards, personal loans or equity in their bond when ‘life happens’
Do you think of money from different sources differently? Do you spend money like your annual bonus or tax refund differently to your salary? This is very common – we are inclined to put our money into ‘buckets’ and attribute them with emotions that would do an imaginary friend proud. Lotto winnings are usually spent quickly and often frivolously. Money from a salary is seen as ‘hard earned’ and far more thought and care is taken. Inheritances are often protected at all costs, especially if they come in the form of shares (even if the shares are dogs that should be sold off and better performing shares bought. Perhaps we can take advantage of this behavioural finance trait, and make it work for us for a change.
Step one – watch how you’re spending your money. If you aren’t in the habit of doing that regularly it can be a scary prospect. Assuming the ostrich position is much more preferable. There is one big problem with having your head in the sand, something can creep up on you and your exposed rear. More often than not it is a building debt mountain that is threatening to collapse. There is a very useful free app called 22seven (IOS and Android). it will put all your bank accounts, savings etc in one place in real time. You can, and should, set budget limits for all your expenses. Once you have categorised an expense it ‘remembers it’ so within a couple of months the budget almost runs by itself. This is way easier and more fun than sitting down with your old excel budget and your bank statement or slips. Once you have your spending ‘in your face’ like this, believe me, you’ll find wastage.
So… You have found R1000 a month you can ‘save’ – what should you do?
Logically, and looking at it purely from a financial perspective, the best thing you can do is put it against your most expensive debit – usually a credit card. (Bonds are usually the cheapest). Only one problem – it is far too easy to access. One weak moment and it’s gone. Credit cards have evolved. You now get cheque and debit cards that have most of the same properties – can be used online, are Visa or Mastercard, have no swipe charges etc – they just don’t put you into debt (with interest rates that start at 18%). If you really want to be savvy just have one (if your debit/cheque card is Visa, pick a Mastercard – it makes a difference when you’re travelling abroad). Remove the credit card from your wallet and ‘ice’ it or give it to a friend to ‘hold’ for you. Now pay it down to zero.
For most of us, savings have to be put out of sight, and not available at one swipe of your credit or debit card. if you don’t already have an emergency fund open a savings account like Capitec where you get a decent interest from R1 with low fees. Link it to your main account to make transfers but then ‘freeze’ your savings card. Literally. Seal it up (or you’ll lose the CSV) and freeze it in a block of ice at the bottom of the freezer, along with the login details.
Many of my clients ask for endowments. No! I hate them. They are expensive and, quite frankly, their uses are limited to trusts and high net worth individuals who have a potential CGT problem. They aren’t ‘tax-free’. They are taxed at 30% within the fund, without taking any of your rebates into account. The new Tax Free Savings Accounts are making endowments obsolete. Read HERE if you want to find out more, or contact Dawn HERE.
The ‘savings pocket’ ( or muliple pockets in some cases) that most of the banks have introduced is a good place to start. Make sure that the transfers between accounts is free, and you’re getting a decent interest rate from R1 (use Capitec as a benchmark). Now schedule an amount to quietly slip into there on payday – and keep pushing the amount up. As you get a grip on your expense using 22seven, when you kill an unnecessary expense, add it to the scheduled transfer. Now… Every time you get a refund or little lumpsum, stick a bit more in there – round up to the nearest R100 or R1000 so you get to the next ‘level’. Make it a game! The brain loves games. I started doing this a little while back, and I now slip the odd hundred in there several times a week. My ‘points’ in this game are growing nicely! Those pockets or buckets can be named, mine is called Emma.
Once you have your ‘safety-net’ in place, open another pocket and keep playing (many banks will let you have up to 5 of these – they understand buckets… Maybe. Funny wunch, bankers). You can then build up funds that you can transfer into unit trusts or ETFs once they reach the minimum lumpsum. It’s like ‘buying’ your reward with your accumulated points in a game. But it’s real.
Tell me how it goes – or if you have any other ideas!
Action: Get a grip on your daily expenses with an app like 22seven, blow-up the wastage, find some savings and put away your ‘winnings’. a Tax Free Savings Account is a good place to start – assuming your emergency fund is full.
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Author Dawn Ridler