How much should you save?

There is no hard and fast rule for how much you should save and this figure will differ from person to person. However, it goes without saying that saving one percent of your income is better than saving nothing while saving two percent beats saving only one.

Most personal finance gurus advise putting away at least 10 percent of your gross income, while others suggest a figure closer to 20 percent and beyond, depending on your age and a host of other factors.

If you've never saved before, start with one percent and work your way up to 10 percent and more.

Remember, the sooner you start the better — if you can only save one percent now it's better to do so than to wait until you can save more.

Why 'pay yourself first'?

If you don't get into the habit of saving now, you'll always find a reason to postpone. You need a new car; you want to go to Mozambique with your friends; you're not making enough money... The list is endless — you have got to start paying yourself before you pay everyone else!

Here are some reasons why paying yourself first is a great idea:

• It's damn near impossible to save if you don't pay yourself first.

• By paying yourself first you're prioritising saving. You are more important than Vodacom, the landlord or that sushi place around the corner.

• Paying yourself first encourages good financial habits. You'll habitually save money before you can even rationalise spending it.

Why saving is important

By paying yourself first you'll manage to break the habit of spending everything you earn. Even if you can't afford to save much, you'll have cultivated an enduring habit of saving. Saving will improve the quality of your own life and the lives of those you love.

Here are some other reasons why it's imperative to start saving:

• Sh*t happens. By paying yourself first you'll create a buffer against life's inevitable emergencies (click here to learn how to set up an emergency fund).

• Nowadays you need a deposit before a bank will grant you a home loan. Depending on your credit score, and a host of other factors, most banks now require 10 percent at the very least while in May 2009 the average deposit as a percentage of purchase price was 22.6 percent.

• Only six percent of retirees are financially independent in retirement. Pay yourself first and you won't be poor, sick and destitute in retirement. Need more encouragement? Read 'Retiring on a shoestring'.

• Dreams are good friends. Some dreams can become reality, if you stop dreaming and start saving.

Set it up so that the money is taken from your salary the moment you receive it. By doing so you won't even know it was there. This is your first and most important bill of the month.

Here's what you can do to make the whole process automatic and as painless as possible:

• Debit order. This is an instruction to your bank to take a specified amount from your account and pay it into another account. Take note, however, that if you want to amend this agreement you have to deal with the company (e.g. the investment- or insurance company) directly and not your bank.

• Ask your company. Some businesses will subtract a percentage of your paycheque to hand to a third party if you give them permission to do so.

• Automatic transfers into bank accounts. Open a fixed deposit or money market account at a bank and arrange for automatic transfers into this account.

You'll want the money you save to work for you and earn some 'real' growth. Real growth refers to the yield your savings earn over and above inflation (presently around eight percent). In other words, you need returns of eight percent or more for your money not to lose its buying power.

Here are some of the options you might want to consider:

• Savings account. This is not a good option as you earn very little interest on money in a normal savings account.

• Money market accounts, fixed deposits and notice accounts. These accounts offer much better interest rates than savings accounts. A money market account is a great place to save for emergencies as your money is usually available instantly. Fixed deposits and notice accounts are good for those of us who would rather not have easy access to our savings.

  These accounts are great for short- to medium-term savings

• Endowment policies. This is a great way to save for a particular goal like an overseas vacation or a deposit on a house. An endowment policy has a fixed period, usually anything from five to 15 years or more.

• Retirement annuities. This is by far the best way to save for retirement. If you don't have retirement benefits at work, get an RA or you'll probably die poor.

  Retirement annuities are long-term investments and you can only access your savings when you're 55 or older.

  What makes RAs great is that your contributions are tax deductable up to a point.

• Unit trusts are easy ways to invest in shares (click here to learn what a unit trust is). Most people don't know much about which shares to buy or when to sell. This is where unit trusts come in as your portfolio is actively handled on your behalf by professionals.

• Shares. No other asset class outperforms shares over the long term and they are your best bet for beating inflation. However, shares are extremely volatile (their value rises and falls dramatically over the short to medium term) and therefore not a good place to save if you're going to need the money in the next five years or less.

  Know this: you're losing out if you're investing for the long term and you don't own shares.

  An easy and cheap way to gain entry into the stock market is to invest in an index tracker like Satrix that tracks the top forty stocks on the Johannesburg Stock Exchange (click here to learn more about Satrix).

• Property , over the long term, usually beats inflation. Be reminded, however, that in South Africa's case property has lagged shares as an investment. Investing in property is often hard work as you have to deal with maintenance issues, non-paying tenants and a multitude of other things you won't face as an investor in stocks.

  You also need to consider Capital Gains Tax (click here to learn what this is) on the profit when you sell.

On page three: How to stick to 'paying yourself first'...

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