Lately there has been a lot of attention given to the financial plight of South Africans, particularly when it comes to over indebtedness. Homes and cars are being repossessed at alarming rates and job losses are a reality. While these issues are real and need to be addressed, we also need to look at the other effects the credit crunch has had on our cash strapped society — retirement planning, or rather the lack of it.

Over indebtedness and a lack of basic savings and investing knowledge is a dangerous combination. One of the main reasons people become over indebted is that they do not know how to save, so they rely on credit. An effective savings strategy can help people avoid the debt trap (Read 'Free yourself from debt').

A successful savings strategy consists of four elements: a short-, medium-, and long term plan and an emergency fund (Read 'Saving for a rainy day')…

Short term: three months to three years

Short term savings can be defined as anything that you would usually use store or bank credit cards for. This may include new furniture, a holiday, a big ticket item like a sound system or a set of high end golf clubs. In other words, luxury purchases.

Saving for luxury purchases instead of financing them achieves two things — no interest payments and if anything happens to your income flow you can put a hold on the purchase of the item. When you buy items on credit you are committed to the payment.

The products that suit short term savings plans are bank savings accounts, call accounts, fixed deposits and money market accounts. In other words, the investments have to be flexible and relatively easy to access.

You should avoid investments that are affected by market fluctuations for short term objectives as the value may be compromised if you need to access the funds suddenly.

Lifestyle purchases should never be financed as they depreciate and financing depreciating assets saps wealth and prevents saving.

Medium term: three years to five years

A medium term strategy can be adopted for more expensive purchases. This could be a child's university education, the deposit on a home, a wedding, home renovations or a new car.

Spend some time carefully planning how much you will need to save and then set up a systematic savings plan (a debit order off your bank account).

The type of products you can look at are unit trusts, money market accounts, longer term fixed deposits, endowments and government retail bonds.

Unit trusts and endowments should be used for a five year plan, because they are affected by equity markets so you would need to give them more time to grow. These investments are still fairly flexible and easy to access, with the exception of an endowment (you will be committed to the full term that you agree to). They are useful if you tend to be undisciplined, because you sign a contract to pay a certain amount each month.

The rest can be cashed in on an as need basis.

Long term: six years and longer

A long term plan is mainly for retirement, but you may want to save for a child's education from the day they are born (not a bad idea).

A long term savings plan for retirement should include a structured and tax effective product like a retirement annuity. You can also consider a mix of stocks and unit trusts.

Retirement planning is not something that you can do without the help of an expert. There are many products on the market to suit your needs and its important to use a qualified financial planner to help you choose the right strategy and mix of products.

If you want to save for a child's education you can look at unit trusts, equities or a specially structured education policy.

A property purchase could also be considered a long term investment because, once the bond is paid off, it could provide an inflation linked source of income.

Retirement products should be considered no go areas, in other words, untouchable. You need to save 15 percent of your salary for at least 25 years to ensure that you have a sustainable retirement.

Go to page two for the fourth element of a successful savings plan: an emergency fund.

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