Cappuccinos, manicures or the occasional movie night aside, the first step in shaping your financial future lies in addressing the three expenses that could be absorbing over 60% of your disposable income, says Yanga Nozibele, Investment Associate at Cannon Asset Managers.

According to the most recent Statistics South Africa Living Conditions Survey, the three major costs weighing on South Africans’ budgets are housing and utilities (32.6%), transport (16.3%), and food and non-alcoholic beverages (12.9%). Together, these three costs account for some 61.8% of all household expenditure.

For many, this amount is likely to be even greater when considering additional spending on furnishings and household maintenance, and miscellaneous services such as home and vehicle insurance.

By contrast, South Africa’s household savings rate, or the percentage of disposable income that is put towards savings, reached -0.1% in January this year. In other words, for every R100 earned, the average person is spending R100.10, meaning that most consumers are not only failing to save any money at all, but in fact are continuing to live beyond their means and falling into debt, adds Nozibele.

Chart 1: South Africa’s average household consumption expenditure

Chart 1
*Figures rounded.
Source: Statistics South Africa (2017)

“Given their enormous influence on budgets, finding ways to reduce or minimise these expenses could therefore mean the difference between living a life burdened by debt or becoming financially independent and retiring comfortably,” she explains.

“For example, just three years ago I was in a position where I had no meaningful assets or investments to my name, and was essentially living hand-to-mouth. Despite it having been a few years since my career had kicked off, I had acquired nothing other than a car, which was actually a liability, and some needless debt that I had taken out when I was young and naïve. And all that I was doing with my salary was paying for expensive rent and petrol costs.

“Then one day, I was talking to a friend who had found themselves in a similar position, and we realised that if we downgraded our apartments and moved to a cheaper neighbourhood for a year or two, we would be able to save enough money to pay off our debt and save towards a deposit on our own home.

“So, the following month I moved to small flat in a more affordable neighbourhood, where I was able to save an extra R6,000 in rent every month. I also made a number of other changes to my lifestyle, such as leaving my car parked at work and catching a taxi instead, saving an additional R1,200 in transport costs.

“Two years later, I was completely debt free, and had saved enough to make a down payment on house, as well as to buy some decent furniture. Sometimes, just small sacrifices snowball into large gains.”

The difference that R1,000 can make

To demonstrate the enormous impact that even small lifestyle changes can make, Nozibele offers the example of a 25-year old who saves an extra R1,000 every month by opting for a cheaper flat, a more affordable car or by reducing their grocery spending, consistently investing this money each month instead of living a more lavish lifestyle.

Being financially savvy, this Supersaver also understands that in order to maintain the same buying power of their money over time, they will need to increase their savings amount every year in line with inflation. The Supersaver therefore boosts their monthly contribution each year to keep pace with an assumed inflation rate of 5% per annum.

By the time of their retirement at 65 years, they would have contributed a total of R1.48 million. However, assuming that the Supersaver’s investment achieves an inflation-adjusted return of 8.5% every year after fees, their regular monthly savings would have grown to more than R7.55 million in today’s value, thanks to the potent combination of compounding and time.

Compounding occurs when your capital and the growth achieved on your capital earn additional interest.

Chart 2: The power of compounding

Chart 2
Source: Cannon Asset Managers (2019)

“This example demonstrates the significance of making even small changes to your lifestyle – now just imagine the impact that saving even more could have. So, the next time you are faced with the choice between an affordable or a more upmarket car, think about whether your future self would thank you for choosing the expensive car over a few million rand extra in your savings bucket.”

Simple tips to turn spending into saving

As July is Savings Month, Nozibele offers the following simple tips for others looking to cut back on their living expenses, and turn spending into saving:

1. Housing

  • If your rent is high, consider moving to a smaller home or a more affordable neighbourhood, or even simply settling for a home with less upmarket furnishings. You could also sub-let a room or rent your spare room out on Airbnb for some extra income.
  • Weigh your options carefully before buying – it may be more cost-effective to rent for a while longer and save towards a larger deposit in order to reduce the size of your mortgage.
  • If you’ve decided to buy a property, shop around between different providers for a good interest rate on your mortgage.

2. Transport

  • Depending on where you live, you could consider cycling to work. This will not only reduce your travel expenses, but potentially has some great health benefits.
  • If you’re not too keen on cycling, or if this is not an option for you, you could explore carpooling with colleagues or friends who live and work in the same areas as you. Alternatively, you could consider using public transport if available. .
  • If your car is a fuel-guzzler, weigh the costs of switching to a more fuel-efficient vehicle. You will also be able to save money by keeping your current vehicle even after you’ve paid it off, and by revisiting and comparing premiums on your car insurance every year.

3. Food

  • Shop around between stores to compare prices and consider buying house brands rather than upmarket or “brand-name” labels.
  • Where possible, buy non-perishable goods in bulk – this may offer a hefty discount to buying single items.
  • Make cooking a regular habit, as eating out at restaurants and ordering take-away quickly adds up.

“We all deserve to spoil ourselves every now and then, otherwise life would become very dull and boring. That said, Savings Month is the perfect time to take a hard look at your budget and re-evaluate where you may be overspending. With the power of time and compounding, the earlier you can cut back on spending and start saving and investing instead, the better for you and your wealth.”

For more information on this topic, read our 3 powerful tips to boost your savings