Set your 2016 financial goals

Most individuals and households will experience increased pressure on their finances in 2016. A weak exchange rate, the impact of droughts on food prices as well as continued increases in the general cost of living will see inflation rising. As a result, interest rates will continue to rise and the cost of household debt will increase – resulting in further pressure on cash flows. How will South Africans be able to make provision for retirement savings under these circumstances? A good point of departure when it comes to managing one’s personal finances is to set smart objectives.

When setting objectives, one needs to be specific in terms of what you want to achieve, i.e. how much do I need to save over what period of time? In order to determine how much you will be able to save on a regular basis, one needs to set up a budget that contains sufficient detail about the income you are expected to earn and your monthly expense. It is very important to differentiate between what you need and what you want when it comes to managing your expenses.

The objectives should be measurable and quantifiable in order to be able to track your progress over time. If you are able to monitor your progress on a regular basis you will be able to make the necessary adjustments in order to get you back on track again. Your checkpoints become like beacons showing you the way to your planned financial destination.

When setting objectives, one needs to make sure that your goal is achievable. In order to make your financial dreams come true, you must consider the time you need to invest for and the investment risk you need to take in order to achieve the necessary returns. You must also consider the impact that a change in interest rates or an unexpected expense might have on your ability to save. Building up an emergency savings reserve will allow you to avoid having to abandon your financial plan for an extended period of time.

In order to make sure that your financial dream becomes a reality one needs to be realistic. If the time to retirement is running out fast, one needs to accept that what you hope for and what the most likely outcome is expected to be is most likely not aligned.

It is therefore, important to set a target return that can be achieved over a specific period of time – based on a sound investment strategy. The return that needs to be achieved needs to take into consideration inflation, which will erode the purchasing power of your savings over time. Many investment products exist with different return and risk profiles that investors may choose from.

Debt limits the ability of most South Africans to save sufficiently for retirement. In order to avoid the debt trap they first need to start repaying existing short-term debt like personal loans and clothing card debt, as this is the most expensive form of debt. As the debt reduces and the household’s cash flow starts to improve the discipline of saving needs to become a priority. The best form of saving for many households is to pay off more than what is required on their mortgage in order to reduce the interest paid on your home loan over time.

As household debt payments decrease the focus should be shifted to investing any surplus money available at the end of the month. Exchange traded funds

(also known as ETFs) and collective investment schemes are flexible and well-regulated investment instruments that can help to meet the long-term challenge of beating inflation by investing in local and offshore asset classes such as property, bonds and equities. Investments in these vehicles can be made from as little as R50 per month. Tax-free saving products that allow up to R30 000 of savings per individual per annum provides an additional incentive for households to make proper provision for retirement.

At Absa we offer some of these products that might help you win in the long run. These include Absa’s Tax-Free Investment Account, our Tax-Free Savings Account and our Tax-Free Savings Account ETFs.