Three Essential Tips to Boost your Savings Ratio

Your savings ratio is a key indicator of your financial health, representing the percentage of your income that you set aside as savings. To calculate it, divide your savings by your total income, then multiply that number by 100 to get a percentage. For instance, if you earn R20,000 a month and save R2,000, your savings ratio is 10%. Increasing this ratio is crucial for achieving financial stability and growth. Here are three essential tips to help you make a meaningful impact on your savings ratio.

1. Avoid impulse buying

Impulse buying can severely hinder your ability to save. Marketers often create a false sense of urgency or make products seem like must-have solutions to all your problems, leading you to make unnecessary purchases. These tactics exploit the fear of missing out (FOMO) and the allure of the latest trends. For example, seeing an online ad for a limited-time discount on a trendy gadget can make you feel pressured to buy it immediately, even if you don’t need it.

To resist impulse buying:

• Distinguish needs from wants: Deliberately differentiate between essential items (needs) and non-essential items (wants). Needs include basics like food, housing, and healthcare, whereas wants are items that provide short-term satisfaction. For instance, a new smartphone might be a want if your current one is functioning perfectly well.
• Implement a waiting period: Before purchasing non-essential items, impose a waiting period, such as 24 hours or even a week. This gives you time to evaluate if the purchase is necessary or just a fleeting desire. For example, if you see a stylish jacket on sale, wait for a few days before buying it. Often, the initial excitement will fade, and you will realise you don’t need it.
• Set financial goals: Establish clear financial goals to motivate yourself to save rather than spend. When tempted by an impulsive purchase, remind yourself how the money could better serve your financial objectives, such as saving for a home, an emergency fund, or a vacation. For instance, every time you resist an impulse purchase, you could transfer the equivalent amount into a savings account dedicated to your goal.

2. Pay yourself first

“Paying yourself first” is a cornerstone principal of personal finance. It involves saving a portion of your income before spending on other expenses. This practice ensures that saving is prioritised and helps prevent the common pitfall of spending first and saving whatever is left, which often turns out to be little or nothing.

To practice paying yourself first:

• Automate savings: Arrange for automatic transfers from your checking account to your savings account each month. This guarantees consistent saving without relying on your memory or willpower. For example, if you receive your paycheck on the 1st of every month, set up an automatic transfer of a fixed amount or percentage to your savings account on the same day.
• Include savings in your budget: Treat savings as a non-negotiable expense in your budget, just like rent or groceries. This reframes saving as a priority. For instance, if you earn R20,000 a month, allocate R2,000 (10%) to savings right away and plan your monthly expenses around the remaining R18,000.
• Monitor your spending: Keep track of your expenditures to identify areas where you can cut back and redirect those funds into savings. For example, if you notice that you are spending R500 a month on dining out, consider cooking more at home and putting the saved money into your savings account.

3. Identify and minimise addictions

Addictions, whether shopping, gambling, alcohol, or caffeine, can significantly impact your finances. They turn non-essential wants into perceived needs, inflating your expenses and disrupting your budget. For example, a daily coffee shop habit might seem harmless, but at R30 per cup, it can add up to nearly R1,000 a month.

To manage this issue:

• Recognise the problem: Acknowledge the existence of any addiction. Denial can prevent you from taking the necessary steps to regain control. For instance, if you find yourself frequently overspending on online shopping, admit that it is a problem rather than rationalising or justifying each purchase.
• Seek professional help: Consider consulting a therapist or joining a support group to address the addiction. Financial counsellors can also help manage money-related addictions. For example, if gambling is affecting your finances, seek out resources like Gamblers Anonymous or financial counselling services.
• Find healthier alternatives: Engage in healthier activities that do not strain your finances. For example, replace shopping with hobbies like reading, exercising, or volunteering. If you’re trying to cut back on alcohol, find social activities that don’t involve drinking, such as hiking or joining a sports club.

Enhancing your savings ratio requires intentional actions and a shift in perspective. By avoiding impulse buying, paying yourself first, and addressing addictions, you can significantly increase your monthly savings. These strategies not only improve your financial health, but also contribute to overall well-being by reducing stress and promoting a balanced lifestyle. Start today by reassessing your financial habits and implementing these tips to see a meaningful impact on your savings ratio.