We are well into 2011. Hopefully, some financial goals were among your new year’s resolutions. If not, there is still time to make some before too many of the year's pay days have passed you by.
While it is no use setting a goal that is unrealistic given your budget, it may be worth making some spending sacrifices to help achieve your goal.
To help you with the give-and-take exercise, you can use some of the online budgeting tools considered in this column previously and some savings goal calculators that can establish how much you need to save to reach a particular goal, or how much you will have after a set period if you save a particular amount.
Before you start, do some homework on what your goal will cost to ensure that when you reach your savings target, it is indeed adequate.
One of the most difficult parts of the exercise is estimating the return you will earn. Most of the calculators leave this call to you without providing much guidance.
If you are saving in a bank savings product, a visit to the interest rates section of the bank’s website may help to establish the rate paid on that product. Most banks’ websites have a “Rates and fees” or a “Pricing and rates” section.
If you plan to invest in a fixed deposit with a set interest rate for a term, your calculation should be relatively easy. But if the rate you will earn will fluctuate, you will not be able to predict how it will change over your savings term.
Currently, interest rates are low, and the general consensus is that we are at or near the bottom of the interest rate cycle, although rates may stay there for a while, so using the current rates will not see you counting chickens that potentially will not hatch, and, should rates rise, the additional returns you will earn will be a surprise on the upside.
If you plan to save in a unit trust investment, such as a balanced fund or a general equity fund, you will also have to make a difficult call on what returns you can expect. Ask the investment house or your financial adviser to help you set a realistic rate based on long-term averages and not on the good, probably unrepeatable, returns we have had over the past decade in an extended bull market.
Not many of the savings goal calculators we found take inflation into account, but if you have chosen an inflation-beating investment, such as a balanced or an equity fund, the inflation increase in your goal amount over your investment term should be offset by your returns, and so as long as you make a reasonable estimate of the average real (after-inflation) growth, your calculations should not be too far off the mark in the end.
Here is a sample of the more useful calculators:
Bank savings goal calculators
The bank calculators offer simple, quick goal calculators. On Absa’s website, for example, look for the “Calculate” link at the top of the home page, www.absa.co.za. Then look in the “Investment” section for the “Desired future amount” calculator. This will tell you how much you need to save each month to achieve your savings goal within a certain period at a particular interest rate.
The “Affordable monthly investment value” calculator allows you to set an affordable monthly savings target, and it will tell you how much you will have saved after a particular period.
The “Capital investment with future contributions” calculator allows you to enter an amount already saved, future monthly contributions, the interest rate and the term. It also delivers not only a total investment amount, but shows you how much interest you will earn over the period.
Standard Bank’s website has a savings product wizard, www.standardbank.co.za/Savings_investment_Calcs/index.html# with two legs: “Get the right account for you” and “Savings account calculators”. The latter offers you the option to work out how much you will have saved after a certain period, how much you need to save to reach a goal and how long you will need to save to reach a particular goal.
First National Bank offers a similar product wizard on its site (www.fnb.co.za) and in both you have to enter the applicable interest rates. However, at least on Standard Bank’s site there is a link to the current rates in the “Get the right account for you” section.
The Standard Bank savings account calculators provide for an annual escalation in your monthly savings amount, which is useful if your savings are pushing your budget to the limit, but you may be able to afford to increase them in the years ahead as your earnings increase.
Stanlib’s goal calculator
The savings goal calculator on Stanlib’s website, www.stanlib.com/Individuals/knowledgecentre/Pages/Savingforagoal.aspx, allows you to determine how much to save as a lump sum or as a regular monthly or annual amount and to escalate this amount, but it does not give you the option of both an initial deposit and a regular contribution. This will require two calculations.
The calculator asks you to provide an estimated inflation rate and then tells you what the purchasing power of your goal amount is in today’s terms. This seems a bit upside-down, and it would be more useful if the calculator converted a goal amount in today’s rands into an inflation-adjusted future amount and set the savings contributions accordingly.
Old Mutual’s dream goal calculator
Old Mutual’s InvestRight calculator does just that, allowing you to see how much your goal will require in the future at an assumed long-term inflation rate of five percent a year.
The calculator is at www.oldmutual.co.za/personal/financial-planning-and-advice/old-mutual-savings-monitor/savings-tips-and-tools/savings-calculator.aspx. At the bottom of this page, click on “Launch investright”. After an introductory tale, choose “Dream goal” from the four options. Name your goal and fill in how much it will cost. Then fill in your investment time horizon, how much you have already saved – you can enter a zero here if you are just beginning to save – and how much you can afford to save each month.
The calculator then shows what your savings will achieve in a low-growth and a high-growth investment, using a range of six to 10 percent a year, and what you need to save to achieve your inflation-adjusted goal amount.
The inflation rate and the growth rate assumptions are set by Old Mutual and cannot be altered.
Once you have done your initial calculation, you can tweak the amount you save or the period for which you save to see how this will help achieve your goal amount.
SanlamConnect’s site
Sanlam’s do-it-yourself financial planning site, SanlamConnect (www.sanlamconnect.co.za), enables you to see a range of outcomes on a savings goal. These simulations are part of a financial planning tool that includes your life assurance and retirement needs. However, you can also use it to help you plan for a savings goal alone, although your savings target date must be at least five years hence, so it is not suitable for shorter-term goals.
To use the site, you need to register and set a password, and fill in a few personal details in the “My profile” section. You need all these if you are going to use the site to plan and invest in Sanlam’s products. Otherwise, you do not need to supply all the details requested. Filling in your income and expenses is useful, though, because this will help the site to identify if your savings plan is affordable.
Use the “Journey director” to get through the steps. You have to “Identify your needs” and “Prioritise your needs”, before detailing your “Existing financial products”.
You can either enter the details of your existing savings products or ask Sanlam to identify them for you, even if they are with other institutions. For Sanlam to search for these products, you need to give it permission to do so using your identity number. We did not test this facility, but Sanlam warns that while it should take a few minutes, it could take up to 24 hours.
Clicking on “Recommendation” gives you an analysis of your existing savings and whether they will achieve your goal. If not, it also gives you a recommendation to meet your need, stating how much you will need to save at a particular risk level and with either no increase in contributions or an inflation-linked one. Five risk levels from low (10 percent allocation to equities) to high (up to 75 percent in equities) are used, each with its own return assumptions.
Click on the “What-if scenarios” to see a graph showing the recommendations and the likely outcomes, depending on the actual investment returns. This shows how likely it is that you will achieve your goal, given the risks taken. Then, on a second graph, you can change the investment amount, alternate between a level or an inflation-linked increase in your savings contributions, change the level of risk and the investment period, and/or add a one-off investment to see what impact any of these scenarios will have on your savings goal illustrated in graphical form.
Once the planning is in place, the really hard part starts: keeping to your savings plan. Hopefully, setting a manageable goal and seeing your progress to it will be motivation enough to keep you going throughout your investment term.
This article was first published in the 1st quarter 2011 edition of Personal Finance magazine.