Case Study: Peter, Joe and their Finances

Saving is essential yet it is frightful how many people delay this process. As the end of the month

draws near, there never seems to be enough money left over to start saving towards your holiday or

children’s education, let alone retirement.

FNB Savings & Investments takes a look at how two similar young men, in different financial

situations are able to apply some sound principles when it comes to saving.

Peter and Joe recently graduated after completing their BCom degrees. They were fortunate in that

both of them found jobs quite easily and, although they work in very different industries, they earn

similar salaries each month.

From the outset these two young guys seem very similar. Peter however had to face a few more

obstacles during his varsity days compared to Joe.

A bit about Peter

Peter had a wonderful upbringing with a very supportive family but, like many others, his parents

were unable to pay for his university studies. Peter, being the determined young man that he is,

started working as a waiter after matriculating and managed to secure a student loan to fund his

studies.

Three years of hard work paid off and he extended his loan to complete his honours degree. While

studying, Peter was diligent in paying his monthly instalments on his student loan, bringing down the

amount consistently, but is still left with a sizable debt at the start of his working career.

Peter decided that he wanted to go to Europe to visit some friends so he has also started to save a

little bit of money every month to turn that dream into a reality.

Who is Joe

Joe has always been an achiever. He was very fortunate in that his family were able to financially

support him and pay for his university studies.

Varsity was very different for Joe, who went out with friends in his spare time. His parents also

funded his honours degree when he decided to continue his studies.

Although Joe worked at his dad’s shop every weekend, he enjoyed spending his money and didn’t

see the need to save at his current young age. He is also planning on taking a trip to America to visit

his brother later this year. He has just received his new credit card which he plans to use to pay for

the trip.

Where to from here?

Many of us left university in the same position as Peter, wishing we could be Joe - no debt to worry

about and a credit card with a limit that can turn our dreams into reality. When it comes to saving

though, Peter’s financial situation has taught him some valuable lessons...

What can Peter apply from his situation when it comes to saving?

Reap the rewards of the compounding effect

The earlier you start to save the more you earn, due to the impact of compound interest. Compound

interest is when you earn interest on interest, so the longer your money is invested the greater the

amount at the end. Peter started saving R200 a month four years ago, at 4.25% interest with a 10%

escalation in his savings contribution each year. That means that by the end of this year Peter will

have saved just over R16,000 – enough to cover his trip overseas.

You need to be disciplined

Starting to save early does not only assist in growing your money (through the compounding effect),

but it also teaches you discipline towards saving. Starting to save is always tough as it means that

many times there is something else you have to forego in order to save. If you apply disciplined

saving principles from the start, saving becomes something you do naturally instead of something

that you dread doing.

Identify your Savings Goals

It is important that you know what you are saving towards. Every savings goal will require a different

savings vehicle. If, for example, you are saving for a rainy day, you need to keep your money in an

account where you have immediate access to it. If you are planning a trip overseas in a few years

time, you can take a savings or investment product with a fixed term which typically has a higher

interest rate associated with it.

Get comfort from understanding “Good Debt” vs “Bad Debt”

Debt is a reality, so don’t be discouraged if you find yourself with having to repay debt. All debt

however is not necessarily “bad debt”. For example, Peter was able to go to university because of his

student loan; this has resulted in him getting a job and being able to earn income. Student debt also

generally has a lower interest rate, which means lower monthly repayments. Because Peter has

never missed a repayment he has been able to create a positive credit record which will further

assist him in the future when he buys a new house or a car. It is important that you continue to pay

“good debt” off, but don’t forget to save while doing so.

What should Joe be weary of?

Never drawing up a budget

Joe’s fortunate situation meant that he didn’t ever really have to worry about money. His job meant

that he had enough to pay for the things he needed and, if he didn’t have the money, he borrowed it

from his parents. Joe also never had any debt that he had to repay and so his money was his to

spend as he liked. It is important that Joe quickly learns the importance of budgeting. A budget

highlights not only the money you earn, but also how you plan on spending it. Ensure that all your

non-negotiable expenses, such as your rent as well as your savings, are catered for before spending

on extras like dinners out.

Saving what is left over

Very often saving is something that people do with money that is left over at the end of every

month. Saving regularly is essential not only to achieve short term goals but also to be able to

provide for longer term goals such as your retirement. Always ‘Pay Yourself First’. Once your budget

is complete and you know how much you can save every month, set up a scheduled transfer that will

automatically transfer your money into your savings or investment account – that way you are not

tempted to spend that money on something else.

Starting too late

It is easy to procrastinate when it comes to saving. The longer it takes to save, the less you benefit

from the compounding effect and the harder it is to get into the discipline of saving. Joe has a year

to save towards his trip. Even though he can save more than Peter, R500 each month, he will still

save much less for his trip - only R6,000 compared to the R16,000 Peter saved. If Joe had saved the

R500 from the start, he would have saved just over R40,000.

Funding goals with credit

Access to credit unfortunately makes it easy to spend more than you can afford. You want to go

overseas, like Joe, so you swipe your card and your flights are instantaneously booked. Your trip is

amazing but you have to pay if off over the next 6 to 12 months. Personal loans and credit cards

generally charge a higher interest than other forms of credit, like a home loan. Instead of using

credit to fund goals, rather save up and pay for it from the start. This way you truly get to enjoy

realising your goal and the only reminder of your experience are the photos and memories and not

the lingering credit statements.