The wealthier South Africans are, the less likely they are to save.
They are also more likely to incur debt. This is in contrast with European countries where higher-income earners save more for retirement.
This is according to the consumer vulnerability index — a score to measure the level of financial vulnerability — released by the Fin-Mark Trust.
The number one reason people feel financially vulnerable is that they do not have savings. The survey interviewed 976 consumers, as well as representatives from municipalities, banks, retailers and the motor industry. But even though people worry about a lack of savings, they do little about it.
About 35% of respondents said the reason they did not save was because they simply could not afford to. Although this may be true of low-income earners, Professor Carel van Aardt, research director at theBureau of Market Research at Unisa, who conducted the study on behalf of the trust, said this complaint often came from higher-income earners.
Van Aardt said it is not a lack of money but rather the consumptiondriven lifestyle of higher-income earners, coupled with poor financial literacy, that results in South Africa’s poor savings culture.
Global trends show that people who earn more spend more on buying homes and cars, but they also save more. Yet the same is not true of South Africans.
In Sweden, for example, the average person saves about 30% of his or her salary for retirement.
In South Africa employed people tend to save only about 10% into a pension fund and often cash this in when changing jobs.
‘Europeans don’t have big houses and cars and save more for emergencies and retirement. This is not happening in South Africa,†said Van Aardt.
Typically, higher-income households tend to buy a new car every two years and upgrade to new homes every five to 10 years, rather than reduce their debt, he said.
What is perhaps most concerning is that South Africans find themselves deeply indebted in their 40s and 50s — a time when they should be debt-free and saving their additional income for retirement.
According to the research, the financial vulnerability of higherincome-households comes down to a very basic principle: South Africans do not budget.
Despite being educated, Van Aardt said, higher-income earners are surprisingly illiterate financially when it comes to managing their day-to-day personal finances.
Budgeting and calculating the real cost of taking on debt is not something most people consider before making a purchase.
Do the simple maths
Behavioural finance experts have shown that people are more likely to spend future income than current savings.
For example, people would more readily take on debt to buy a car for R200 000 — which would end up costing them R300 000 with interest — than they would draw on savings of R200 000 to buy the same car. This suggests that the less you save the more you rely on debt that you find easier to spend.
The problem is that people seldom do the calculations before they commit to spending the money.
A good example is an advert on the radio by Renault that dismisses the idea of saving up for a car. ‘If you take R1 and wait five decades that will be worth R50,†says the advert. It continues: ‘Why wait? You can drive a Renault today, which is far more exciting.â€
Apart from the fact that there should be a law against advocating debt over savings, the real calculations speak for themselves.
If you bought a car on hire purchase for R200 000, you would have repayments of about R4 100 a month for the next six years. The car would cost you close to R300 000.
But if you chose to save R4 100 for six years growing at about 10%, you would have R409 000 in the bank, enough to buy two cars.
That is what Professor Carel van Aardt, research director at the Bureau of Market Research at Unisa, means when he talks about financial literacy.
Learning from our parents
Those of us in our 30s and 40s may find our parents’ words coming back to haunt us.
Our parents experienced the protracted bear market of the 1970s, when high inflation and low economic growth were similar to the economic climate today.
Our parents learned that the only way they could provide for a secure retirement was not through above-average increases in asset prices, but by saving a significant portion of their monthly income.
They looked with dismay at the generation they had spawned; a generation that had become used to high equity and property growth rates to fill the gap where savings had fallen short.
Our parents told us to save and they told us that when joining a company, we should look not just at the take-home pay but to select the employer that would provide good pension and medical benefits.
They told us not to cash in our retirement funds to buy houses and cars. We pretty much ignored them.
But now our generation is about to see history repeat itself as we enter, in all likelihood, 10 years of lacklustre asset growth.
If we had any savings accumulated, they are worth less than they were two years ago and no one is talking about double-digit real growth from our assets for a long time to come.
We need to go back to the fundamentals of preparing for retirement, which is quite simply saving a significant proportion of our income and cutting our expenses.
We will learn our parents’ lessons the hard way. And by the time our children are in their 20s, they will ignore our lessons also because the inevitable asset bubble will by then have returned.