Saving now will save you later
July 2015 has been labelled National Savings Month by the South African Savings Institute. The goal is to ignite a much-needed savings mentality in a country where the figures on saving are shocking. South Africans are some of the worst savers in the world according to the South African Reserve Bank, with the average household debt sitting at 75% of disposable income. In his Budget speech, Finance Minister Nhlanhla Nene pointed out that around 45% of credit-active consumers have impaired credit records. The problem is that there isn’t a culture around savings and this has to be addressed in order to help consumers protect themselves and build the economy.
“Over the last few decades we have seen a sharp decline in domestic savings from over 20% as a percentage of Gross Domestic Profit (GDP) between 1960 and the 1980s, dipping to the late teens in the 1990s and dropping as low as 13.2% in 2012,” says René Grobler, head of Investec Cash Investments. “Against our international peers, measured on average between 1975 and 2012, South Africa’s savings rate is close to the bottom of the pile, with China at 42%, Russia at 28% and South Africa at 19%. This is significant at a macro-economic level, because there is a direct link between savings and economic growth.”
Kevin Lings, economist at Stanlib adds: “A key component in achieving healthy and sustainable economic growth is the level of fixed investment activity. In the first quarter of 2015, South Africa’s level of fixed investment spending represented only 20.3% of GDP. For the South African economy to grow in the 4% to 6% range on a consistent basis, the ration of fixed investment spending to GDP would certainly have to approach 25% of GDP on a sustained basis.”
A robust savings culture not only plays a role in the economy, but it also ensures that the consumer is protected in the event of a life-changing situation or emergency. Unexpected events are almost a given, and without savings the consumer is often left facing a mountain of debt and no clear pathway to clearing it.
“We live in a consumerist society where we like to show how much money we have, rather than save for those emergencies,” says Rowan Burger, managing executive: large corporate segments at MMI Holdings, Momentum and Metropolitan. “It is far easier to get a loan than start an investment. It also means that we have to forgo the immediate gratification of spending now rather than setting aside for a rainy day. Part of the reason for this is also that the finance world is seen as intimidating and overly complex, and this is something that the industry is working to improve.”
Burger hits the nail on the head when he points out the ease of credit over savings. Instead of a culture of save, here there is a culture of spend with many South Africans accessing credit facilities that they cannot afford. Many cannot pay their monthly instalments and overextend themselves, which has obvious consequences.
“The benefits of delayed gratification associated with savings and investing isn’t taught or visualised for our population at a young age, which is exactly when this type of education should start,” says Annabel Dallamore, chief executive of Stock Shop, an organisation designed to provide people with the tools they need to control their finances. “Individuals who save consistently or save a portion of their money no matter how small, are pivotally important to the long-term sustainability of the health of people and the economy. Financially empowered individuals are less of a burden on our system, which leads to self-sufficient retirees and potential entrepreneurs who can start businesses and provide employment.”
It is in retirement that a lack of savings makes itself felt. According to the 2013 Sanlam Benchmark Survey 51% of South African pensioners cannot make ends meet and a third do not have the funds they need to cover their second-biggest expense – medical.
“Many surveys indicate that less than 10% of South Africans retire comfortably,” says Burger. “This is because people cash in retirement savings to cover short-term debt rather than stay the course. You need 40 years of savings at 15% of your salary to secure a comfortable retirement.”
It looks bleak and when the amounts are tallied for the potential retiree who has no savings or plans, the situation is dire.
“I like saying the figure R1 410 out loud,” says Schalk Louw, Portfolio Manager at PSG Wealth. “This is the government pension grant for people older than 60 years of age who do not have pension funds. Usually when people hear this figure they are shocked, as they know they cannot live off this grant alone. Only then do they realise the importance of saving.”
There are a number of initiatives available to the consumer that allows for them to start saving and providing for their future, regardless of how far down the road they may be. Old Mutual’s 22seven, founded by its chief executive Christo Davel, allows people to invest their money tax-free and over their mobile phone, and Standard Bank has an array of tax-free savings products that can be structured to suit different needs. There are also RSA Retail Bonds and initiatives by other financial institutions and organisations such as Stock Shop that focus on helping people to save.
“Saving is about self-empowerment,” says Davel. “When you save, not only do you feel that you can do things, but you are materially more able to do things because you can afford them. Ultimately, that really gives you independence and the ability to do things you want without having to rely on anyone or anything else.”
A lot of work has to be done to ignite a culture of savings in South Africa, to push the mentality that saving money is essential to the future. Consumers must be shown that it is easy, how it provides them with control over their money and how the short-term gain is not worth the long-term loss.
“The message that needs to come across is that successful savings does not depend on how much you save, but rather on how soon you start,” says Bev van Nijkerk, Professional Market Segment specialist at Sanlam. “To achieve this, industry and government and the regulatory authorities need to enable an environment in which people are informed and educated about the opportunities for saving, and are enabled to budget properly so that they live within their means and learn to prioritise better.”