It makes sense to save more – but
Yesterday Liberty Group took the opportunity to further support “government’s efforts to encourage a savings culture among South Africans” as it released its 2007 results. They correctly observed that “One of the biggest issues facing the South African economy is the critically low rate of national savings.” Liberty also confirmed its commitment to a number of government projects to address poverty and the poor general savings levels in South Africa. These include “improving the cost effectiveness and consumer protection provided by contractual savings products and influencing the reshaping of the life assurance industry.”
Finance Minister Trevor Manuel was also at pains to stress the importance of savings during his Budget Speech earlier this year. “Inflation and our own lack of savings increase our vulnerability to financial turbulence,” said Manuel. He also noted that one of the biggest challenges to South Africa was the nation’s current account deficit. At more than 7% of GDP we have to attract foreign investments to ‘balance’ the country’s books. And “our ability to continue boosting investment to drive long term growth depends on increasing savings and expanding exports.”
Finding spare cash is increasingly difficult
But finding spare cash in today’s tough economic conditions is not going to be easy. We experienced a similar cash squeeze in 1998 when interest rates soared from 16.5% to 24.5% in record time. Back then mortgages and car payments went through the roof; but we cannot remember a similar struggle with fuel and food. Today it seems we’re being attacked from every side.
The savings rate in the country is low for a reason. The average consumer is struggling with unserviceable levels of debt. In a recent economic outlook presentation, MD of Old Mutual Unit Trusts, Anil Thakersee showed some slides which illustrate the difficulties facing the South African consumer. Household debt as a percentage of disposable income has gone up in a straight line since 2003 and now stands at almost 80%. That’s the highest it’s ever been. At the same time the household debt servicing burden is on the rise too. Although not as severe as the mid-80s and late-90s the ratio of approximately 10% is cause for concern.
Shrinking disposable incomes make it more difficult to fund savings activities too. There’s no doubt the series of interest rate increases in recent times have hit consumers hard. We’ve experienced nine interest rates hikes in three waves since the middle of 2006. And the third wave looks set to do the most damage.
Traditional savings accounts don’t provide spectacular returns
Even though higher interest rate environments make for better interest rate returns, traditional savings accounts hardly shoot the lights out. It’s also difficult to invest savings for the short-term without incurring unnecessary additional charges. Once again we need to appeal to the banks to take a more careful look at the savings products they offer. Today’s short-term cash accounts are certainly more flexible than the traditional call, notice and fixed deposit accounts that were popular a decade ago. But investors are still unsure of how much it costs them to move funds to and from the account. And obviously a transaction account is not the best way for an ill-disciplined individual to save.
Government recently entered the fray with its RSA Retail Bond savings product. Investors can purchase bonds in increments of R1 000 up to a maximum of R1m per individual investor. The bond terms are two, three or five years and attract a fixed interest rate for the life of the investment. Interest can be paid out every six months or re-invested. The current rates on these products are 9.5%, 9.75% and 10.25% respectively. But these products are probably only more suited to investors with small amounts to save. In a rising interest rate environment you’re probably going to be best served in a variable rate savings product. You want to lock down the five year rate just as the interest rate cycle turns…
Equities remain the best long-term bet
We’ll finish with a point that’s been raised time and time again. Over the long-term the equity markets provide by far the best return. Analysts agree that the JSE has provided annual compound returns in the region of 18% over the last 50 years. And there’s no way you’re going to beat those returns in cash or bonds.
Investors don’t have to be stock market geniuses to take advantage of this trend. There are hundreds of unit trust funds that offer access to the stock market. Your financial adviser will be able to ensure that you’re invested in the right unit trust to meet your long-term financial requirements.
Editor’s thoughts: Perhaps the only positive consequence of higher interest rates is that investors earn more interest income on their short-term savings. Of course, in real terms the return remains unimpressive – with the interest earned on the best money market accounts only just beating inflation. Are you holding more of your portfolio in cash since the latest round of interest rate hikes? Send your comments to [email protected], or add them below.
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