SA’s financial mindset gradually shifting towards saving

Elize Botha, Managing Director of Old Mutual Unit Trusts.

While harsh economic realities continue to put downward pressure on South Africans’ ability to conserve money for the future, these same realities do appear to be positively impacting the general attitude held towards saving. This is according to the 2017 Old Mutual Savings and Investment Monitor, which shows an encouraging increase in the percentage of people who identified themselves as “savers” as opposed to “spenders”.

While it’s encouraging to see that South Africans haven’t reduced the percentage of their income allocated to savings (15%), despite facing tough economic times over the past three years, Elize Botha, Managing Director of Old Mutual Unit Trusts, is concerned that only 2% of South Africans currently saving are investing their money in an equity-based investment vehicle that will deliver growth in the long-term.

According to the Monitor, South Africans were more likely to save money by building a positive balance on their credit card (5%), give money to their friends or family for safe keeping (3%) or keep cash under their mattress or in their wallet (14%), than investing in an equity-based collective scheme investment vehicle such as a Unit Trust or exchange-traded fund (ETF).

“By saving through an investment vehicle, South Africans will have a significantly increased chance of growing their wealth and reaching their ultimate financial goals,” says Botha. She, explains, “While bank accounts and some informal saving vehicles are seldom able to deliver real growth required to beat inflation, equity-based investment vehicles have the capacity to protect the buying power of money over the long-term.”

Quoting the Monitor, Botha says it’s alarming that 40% of South Africans have no formal savings at all. “A huge percentage of people (70%) are using informal savings vehicles such as stokvels to save for rainy-day emergencies. While some saving is better than none, saving in a stokvel is not a good investment strategy for the long-term.”

Using the Monitor as a benchmark, Botha outlines how investors can sustainably allocate their household income to meet both their immediate obligations and long-term financial objectives.

“Spending 62% of a salary on living expenses, such as groceries, rent, water, cell phones and so on, is too high.” says Botha.

Another area of concern that Botha mentions is the average level of debt. “The Monitor reports that 16% of household income is going towards debt repayments, such as personal loans, store accounts and credit cards. This is not sustainable and needs to be addressed if we hope to reach our financial goals.”

Instead, Botha recommends that South Africans follow the simple 50/30/20 rule when budgeting and allocating money to saving and investments. “50% of your income should go to your living expenses, which would include essentials and ‘non negotiables’ such as insurance, rent, school fees (if applicable) and so on. 30%of your income should be used for flexible spending, which could include DSTV, internet, gym fees, and other miscellaneous negotiable expenses.

“Lastly, allocate 20% to your formal savings and investments,” says Botha. “Consider, depending on your lifestage, allocating at least 15% of your income to equity-based retirement vehicles such as your retirement annuity and 5% towards a money market account to meet your medium-term goals, or act as an emergency fund. Remember, one should always have at least three months’ salary saved up for those ‘rain day’ emergencies.”

Botha also urges South Africans to repay debt as quickly as possible and to do their best to avoid short-term loans, or using their credit card to purchase depreciating assets such a motor cars, furniture and appliances. “In order to become debt-free as quickly as possible, I would also recommend using 20-30% of one’s income to pay off debt such as clothing accounts, personal loans and credit card repayments.

“Our financial aspirations, like each of us, are unique,” concludes Botha. “With a wide variety of collective scheme investment vehicles on the market, there is a unit trust out there that is designed not only to beat inflation over the long term, but also to meet both your medium and long-term financial goals.”