The household is the cornerstone of our economy

Gareth Stokes, FAnews Online Editor

The South African consumer accounts for approximately two thirds of the country’s gross domestic product (GDP). It makes sense, therefore, that the vibrancy and sustainability of our economic performance hinges on the state of household financial wellness

A report running to 27 pages is often lost on today’s busy executive, so the collaborators set about producing a single measure (or number) to provide a quick and easy “peek” at household financial wellness too. The result – launched in conjunction with the aforementioned report – is the Momentum / UNISA Household Financial Wellness Index. Both were presented to media and industry stakeholders at a function held in Johannesburg, 19 April 2012. The index will provide financial services professionals and consumers with a meaningful overview to better understand and interpret the current state of financial wellness of South African households.

A comprehensive measure

“There is currently no similar index in South Africa which is constructed on a holistic approach to determine the comprehensive financial wellness across all households,” observed Bernadene de Clerq, Head: Personal Finance Research Unit at UNISA. “Other indices have only applied limited criteria and are thus not comparable.” The index is a blend of five types of capital including physical, asset, human, environmental and social capital.

The physical capital component (touched on in the opening paragraphs) reflects each household’s capacity to generate income by considering salaries and wages, social grants and other forms of income offset against household consumption. Asset capital derives from the household balance sheet and refers specifically to the difference between assets (what households own) and liabilities (what they owe). With the financial components taken care of the index is fleshed out with measures of human capital, or the human development stage of the household. Education was chosen as a proxy for this form of capital and the index considers the highest education level of a household member. The final two capital categories consider house ownership, the structure of the dwelling and the social environment. “We have built the index around an intricate definition of financial wellness – with each component influencing the other,” observed De Clerq.

Four categories of financial wellness

Given the complex inputs to the equation, how does one go about making sense of the result? To simplify matters the index implies one of four categories of financial wellness, indicated by an index scores. These categories include:

1. Anchored Unwell (index score 0 to <30): The household is deeply rooted in an Unwell position with very little chance of being lifted from such position without major outside assistance.

2. Drifting Unwell (30 to <60): The household is not deemed to be entrenched in an Unwell position, but its position is considered unstable. Negative circumstances can easily cause the household to slip to the Anchored Unwell position, whereas positive influence can lift it to the Drifting Well position.

3. Drifting Well (60 to <80): As is the case with the Drifting Unwell household, the Drifting Well household’s situation is unstable. It can easily become Drifting Unwell, but may also move toward the Anchored Well position with assistance.

4. Anchored Well (80 to 100): The household is financially well.

How South African households measure up

What can we learn about South African households’ financial wellness from the first ever Momentum / UNISA Household Financial Wellness Index? If we apply a blanket calculation across the entire population of households we achieve a score of 59.35 (at the top end of the Drifting Unwell category). The more we unpack this number the more we learn about the country’s unique household footprint. For example – only 4.8% of households fall in the Anchored Unwell category compared to 48.5% Drifting Unwell, 30.5% Drifting Well and 16.2% Anchored Well.

Financial services companies will benefit by segmenting the result even further and focusing on subsets of data based on education and employment statistics. It is clear, for example, that the level of financial wellness improves dramatically in households with higher levels of education. Household with partially completed primary (42 points) or secondary education (51 points) fall predominantly in the Drifting Unwell category whereas households with completed secondary (61 points) or tertiary (78 points) education fit the Drifting Well category. The index results confirm that education, employment and age have a substantial impact on a household’s financial wellness.

One of the more worrying results is the pressure that retirement places on households. Many households approach the Anchored Well index level as they near retirement, but fail to cross into financially secure territory due to inadequate retirement provisioning.

A challenge to financial advisors

“The index is a multi-dimensional body of research providing insight regarding financial wellness based on physical capital, human capital, social capital, environmental capital and asset capital – ensuring a holistic approach,” concluded De Clerq. “This provides valuable insight to policymakers and financial services providers regarding the overall financial wellness of households and potential areas which might need intervention.”

Editor’s thoughts: The Momentum / UNISA Household Financial Wellness Index reveals something many of us already know, that the majority of local households are drifting in an un-well financial position. What role can the financial advisor play in improving the financial wellbeing of households over time? Add your comment below, or send it to gareth@fanews.co.za