South Africa’s savings culture – or lack of it – is well-documented.
Research carried out during July last year to coincide with Savings Month in South Africa showed that over two-thirds of South Africans do not save.
Although the main reason given by 37.8 percent of these South Africans is that their salary is too low to cover all of their expenses, it is representative of a broader challenge in the country. “About 70 percent of people in South Africa are using their income to service debt. The debt cycle in the country is less than ideal, and South Africans are over-indebted,” says Claire Klassen, Consumer Financial Education Specialist at Momentum Metropolitan Holdings.
In fact, DebtBusters’ data shows that people applying for debt counselling with take-home pay of over R20 000 per month are spending over 60 percent of their monthly net income to service debt and have a persistently high debt-to-income ratio of over 130 percent.
Persistently high levels of debt and low savings rates are compounded by a general lack of understanding around financial products, concepts and risks.
This is why the National Treasury introduced the National Consumer Financial Education Strategy in 2013. The aim is to enhance financial literacy and arm South African consumers with access to information and financial education programmes that will equip them with the skills and resources to make informed financial decisions. It is underpinned by four pillars: financial control, financial planning, product choice and financial knowledge.
A holistic approach to meeting aspirations through financial literacy
“A focus on building greater financial literacy and capability is also matched by accurate information on financial products, reflecting the coaching role that today’s financial advisers need to play,” says Klassen. “Essentially, this means that financial advisers are no longer able to just sell or push products – they are obliged to carry out a financial needs analysis, improve financial literacy and take a holistic approach based on the individual’s financial goals and aspirations.”
Particularly critical to target, according to the National Consumer Financial Education Strategy, is the country’s young people. It shows that young South Africans between 16 and 19 had the highest need for consumer financial education programmes and initiatives in financial control, financial planning and product choice. South Africans between 20 and 29 had the highest need for initiatives in financial control – which means managing their current expenditure.
“Against this backdrop, this is why the Momentum Metropolitan Consumer Financial Education programmes focus on addressing the financial education needs in our youth and those about to start or just started in their working professions,” says Klassen.
“We offer high school programmes and programmes aimed at participants at TVET (Technical and Vocational Education and Training) colleges, universities and Work Readiness programme partners and community organisations.”
Klassen’s top tips to help South Africans, particularly young South Africans, save for a better tomorrow are:
1. Prepare a budget tracking real income versus expenses, and cut out unnecessary expenditure: a budget will allow you to see at a glance what you are spending your money on, whether it is a necessary expense or a luxury, and where you can cut costs to save the recommended minimum of at least 10 percent of your salary. As an example, if you regularly buy fast food or use food delivery services, cut that expense out and rather buy groceries to cook at home. The money saved can go towards savings.
2. Don’t buy on credit, if possible: most people can’t afford to pay for big ticket items like a car or property cash – and you need a credit record showing your payment history on current and previous debt to purchase these items – however, where possible, pay cash for smaller items such as laptops and household appliances because the interest on credit will push the price up. A case in point: purchasing a laptop in cash versus on credit. Just say, for instance, the cash price is R2 500. If you choose to buy it on credit of R135 per month for 24 months, you will end up paying R3 240 in total, adding R740 to the initial cash price. This translates to 29.6 percent extra.
3. Be smart about paying off debt – start with the smallest amount you owe, and work your way to paying off the bigger debt: this will make it easier to tackle debt head on, and make it more manageable to pay off. The more you continue to pay off your debt, the better your interest rate will be. Always face your debt, don’t ignore it and wait until it has been handed over for debt collection. If, however, it has been handed over, be proactive and negotiate a payment plan with the creditor or debt collector.
4. Embrace the power of compound interest: compound interest, which is essentially interest on interest, has the potential to grow your savings exponentially. The earlier you start saving, the more power compound interest will have on the eventual lump sum you aim to achieve. Take as an example a saving of R400 per month (without increasing the premium) over a 40-year period. If you do not touch the money and the average interest earned is 10 percent per annum, you invest R192 000 and save R2 336 889.
5. Think of short-, medium- and long-term goals and have different ‘pockets’ of savings for each: these pockets can include emergency savings, holidays, car and house, and retirement. Everyone has unique needs and aspirations, so your savings should reflect that. You can use your banking app to easily create these different pockets, but you should make it difficult to spend the money – so separate your savings from your day-to-day money.
“Saving is absolutely critical because we do not know what the future holds or what the realities of life will bring us, so we should prepare ourselves as best we can by arming ourselves with financial knowledge and saving for various eventualities,” says Klassen.
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