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Delay your savings plan at your peril

28 July 2008 Gareth Stokes

You have two strong allies when it comes to making provision for your retirement: time and the power of compound interest. If you use these forces to your best advantage you are guaranteed of victory in the battle for a comfortable retirement. If not, you’ll join the throngs who have to rely on family, friends, or (even worse) the state for help in their golden years.

Until recently South Africans have been largely in the dark when it comes to the importance of a long-term financial plan. For many years everyone relied on the popular defined benefit pension fund. As long as you committed yourself to a lifetime’s labour for a single company you were practically guaranteed an adequate retirement. But all that has changed.

The shift to defined contribution redefined the savings environment

The majority of today’s retirement fund arrangements have moved from the traditional defined benefit to a defined contribution arrangement. This moves the financial liability of providing funds in retirement from the company to the individual. You can no longer rely on the company to make up any shortfalls in the retirement fund pot. We can certainly argue the case that the move to defined contribution retirement plans has made savers more aware of the link between what they put in to their savings plan and what they ultimately get out.

But this realisation hasn’t improved South Africa’s net savings position. Statistics reveal that the country is in a worse ‘savings’ position today than any time in the last three decades. In 1994 we were saving 2.5% of after-tax disposable income… By 2001 this ratio had dropped to 0.8%. Someone earning R100 000 of after-tax disposable income per annum was only putting away R800 (R67 per month) for a rainy day. Since 2007 South Africa has become a nation of dis-savers. What this means is even though existing savings are wholly inadequate, South Africans are now dipping into the pool to the tune of 0.7% each year instead of adding to it.

Right now the savings environment is pretty shocking. We are loaded with more debt than at any time in the country’s history. The Reserve Bank estimates that total debt to income has reached 78%; while the debt servicing ratio (the amount of after-tax disposable income needed to repay your loans) has crept up to an alarming 11.8%. Steep food & fuel price inflation and rising interest rates are simply adding to the consumer burden making it impossible to save!

Getting the youngsters to the front line

It’s quite clear that something has to be done. And that’s why the South African Savings Institute (SASI) has launched a campaign called Teach Children to Save (TCTS). The campaign is being rolled out to coincide with national savings month (July) and is part of an international pilot programme aimed at improving financial literacy among the world’s youth. SASI has support from various domestic partners including the Banking Association of South Africa, Operation Hope, Citi Bank and various financial sector associations.

The main drive of the project will take place on 25 July 2008 when “volunteer bankers and financial services practitioners will deliver a one-hour session on why saving is important, how to design a budget, recognise needs and wants and how interest makes money grow,” to grade 4 to 7 learners in schools around the country. The aim: to convert these youngsters into life-long savers!

The financial services industry is at the forefront of various initiatives to ‘educate’ South Africans on the importance of saving for retirement. Industry associations like the South African Insurance Association (SAIA) spend large amounts on product education in poor communities. The Association of Collective Investments (ACI) has tackled the problem from a different angle. Their Fundisa Fund offers incentives to parents (and interested parties) to save money for a child’s education.

Start saving today

Where the SASI programme differs from existing savings education initiatives is in its focus on savings principles rather than certain product classes. There is no need for a sales and marketing lean to its presentations and activities. Instead it can focus on convincing the wealthy to re-direct their expenditure from ‘wants’ to needs and educating the poorer communities about the importance of making provision for the future.

The best time to start saving is today. It makes sense for your own future and for that of the country. In the words of Elias Masilela, chairman of the SA Savings Institute: “We implore every South African to ride the rainbow and reach – in our lifetime – the pot of gold!”

Editor’s thoughts:
School was quite some time ago and we battle to remember everything we were taught over those 12 formative years. But we know that finance and investment hardly ever got a mention. So while we matriculated knowing that Jan van Riebeek landed in the Cape in 1652 we had little knowledge about how to save for retirement. Can you remember receiving any basic financial literacy training at school – and would it have helped? Add your comments below, or send them to gareth@fanews.co.za

Comments

Added by Dave Smith, 30 Jul 2008
i am not saying that this picture is incorrect, but who gave the stats. I hope not the Govt. (not reliable) ask Investec. This is something that is sorely lacking in schools though and should be taught as a subject.
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Added by RS, 28 Jul 2008
The funniest thing is that even today in schools here in SA financial literacy is not taught. Sure there might be the slightest modicum of reference to it in our curriculum but it’s hardly worth mentioning, not only that but the teachers who are mandated with teaching this modicum of financial literacy are not overtly literate themselves. Entrepreneurship is taught to some degree in primary school but it is dropped the minute you enter high school in deference to the really important stuff like geography and history (funny though, you’d think it would form a large part of ‘history’, but it doesn’t). Not only that but when suggesting some form of financial literacy or entrepreneurial (even extra curricula) courses to most schools, they are spurned as the job of the school is to get the kids through the current curricula and to get a good pass mark at the end of the year. What happens to these kids after they leave school is not really a concern of the schools themselves. Universities are generally just postponing the problem – more educated students but still with no financial life skills (oh, apart from how to brew cheap pineapple beer to make your allowance last longer). For the youngsters emerging from a proper education system for the first time it’s even more dire – they come from generations of people who have not had exposure to financial skills and now they are being hired into fairly well paid positions with the financial literacy skills of hamsters. The result – not only don’t they understand saving but they are in debt up to their necks by the end of their first year of employment. Then of course there’s the 70% of the unemployed population who are between the ages of 15 and 35 – financial literacy doesn’t get a look in until there is some financial generation! Our company brought financial literacy and entrepreneurial skills courses – aimed at 13 – 25 year olds – to South Africa at the beginning of the year and we are aiming to at least start to make a change in the local situation.
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