Debt and savings are like oil and water

South Africans have narrowly missed another assault on their budgets with the repo rate remaining unchanged at 5.5%. Gill Marcus and other economists have raised the flag for months that interest rate hikes are on the cards and while the one was dodged, there are more to come. While South Africans have enjoyed the benefit of low interest rates for the past five years, most have not taken advantage of this to reduce their exposure to debt and increase their savings. If anything, their appetite for debt has grown even stronger.

 

The most troubling aspect of the South Africans’ over-reliance on credit is that they have become dependent on expensive personal loans to fund their lifestyles. While the majority of people who make use of personal loans are low income earners, statistics show that the biggest demand has come from individuals earning in excess of R15 000 per month. In the last quarter of 2012, 41% of loans granted were approved in this segment. Before the 2008 credit crunch, people in the higher earning brackets used their bonds for short-term financing but after the credit crunch, banks tightened their lending practices to the point where people were forced to seek alternative funding. This is when the demand for personal loans skyrocketed.

 

Head of Financial Wellness for Momentum, Estelle Scholtz-Mare, says, "South Africans are still paying 76% of their income on debt repayment which does not augur well for savings. Living so close to the edge of their incomes means that they are highly vulnerable to the negative impact that increasing interest rates will have on their budgets. If you add this to increasing food inflation running at about five or six per cent - and increasing fuel and utilities costs – then you can say that many of us are teetering on the edge of insolvency”.

 

According to statistics from the National Credit Regulator, South Africans are in trouble. In December 2012 the National Credit Regulator reported that of the almost R160 billion unsecured credit that was outstanding; 24% of these loans were in arrears of 30 days or more and 16% of borrowers had missed payments for 90 days or more. The bottom line is that a massive 47% of credit clients have impaired records. This means they have effectively been kicked out of the credit market, which will no doubt have a knock-on effect in terms of the economy, especially when it comes to retirement funding.

 

Scholtz-Mare says Momentum has conducted extensive research to uncover the barriers to saving. "While people know they must save - and indeed list retirement savings as a priority - they fail to implement a structured and dedicated plan.”

 

She says consumers readily admit that they are focused on the ‘here and now’ and get sidetracked by immediate financial needs that are not always necessities. "Many individuals acknowledge that their debt commitments eat up the majority of their incomes which, in turn, leaves them with very little savings. They also claim that they have no clue as to how to calculate their retirement needs and are relying on their company pension plans. This is a risky strategy because research has shown that often individuals spend their retirement payouts instead of reinvesting them when switching jobs. Thus, the majority of individuals will not have accumulated enough savings.

 

"Momentum is fully aware that these are fundamental issues affecting South Africans’ ability to become financially well and we are constantly developing tools and resources to assist them. That’s why Momentum recently launched a comprehensive set of solutions in the form of an online budget tool, calculators and self-assessment questionnaires.

 

"We realise from our research that continued education must form the cornerstone of our financial wellness initiatives. This means that we are not only focusing on savings, but are looking at the client as a whole and addressing the behavioural aspects of financial wellness. We fully understand that there is no quick fix – it will take commitment from consumers, regulators and service providers to get debt and savings to an acceptable and healthy level,” concludes Scholtz-Mare.