Category Retirement
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Did you know that July is National Savings Month?

18 July 2012 Ryan Adams ? Glacier by Sanlam
Ryan Adams ? Glacier by Sanlam

Ryan Adams ? Glacier by Sanlam

National Savings Month is an awareness campaign run by the South African Savings Institute (SASI) and was launched in April 2001 by the then Finance Minister, Trevor Manuel. SASI is a non-profit organisation that aims to cultivate an environment of saving

The most notable objectives promoted by the campaign include debating key aspects of saving, raising awareness of the benefits of short, medium and long term planning as well as getting the public to start saving.

Saving affects each and every household to varying degrees and has a spill-over effect on the economy too. I am quite sure many of us have been exposed, through the media, to the fact that our savings rate is far too low and that too large a portion of our disposable income is used to service debt. This may be problematic if you spend more than you earn and in order to “make ends meet” you use a credit card or overdraft facility which charges a high interest rate. This cost is not always understood at the outset because of the minimum payment (in the case of a credit card) required. It may seem that you are making the required payments but additional interest is being levied on the outstanding balance. Groceries which were purchased a few months ago are still being paid off because of the unsettled outstanding balance. In an extreme scenario this could cause greater difficulty because the cycle of debt envelopes you to the point where you may need another debt facility to pay off your existing debts.

The cycle of debt deprives us of the ability to live with financial freedom because we are unable to save or invest for the future. Most of our disposable income goes towards servicing debt and not towards securing our financial future. The graph below indicates the debt/disposable income ratio over time.
 (Click on image to enlarge)

Source: INET

From the graph we see that the proportion of disposable income used to service debt has increased substantially from the middle of 2002 (52.5%) to the end of 2011 (75.9%). What this means is that if your monthly income is R100, R75.90 would go towards servicing debt. In addition to their debt burden, the cost of living has also risen significantly to a point where it is becoming difficult for households to “make ends meet”.

South African consumers have and are benefitting from structurally lower interest rates since our markets became competitive on a global front again. This translates to a cheaper cost of borrowing for consumers compared with what they had experienced in the late 1980’s to early and mid-1990’s. What is also evident is that there has been some improvement over the last few years in reducing the proportion of debt-to-disposable income. The ratio has declined from a peak of 82.3% (2008) to 75.9% currently. Despite interest rates being as low as they have been, households have been unable to make significant inroads to reducing their debt levels. This, together with high unemployment, is probably the most significant impediment to improving our savings rate. The need for instant gratification when purchasing an item on credit needs to be weighed up against the opportunity cost of deferring your savings plan and ultimately paying a much higher price (when one includes interest) than the initial shelf price. By satisfying your wants today you could be hindering your ability to save enough for your retirement or children’s education in the future.

In addressing the objectives of SASI in developing a good savings culture the chance is that we could all benefit in some way. One example is that if your debt burden is reduced, you could contribute more towards your retirement saving or perhaps implement a saving/investment plan to fund your children’s education. This reduces your reliance on the state for your pension (which will probably be insufficient) and financial institutions whom you may need to borrow from in order to fund larger expenses.

According to the March 2012 SARB Quarterly Bulletin, gross savings as a percentage of GDP stood at 16.3%. To put this into context, 13 African countries had higher savings rates than South Africa[i]. There are a number of reasons why South Africa’s savings rate is too low. This includes high unemployment (25.2% in Q1 2012) but more crucially a lack of proper financial education. Reducing unemployment is a long term goal but an improvement in financial education can be implemented sooner, preferably at an earlier age.

There are numerous benefits for creating an environment that fosters a savings culture where both the individual and the broader economy can gain. This can only be achieved if all stakeholders understand the potential long term benefits thereof. You can benefit from compounding (allowing your money to work for you). Using a simple example let’s compare two investments. Firstly, assume a lump sum investment of R10 000 that was made 20 years ago, that earned on average a 10% return per annum and secondly a R20 000 investment made 10 years ago, earning the same return as the first. In the first investment the initial investment grew to R67 275 and the second R51 875. This illustrates the benefit of time and the power of compounding, something one should never forget. If you start early you don’t have to invest as much on a monthly basis because you have the benefit of compounding over a longer time horizon.

Another benefit to the individual is when the economy suffers a downturn and you have a source of funds you can use to supplement your income without having to go into debt. Just as you can benefit from the compounding effect of savings the reverse is also true. In general the cost (interest) of debt is greater than a rate you could earn on your savings. Therefore if you have unsettled debt the interest that will be levied against this can increase if all your debt is not paid off. In effect you will be paying interest on interest.

Thirdly, you place less of a reliance on the state and family when you retire. Finally you may also be able to negotiate a better loan rate when you have a sizeable deposit. There are also benefits that extend to the economy too. For example, the government could potentially pay less towards social grants and rather increase investments into the economy which could reduce unemployment.

What can you do to improve your personal savings status? I’ve alluded to it in previous paragraphs. It is essential to avoid (if possible) or pay outstanding balances on your debt with the highest interest soonest. Draw up a monthly budget and distinguish between ‘needs’ and ‘wants’ and stick to it. Build into your budget a savings plan that is debited every month. Don’t only save what is left at the end of the month because you can always find a reason to spend excess funds. It’s important to define your savings goal for the different stages of your life. Therefore it is important to have a clear plan for your short, medium and long term financial needs. Partnering with a financial planner who understands this can go a long way to ensure that you are on the correct path as early as possible or to improve your current situation.

[1] World Economic Forum’s 2011/2012 Global Competitiveness Report

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