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Saving too little is saving yourself poor

30 November 2022 Nirdev Desai, Head of Sales at PSG Wealth

It is a well-known fact that South Africans in general have a poor savings culture. According to Trading Economics, South Africa’s household savings rate is 0.3% of household income.

In contrast the pinnacle of consumer spending culture, the US, is on a household savings rate of 5.4%, India is on 11.4%, and Portugal, which is probably close to SA in terms of average income and expenditure, is on 11.3%.

According to Nirdev Desai, Head of Sales at PSG Wealth, South Africans with reasonable incomes don’t save and they underestimate the amount they will need to retire comfortably. For example, if you want to retire on the average South African salary of R22 500 per month for the rest of your life, you will need to have R7 million in capital in today’s terms at age 65.

“Planning is the corner stone in achieving financial freedom and one can draw on the analogy of planning for a long road trip. It requires you to ensure you have the right vehicle, sufficient fuel in reserve and appropriate maintenance to get you there. Just like financial freedom requires the right planning, sufficient savings, sufficient reserves and continuous maintenance of your financial plan.

Importantly, don’t save yourself poor by saving too little, having too little inflation-beating investments and too much debt. The worst thing you can do is jeopardise any savings potential by getting into too much debt. “An interesting reality is that for our size of economy, we get the most incredible cars for sale here, one just has to drive around Cape Town or Johannesburg to see this. South Africans want the best. And from a lending perspective, the limits for spending on a car or a house on an individual’s income is very generous,” Desai explains.

In South Africa the debt limits only apply on the required debt repayment to the bank, not the capital outstanding and not the extraneous maintenance costs. For example, for the average non-farm employee in SA, a R22 5000 salary will allow for a R5 000 repayment on a vehicle. This vehicle will on average cost between R5 000 and R10 000 a month in maintenance and driving costs (depending on milage), and will be worth 40% after 5 years.

With the remaining money after tax and after medical aid income, there is very little left for rent, let alone savings for retirement or discretionary investments. For many South Africans when the day comes that they retire, get retrenched, or worse, pass away and leave their family with their debt, there’ll be nothing left in their savings pot.

“Just because the bank says you can spend 20% on your car, and 30% on your home loan repayments, doesn’t mean that you must,” Desai continues.

“Spend a year or two seeing what you can actually spend towards these payments by renting or living with your parents and paying reduced rent. Crucially, make sure you have capacity for interest rate increases in your budgeting scenarios – particularly in the current interest hike cycle.”

Desai points out that the point of departure should be ensuring that you have a good financial planner to guide you to the right vehicle for your investment journey and help coach you around temptations such as that new super hatchback, or the dream house you’ve just seen listed online.

“It is important to ensure that you have flexibility to invest in growth assets, which is one sure way to earn returns above inflation. Listed equities typically return 6% to 7 % above inflation over the long-term. Furthermore, with time, these real returns compound dramatically. Over a 10-year period on average you will have doubled your lump sum capital compared to investing in cash.”

Desai does stress that investors should be aware of the volatility that growth assets will bring and that one should expect that you need 10 years to reliably get the returns that equities deliver over the longer term.

• “By moving in and out of equity markets and between different funds invested in equity markets, you are almost guaranteed to destroy wealth. In aggregate, investors don’t achieve the average of market returns and optimistically achieve only 70% of market returns due to the impact of emotional decisions and poor market timing,” he elaborates.

Ultimately, one must diversify your portfolio with well-constructed, time-managed investment cash flow strategies. And most importantly, advice is key.

If someone is committed to saving, they are on a good wicket. The hardest thing to do, is to start. Preferably start early, following these simple rules of thumb:

• Save a minimum of 15% of your income towards retirement, ensuring you have a margin of safety in your disposable income.
• Save more if you’re behind on your retirement goals (start saving early!).
• Manage your expenses and spending tightly.

“Importantly, save over and above what you’re saving for retirement in discretionary savings. This is critical for many of us as we now suddenly see interest rates causing higher loan repayment rates, for example. Also, keep in mind that next time the interest rates come down, you don’t get tempted to create more debt. Savings should be a lifelong endeavour, and one should get better at it, and pass this knowledge on to the next generation - there’s no better way than to live by example.” Desai concludes.

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