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Saving vs investing: why they are two very different things

16 August 2016 Sylvester Kgatla, Absa
Sylvester Kgatla, Head of Absa Fund Managers, Absa Investment Management.

Sylvester Kgatla, Head of Absa Fund Managers, Absa Investment Management.

South Africans are among the world’s worst savers. Globally, savings are measured as a percentage of GDP in order to determine the health of a nation’s savings culture. Including pension contributions and all forms of investments, South Africans save a pretty unhealthy 15,4% of our GDP . By comparison, Brazil, for instance, saves around 25%; India 30%; and China more than 50%.

Household savings are even more bleak : looking back as far as 1960, we see that while our high was an impressive 23,8% (Q2, 1972), our low was a toe-clenching -2,7% (Q4, 2013). We’ve improved marginally since then: but we are still at a negative figure of -0,8%. In other words, instead of a slow building of wealth, we’re getting poorer.

We have multiple explanations for this, of course: we don’t earn enough, or upwards inflationary pressure has made savings a pipe dream, or we’ll never be able to afford to retire anyway so we might as well enjoy life now. However Head of Absa’s Fund Managers Sylvester Kgatla is firm that while these might be valid they are not good excuses. “Saving is not necessarily related to income,” he says. “It’s a behavioural issue. In most cases it’s a decision that one makes.”

The result of not saving is constant financial stress. The result of good savings behaviour is the comfort that comes from the growth of wealth. All of us know which we’d prefer. But how to go about it?

We need to save, and we need to invest; and we need to know the difference between the two, and work them both to our own best advantage.

The difference comes down to two things: time frames, and an outcome that beats inflation:

What are savings?

Savings tend to be short-term, up to 24 months; usually put into a low-risk product like a fixed-deposit or call account held at a bank, explains Kgatla. More sophisticated investors might go for low-risk market-related products such as money market unit trusts, interest-bearing unit trusts, money market funds, income funds or Exchange-traded funds.

We tend to save for a specific goal, such as the December holidays, or a car or home deposit; or to have a slush fund for a rainy day. A slush fund is invaluable. For instance, imagine you have your eye on a new desk for your home office, which costs R6 500. Paying cash for it is easy: the ticket price is the price you pay. But if you don’t have the cash, and instead choose to buy it on terms, this is an example of what you might pay:

36 months x R315/month = R11 340.

It’s that kind of thing – paying around 40% more for things – that keeps us in the debt cycle. Far better to save up for it.

…and what is an investment?

The primary criterion is that real return must beat inflation. Although time is a factor, it’s really the equation of risk x time that qualifies money saved as an investment.

Take, for instance, money invested in a call account for five years – a very safe savings vehicle, which would tend to offer what seems a generous interest rate. However, depending on inflation over those five years, and the costs associated with the product, you may actually lose money over the period as the real return is likely to be negative, meaning that the income or growth from the investment was less than the rate of inflation over the period.

While definitions vary, for purposes of discussion Kgatla tends to define a medium-term investment as one which would have a two- to five-year life; and a long-term investment as one which would exceed five years. Sophisticated – and confident – investors might prefer to self-manage their investments, using share portfolios and other growth assets such as or commercial or residential properties. For the rest of us who trust the experts more than our own knowledge or attention to the market, “unit trusts and exchange-traded funds (ETFs) provide highly effective ways of accessing the market, achieving diversity and getting the benefit of blue-chip investments that might otherwise be out of reach”, says Kgatla.

The central tension around investment is that there is a correlation between risk and return. In order to be in the running to achieve an inflation-beating return, you inevitably will need to invest in instruments that also carry some level of risk. A balance needs to be achieved between the risk for which you have an appetite, and the risk you need to take in order to achieve your investment goals.

“Most of us are risk-averse,” says Kgatla. “So this is what investors need to focus on: if we discover that there is a gap between our present level of investment and our expectations for the outcomes, we have two options: to increase contributions, which for many people is out of reach; or to increase risk exposure.”

The best thing any of us could do is to stick to our financial plan and meet on at least an annual basis with a trusted financial advisor to get a clear picture of where we are, where we are going, and whether the roadmap between the two is well-drawn.

As Kgatla says, feeling the pinch is no excuse: “It’s not how much you earn, it’s how you spend, and how you save, that is the determinant of wealth.”

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