As a nation, South Africa has proven itself to be rather dismal at saving. And given that our interest rates are currently at their lowest in some three decades, making money from savings has become considerably tougher.
Of course low interest rates are a blessing if you have a lot of debt. And most South Africans do: the country’s household debt to disposable income ratio is about 77 percent. With interest rates low, that naturally translates into lower repayments on that debt. The concern is that even in the current low interest rate environment, this number is still high. If interest rates increase, it will be more difficult to service the debt and will affect the ability to save.
But for those South Africans who don’t have much debt, low interest rates are not ideal – especially if you prefer saving in an investment like a bank account. And a recent survey conducted by Sanlam, as part of the ‘National Start Something Day’ found just that. Respondents were asked what savings method would work best for them. Nearly half said they would prefer transferring their money into a separate savings account via a debit order. Under four percent would want their employer to offer them a savings solution. And a whopping 10 percent said no savings method would work for them, as they simply struggle to save.
What’s more, only a third of respondents said they would be willing to give their money to a financial expert for a tailored retirement solution. It seems that as a nation, we don’t have much of an appetite for riskier investments. Or alternatively, we’re unaware of the risks that inflation holds for our retirement savings.
So what’s the problem with saving money in a bank account? Nothing if you are going to use your cash in the near future and so need quick access to cash. But it is not the ideal way of making your money work for you over the long term. And there is a very real chance that by the time you withdraw that money from the bank account, it will have failed to keep pace with inflation.
Take saving for a university degree for your child as an example. Inflation has on average been running at around six percent over the past number of years (although it is slightly lower today). Education inflation is even higher than consumer price inflation. So even if you start saving for your child’s tertiary education the day your child is born, if the return offered by the savings product is lower than inflation, your power to buy that degree is constantly eroded.
How do you know if your returns are sufficient for your savings to keep pace with the rising cost of goods? Well, returns are expected to be low in a low interest rate environment, because inflation is generally low. And your returns may look impressive in a high interest rate environment, but inflation is also likely to be high. The return in excess of inflation is therefore more important than the absolute number. Your responsibility, therefore, is to ensure that your assets are returning an amount that is higher than the inflation rate.
The best way of achieving this is by also putting your money into assets outside of cash, like equities, property or even bonds (government’s inflation-linked bonds secure real returns, or returns above inflation, of three percentage points). Funds like absolute return funds or positive return funds are also mandated to produce returns above inflation.
How you invest your money will be determined by a number of factors. Firstly, you need to decide what it is you’re saving for. Saving for retirement will need to be treated very differently to saving for a potential emergency. Then decide over what time period you are saving. If it’s for a shorter-time period, then opt for a less risky investment. Your age, for example, is a determining factor in how much you put into equities, bonds, property and cash. Also, consider your appetite for risk. If you have little willpower to invest in equities, then you’re likely to have to save more to achieve your retirement goal.
A final tip: put money away as often as possible – especially in a low interest rate environment. This will help compound your returns over your saving years. In a world as volatile as ours, that may prove essential to secure financial independence on retirement.
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