Youth savings rate in SA needs to urgently be addressed

As Youth Month comes to an end, it is critical that South Africa’s young workers entering the job market for the first time ensure that a percentage of their salary is dedicated to savings. In order to better the country’s national savings rate, consumers

This is according to Jason Garner, Management Consultant at acsis, who says that in order to improve the national savings rate, the country’s youth need to be educated on the importance of financial planning, as well as constant reviewing of their plan, as it is the only viable method of securing long-term financial security.

He says that thousands of South Africans under the age of 25 years enter the workforce each year, and it is crucial that these individuals implement a financial plan as soon as possible. Before they become accustomed to spending their entire salary each month, these young employees should start saving towards future financial goals. It is crucial for the youth to realise how a financial plan needs to grow and evolve as a career does.

“Most employees between the ages of 18 and 35 fortunate enough to be earning enough to save accordingly do not realise that these years are the most vital to wealth creation and stability later on in life. Due to compound interest, individuals who have invested capital during the early years of employment will eventually be making money on the original investment, as well as on the gains made in following years. In addition, as a career evolves, so should the percentage of the salary that the individual contributes each month. Increasing the percentage of contributions will ensure that as the individuals’ lifestyle evolves, so does his or her financial plan.

“For example, imagine we have R10 to invest per year and we get a 10% return on the money each year for five years. If we didn’t have compounded growth on our money, after five years of investing we would have grown our investment by R1 per year for a total return on our R10 investment of R5. If we applied compound growth to the R10 investment however, it would have grown by R6.10c, simply by having the growth each year become part of the investment that grows by the 10% growth rate,” explains Garner.

“What this means is that the earlier we start investing the greater the effect compound growth will have on how much money we will have in future as well as how much we will need to save in the future in order to achieve the financial freedom we all strive to achieve. If we start saving a small amount in our mid-twenties, we will need to save significantly less in our 30’s and 40’s than those who started saving much later,” says Garner.

Garner says that youngsters in this age group often have the most disposable income available and unfortunately do not ever learn to capitalise on this advantage, as they are not taught the value of financial planning early on in life. “Once an individual becomes used to having available disposal income, they will often not be able to alter their spending patterns when they eventually choose to start saving later in life. It is therefore vital that an evolving financial plan is implemented from an early age.

“Not only will this approach benefit individuals financially, but will also contribute positively towards the country’s national savings rate, which at the moment constitutes only 20% of the country’s GDP.” When compared to other emerging economies such as China and Malaysia, South Africa scores extremely low on domestic savings levels. In order to be on par with these countries, our national savings rate needs to be improved considerably.”

He says that many do not realise how an evolving financial plan, along with the assistance of a financial planner, is able to build wealth and financial stability. “A planner in fact plays a vital role in helping clients analyse their current situations and determine how to articulate their life goals. This includes developing appropriate strategies that will give the individual the best possible chance of achieving these goals. The planner will also ensure that these strategies are implemented effectively with the most appropriate investments, as well as monitoring them regularly to ensure that they remain on track to achieve their client’s needs,” concludes Garner.