Polishing the cornerstone of financial wellness

Jonathan Faurie, FAnews Journalist

Financial wellness of households is the cornerstone of an economy’s health and resilience. A growing number of financially well households will increase the chances of an improvement in the number of South Africans that can achieve a comfortable retirement.

At the release of the Momentum Household Financial Wellness Index, Danie van den Bergh, Head of Momentum Brand, defined financial wellness as a financial position whereby members of a household can cover their retirement plan as well as unforeseen expenses now and into the future.

The state of the nation

When we look at the above definition, we can see the uphill battle we as a nation face bearing in mind the country’s current economic environment. Despite this, Momentum pointed out in its wellness index that the number of households that fall within the financially exposed group has increased.

Speaking at the event was Professor Bernadine de Clercq from the University of South Africa who was very involved in the research into the survey. She pointed out that the analysis shows that the proportion of households in the financially well category increased slightly to 27.9%, implying that 72.1% of households in South Africa remain financially unwell. 

“A general movement from financially unstable towards the financially exposed and financially well categories did however occur, contributing to a small improvement in the state of households’ financial wellness. Unfortunately the proportion of financially distressed households did not decline but remained stagnant,” said De Clercq.

A financially distressed home is defined by Momentum as a household that is deeply rooted in a financially distressed position. Major outside assistance is required for improvement. A household in the financially unstable portion is a household that is not entrenched in a financially distressed position, but remains in an unwell situation. Its financial situation is very unstable and adverse events and wrong decisions can easily change its position to financially distressed. A household in the financially exposed category has more opportunities to improve its financial wellness. Although the financial situation is not unwell, negative/positive changes will cause households to become either financially unstable or financially well.

Getting on track

Some of the common factors that drive the financial position of a household is the overall education level in the household and the level of employment.  We know that South Africa fares fairly poor in both of these aspects, but this is where the role of the adviser is so important. You have the knowledge and the skills to contribute towards the households education level when it comes to financial wellness.

The wellness index does provide certain tips on how to get households on track for financial stability. Many of these tips are well known, but some of them are worthwhile looking at. The first is the fact that advisers need to have a discussion with their clients regarding debt. Debt is expensive and households need to regularly evaluate their levels of debt and what it is costing them. They need to try and pay off their expensive debt first and try to only go into debt that will leave them with a discernable asset such as a home or a vehicle.

Two investments that should never be seen as grudge purchases are education and healthcare. There is a strong correlation between education and unemployment, a person becomes more employable when they have qualifications behind their name. Parents need to invest in their children’s education so that the cycle of the household’s financial position can be broken. Quality education is expensive, so planning in advance is a necessity.

Quality healthcare in South Africa is also expensive. Even if a household has to go without some of the luxuries they would like to have, belonging to a medical scheme in South Africa is becoming an increasing priority. There is also a strong correlation between health and employment. Healthy people are more employable than unhealthy people.

Back to basics

While the above tips are helpful, the fact that clients need to live within their means cannot be understated. This is the solid foundation of financial wellness, you cannot have a champagne taste on a beer income.

It is frightening to think that there are some South African households who are not aware of what their financial position is. This starts with a budget. While this is common sense, many households live day-to-day and don’t know how to budget. Clients also see advisers as product salespeople and don’t know that an adviser is able and willing to sit with them to show them how to budget.

The second basic step that clients need to return to is making time for financial wellness. Many of the discussions at the launch of the index was that talking about finances in the home is becoming taboo. It is just something that is not spoken about. Clients need to sit with their children and go over the advantages of having a budget and living according to it. Clients also need to know the value of purchasing products such as life and disability insurance from an early age where premiums are cheaper and commitments such as children may not be a factor as yet.

Editor’s Thoughts:
There is no defined blueprint to achieving financial wellness. However, there are basics clients need to adhere to that will put them in a position where they can then take their own path. The role of the adviser in setting this foundation is becoming critical in the current economic climate. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.