Now couldn’t be a more difficult time for South Africans to save and invest. The economy shrank in the first quarter of the year and unemployment increased by 1.1 percent (to 25.2 percent). Inflation is more than six percent and the petrol price is at an all-time high, having doubled over the past five years. It’s no wonder that confidence in the economy is also at its lowest in five years.
The latest Old Mutual Savings & Investment Monitor shows that only 52 percent of respondents to the survey feel confident about the economy. Confidence in the economy has been slipping steadily over the past five years, the survey shows.
This annual survey tracks the saving and investment behaviour and attitudes of a representative sample of working people in metropolitan households in South Africa.
Lynette Nicholson, head of research at Old Mutual, says the situation for many households is, indeed, “bleak”, particularly for consumers at the lower end of the market, who are “experiencing the most stress”.
But this reality doesn’t nullify the importance of the savings message, Nicholson says. “We must encourage people to save – even if it’s a little bit, such as R50 a month.”
Savings down
This year’s survey shows that 38 percent of respondents are saving less than they were a year ago. Nicholson says that in lower-income households (those with a gross income of less than R6 000 a month), the figure shoots up to 48 percent. In high-income households (those with an income of more than R40 000 a month), 27 percent of people say they are saving less than they were a year ago.
“Savings as a percentage of household spend has dropped sharply in favour of increased spending on living expenses. The decrease is evident across all income groups,” Nicholson says. “This may be a reflection of the pressure faced by households as living expenses continue to rise without the concurrent increases in salaries and wages – an ever-increasing percentage of household income is being eaten away by the cost of living.”
This year, households are saving only 14 percent of their income (on average). Last year, respondents said they were saving 20 percent of income. This year’s household savings rate is the lowest in six years.
The survey shows that 65 percent of household income is being spent on “consumption” (living expenses), 15 percent is being spent on servicing debt, and six percent is going towards insurance and medical scheme contributions. The percentage of household income being spent on living expenses is the highest in six years.
financial discomfort
The survey’s “financial household comfort indicator” shows that most respondents (37 percent) say that their household is “just about getting by”, 30 percent say they are “doing alright”, 18 percent are “finding it quite difficult”, while six percent are “finding it very difficult”. Only nine percent of respondents define themselves as “living comfortably”.
Nicholson says that if responses are segmented according to household income, the picture changes accordingly. Only one percent of respondents in the upper-income category (those with a household income of more than R40 000 a month) say they are “finding it very difficult”, four percent are “finding it quite difficult”, 23 percent are “just about getting by” and 43 percent are “doing alright”. A high 29 percent say they are “living comfortably”.
On the other hand, only two percent of respondents in lower-income households say they are “living comfortably”, 12 percent are “doing alright”, 37 percent are “just about getting by”, 33 percent are “finding it quite difficult” and 16 percent are “finding it very difficult”.
Nicholson says that high levels of household discomfort in bad times reveal a lack of planning, and making provision for difficult times helps to cushion the blow. “We need to realise the importance of planning ahead, especially for bad times,” she says.
Savings objectives
Nicholson says the survey shows, year-on-year, whether people are saving significantly more or less for certain objectives.
This year’s survey shows a sharp upturn in saving for funeral expenses and for end-of-year or Christmas expenses. Retirement and old age is also a savings objective, but only those respondents in households with an income of more than R40 000 a month are saving more towards retirement than a year ago, the survey found.
“Last year, six percent of people said they were saving for year-end expenses. This year, 15 percent of people are saving for the end of the year,” she says. This could suggest that South Africans value spending over the festive season.
Age and income continue to be the primary determinants of what people are saving for, the survey says. The main savings objectives charted by age and income show:
* Greater emphasis by older and wealthier consumers on retirement savings;
* Only wealthy households have the luxury of holiday savings at a significant level;
* The relative importance that older respondents place on medical expenses;
* There is a peak among “Gen X” respondents (people born from the early 1960s to the early 1980s) in saving for their children’s education; and
* The universal importance of saving for a rainy day (in other words, having an emergency fund).
Nicholson says that, overall, 66 percent of parents surveyed do not save at all for their children’s education. “Sometimes, it’s a case of food or an education policy,” she says.
Retirement savings
A positive development reflected in this year’s survey is the upturn in formal retirement savings in the form of contributions to occupational pension or provident funds. Sixty-six percent of households have at least some form of retirement provision, which is the highest level recorded to date, the survey shows. Nicholson says this could be because of proposed changes to retirement fund legislation that make it compulsory for employers to provide some form of retirement benefit for their employees.
While 66 percent is encouraging, Nicholson says it’s still worrying that a third of households have made no provision at all for retirement.
The survey shows that wealthier households save more for retirement: only 12 percent of households with an income of more than R40 000 don’t contribute to a retirement fund. In households with an income of less than R6 000 a month, 58 percent don’t contribute to a retirement fund.
Dependency
A third (32 percent) of respondents say they are relying on the government to take care of them in their old age, if they can’t take care of themselves. And 39 percent of respondents expect their children to look after them when they’re old. This attitude is most prevalent among poor households: 51 percent of people in households with an income of less than R6 000 a month say “my children should look after me when I am old”.
People in more affluent households are less inclined to be reliant on their children in their old age. A quarter of respondents in R40 000-plus households say their children will take care of them, and 34 percent of respondents in households with an income up to R20 000 have this expectation.
‘Sandwich’ generation
Almost a quarter of all respondents (23 percent) are financially responsible for aged parents as well as dependent children. Such people are said to be in the “sandwich generation”. Most respondents in the sandwich generation (34 percent) are aged 31 to 39 years, 27 percent are between 40 and 49, and 16 percent are 50 or older.
Debt
Old Mutual’s Lynette Nicholson says the Savings & Investment Monitor shows that there has been a year-on-year increase in all categories of debt: 65 percent of respondents (compared with 62 percent last year) have at least one store card; 20 percent (compared to 17 percent last year) have a personal loan; and 33 percent (compared with 29 percent last year) have at least one credit card.
The survey shows a gradual increase in property ownership – from 41 percent last year to 44 percent of respondents this year. Ownership is predominantly that of a primary residence, and home ownership correlates strongly with income.
Nicholson says the majority of respondents who have a mortgage bond (63 percent) pay the minimum bond instalment. Only 28 percent of respondents with bonds say they are paying extra every month. “This shows that people simply aren’t managing to pay more,” Nicholson says.
A budget will provide a ‘reality check’
One of the barriers to saving is that we don’t budget to save – that is, if we budget at all.
People don’t budget because they don’t want to confront the “inconvenient truth” that they’re living beyond their means, Soré Cloete, a Certified Financial Planner and senior legal manager at Old Mutual, says.
Cloete says that one of the most interesting things to come out of this year’s Old Mutual Savings & Investment Monitor is that 80 percent of respondents say they want to learn more about how to save.
If you want to learn more about your finances and savings, there’s nothing like a proper budget to provide you with a “reality check”, Cloete says.
A budget is the cornerstone of effective financial planning, she says. To get an idea of what a good budget looks like, download the budget template on Old Mutual’s website. Go to www.oldmutual.co.za and hit “Tools” on the top right hand side of the main page, and find it in the scroll-down menu.
Cloete says once you have a basic budget in place, take a close look at where your money is going. Don’t forget to take into account micro-payments – those frequent, small amounts that we often neglect to track, such as money spent on lunches, cigarettes or tuck-shop money for your children.
“Identify which expenses are essential (such as rent or mortgage payments, groceries, school fees, insurance and retirement savings) and those that are honestly non-essential,” she says.
Then work towards reducing and ultimately eliminating non-essential expenses, she says.
Those expenses that you may not even be aware that you’re incurring at the time – such as cellphone charges – can be dangerous to your long-term financial health, she says.
A proper budget makes provision for savings, she says.
Cloete says the best way to save is via a debit or stop order to an investment that is right for you. This could be a unit trust fund or an investment plan, such as an endowment policy.
“Cut out luxuries to save. The DSTV subscription should go in favour of saving for your children’s education. Reconsider that extra cellphone contract or how often you eat out.”
Your budget is a living document. Keep adjusting as your circumstances change – for example, when your salary increases, or you have a child, or a child becomes independent.
“Set money aside in your budget for unforeseen expenses, such as car maintenance. This will ensure that you don’t end up out of pocket when you have to incur these expenses. It’s always better to over-estimate than under-estimate what things might cost.”
Cloete recommends setting financial goals. “It’s so much easier to stick to a budget if you set yourself goals that you know will benefit you in the long run. For example, make it a goal to repay your mortgage or vehicle faster.
“Budgeting is like exercising. The harder you work at it, the better your financial fitness becomes. With practice you’ll get better at managing your expenses, and one day you’ll realise how much fitter you are, financially. The best thing about this is that you’re the one who benefits.”
Most people look to bank staff for advice
Most South Africans look to bank consultants as their primary source of personal financial information, instead of using a suitably qualified financial adviser.
The next biggest source of personal financial information is word of mouth (speaking to friends and colleagues) followed by financial advisers, the latest Old Mutual Savings & Investment Monitor shows.
The survey shows that 34 percent of respondents will turn to a bank consultant for financial advice, 20 percent will rely on word of mouth, and 18 percent will consult a financial adviser.
And the very sectors who are in most need of guidance are the least likely to consult a financial adviser, the survey shows.
The main reason for this is the perception that they don’t have enough money to warrant engaging the services of a financial adviser.
You don’t have to be rich to engage the services of a financial adviser, Soré Cloete, a Certified Financial Planner and senior legal manager at Old Mutual, says.
A qualified financial adviser can add value to your life, no matter what income bracket you are in. And most advisers service clients from across the spectrum, from high-net-worth individuals to modest earners.
If you’re serious about learning more about your finances, get advice from a qualified financial adviser, she says. Recognise that you need expert help.
“It’s important to work with an adviser who is qualified, and preferably, but not necessarily, a Certified Financial Planner, accredited by the Financial Planning Institute.”
If your adviser is not independent, make sure that he or she is linked to, or only sells products provided by, reputable investment houses.
“Ask for the details of and credentials of the investment house,” Cloete says.
A qualified adviser is required to examine your unique circumstances and consider your time frames, risk profile, the products that are most suitable for you, as well as tax efficiencies and what you can afford.
The survey shows that it’s not only the poor who lack confidence in managing their financial affairs. Baby boomers (people born between about 1945 and 1964) reported a lower level of confidence than last year, and individuals who earn R80 000 or more a month rate their confidence in making financial decisions at 7.1 out of 10.
However, their finances are in better shape, and the survey shows that 71 percent of them have a financial adviser.– Angelique Ardé
* To read the entire survey, go to www.oldmutual.co.za/savingsmonitor