Learning to live on less?

Published Aug 1, 2015

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Households under financial pressure are “turning inwards” and taking loans from family members and friends rather than from financial institutions, and children are opting to live with their parents for longer.

These are a few of the findings in the latest Old Mutual Savings & Investment Monitor, an annual survey of the savings behaviours and attitudes of working people in metropolitan households across South Africa.

In spite of having taken some savvy – or desperate – measures to contain costs, respondents are less confident about making financial decisions and less satisfied with their financial situation compared with last year.

Respondents this year gave themselves a mean score of six out of 10 for satisfaction with the current financial situation and 6.3 for confidence in making financial decisions. These scores are the lowest in four years.

Fewer people are feeling financially secure and able to pay for unplanned events, the survey shows.

More than half (52 percent) of people in households with an income of between R6 000 and R13 999 a month would need to borrow money if they had unforeseen expenses of R5 000, while 31 percent of people with a household income of between R20 000 and R39 999 a month would have to borrow if they suddenly needed R5 000.

The survey shows 41 percent of respondents are saving less than they were a year ago. Last year, 38 percent of respondents said they were saving less than the previous year.

While the percentage of our income that goes to savings diminishes, the percentage of income that goes to consumption expenses is increasing. Consumption expenses are defined as everything other than debt repayments, insurance premiums, medical scheme contributions and savings. They account for 68 percent of the average respondent’s household income. This is up from 65 percent last year, and 58 percent in 2013 – a 10 percentage-point increase over two years.

The survey shows that 52 percent of respondents aged between 18 and 30 still live at home with their parents. This year’s Old Mutual survey also recorded the highest percentage (since the survey began in 2009) of people in the “sandwich generation” – these are people “sandwiched” between supporting their offspring and their parents.

One-quarter of all working metropolitan South Africans now fall into the sandwich generation, according to Old Mutual. (See “How to reduce dependency”, below)

Most people in the sandwich generation are in “Gen X” (born in the years from the early 1960s to the early 1980s) and have a household income of between R14 000 and R19 000 a month.

But there are people in the sandwich generation in all income groups: in households with a monthly income of between R20 000 and R39 999, 28 percent of respondents are taking care of two generations, and in households with an income of R40 000 or more a month, 25 percent are doing so.

Unsurprisingly, those in the sandwich generation are feeling the pinch: 28 percent of them say they are behind on their debt repayments, compared with 15 percent of respondents who are not being sandwiched

As many as 55 percent of respondents in the Old Mutual survey said they expect to support family members or their parents in the future. This is up from last year’s 48 percent of respondents.

An alarming percentage of respondents plan to depend on their children or the government when they are in retirement: 41 percent say they believe their children “should” take care of them when they are old (this is up from 39 percent last year and is the highest level recorded) and 36 percent of respondents believe that the government “will” take care of them if they are unable to take care of themselves in retirement.

It’s important to realise that the government will only “take care of you” to a maximum of R1 410 a month, which very few people could live on.

While the survey shows an increase in the percentage of respondents saving towards retirement (from 37 percent last year to 42 percent), there are still many who say they are not contributing towards a pension fund, provident fund or retirement annuity (RA).

In households with an income of less than R6 000 a month, 73 percent of respondents don’t contribute to a pension fund, provident fund or RA. As household income increases, this percentage comes down. But even in the households with an income of between R20 000 and R40 000 a month, as many as 20 percent of people are not using these tax-advantageous instruments to save for retirement.

A significant percentage of people see their property as their nest egg: 35 percent of all respondents say they will rely on the sale of their primary residence to fund all or part of their retirement.

One in two respondents believe that death, funeral and disability cover are more important that saving for retirement.

This year, the survey shows that the incidence of saving through unit trusts has risen steadily among higher earners – from 10 percent in 2009 (when the survey began) to 22 percent. There has also been a marked increase in the number of households saving in stokvels, across all household income groups, but this form of saving is most pronounced in the R14 000 to R19 999 and R40 000+ household income categories. The survey doesn’t indicate why high income earners, specifically, would opt to use a stokvel to save. But respondents in general say the main reasons for using a stokvel are: it’s a forced saving; it’s an easy and cheap way to save; and there is a sense of belonging and they derive support from being a member of a stokvel.

Overall, the use of stokvels has increased from 45 percent last year to 58 percent this year, Lynette Nicholson, the research manager at Old Mutual, says. “But stokvels are generally not designed for growth, and these findings highlight the urgent need for greater financial knowledge and understanding.”

Along with the increased use of informal saving vehicles such as stokvels, there has also been a growth in informal borrowing over the past year. This has manifested in a drop in the percentage of people getting personal loans from a financial institution and an increase in the percentage of people getting loans from family members and friends.

This may indicate that people are seeking more favourable terms by borrowing from family members and friends, or that they wouldn’t qualify for a loan from a financial institution. Forty-five percent of these borrowers say they repay their loans to family and friends irregularly or only when they can.

HOW TO REDUCE DEPENDENCY

Twenty-five percent of all working metropolitan South Africans find themselves in the “sandwich generation” – supporting their children as well as their parents. How do we reduce this number, and prevent the savings crisis from being passed on to future generations? The experts at Old Mutual say that it comes down to planning, financial education and taking professional advice.

Planning

The “sandwich generation” is a global phenomenon and stems largely from a lack of financial planning. Soré Cloete, a Certified Financial Planner and senior legal adviser at Old Mutual, says planning is all the more essential for people in the sandwich generation, because they are paying for their parents’ lack of planning.

When you have to look after not only yourself and your offspring, but also your aging parents, this added financial burden is likely to jeopardise your own retirement planning, and the cycle of dependency continues as you become dependent on your children for support during your retirement. This means you need to recalibrate your own plan, Cloete says.

You may have little choice but to reduce your spending and increase your saving. One way of doing this is by postponing your retirement, as this enables you to save for longer.

As the saying goes, “a failure to plan is a plan to fail”. But very often people don’t plan because they are not financially literate, let alone financially savvy.

Cloete says that educating yourself financially starts with enlisting the help of a financial adviser. “It’s about talking to an expert to help you to work out how to spend more effectively and to save sufficiently. A financial planner should be your first port of call.”

Finding the best saving and investment vehicle for your needs is crucial. It’s also imperative that you maximise the returns on your investments to ensure ongoing growth. To achieve these objectives, you need expert financial advice, Cloete says.

This year’s Old Mutual Savings & Investment Monitor shows that only 22 percent of respondents have a relationship with a financial adviser. Most respondents get their financial information via word of mouth and from bank consultants (28 percent each). The main reason respondents give for not consulting an adviser remains “I don’t have enough money”.

Cloete says that financial advisers work in all segments of the market and are remunerated accordingly. “Irrespective of your income level, you are eligible for financial advice. Braais and tea parties are dangerous places to pick up financial advice!”

A good adviser would also be able to help you manage some of the emotional stresses that come with being in the sandwich generation. Your adviser would encourage you to:

* Set boundaries for your spending to ensure that you live within your means. Give your children a fixed amount of money every month and encourage them to get independent as soon as possible. The greatest gift you can ever give yourself is to make your children independent of you.

* If you are supporting your aging parents living elsewhere, consider moving them into your home. It would save you money and time, while lessening the pressure of caring for someone in a different house. Multi-generational living is increasingly popular. But try to avoid depleting your own savings to care for your parents.

* Have regular family meetings and make sure that everyone understands and lives within the family budget. This should make for more harmonious living.

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