South African households were in a healthier financial position last year than in 2015, but we have a long way to go in educating and empowering ourselves, and our economy needs to pick up considerably, before we can begin considering ourselves financially well as a nation.

This is an underlying message in the report that accompanied the release last week of the Momentum/Unisa South African Household Financial Wellness Index for 2016, which rose to 67.3 from 66.3 in 2015. 

Professor Carel van Aardt, who heads the Household Wealth Research Division of Unisa’s Bureau of Market Research, is largely responsible for producing the index. He says that although the index, which refers to 2016, is up, South Africa’s economic situation this year has deteriorated, and this does not bode well for South Africans’ financial health this year and next (see “Gloomy forecast despite index rise”, below).

The report defines people or households as financially well if they “continually plan and manage their money so that they can afford their expenses and reach their goals over their lifetime”.

The index was constructed from a nationally representative sample of 2 688 households. Based on how they answered a questionnaire, the households were grouped into four categories of financial wellness: 

• Financially well. This household is financially well in the current political/economic/social climate. However, negative developments may cause the household to become financially exposed.

• Financially exposed. Although the household is financially unwell, negative or positive changes will cause it to become either financially unstable or financially well.

• Financially unstable. This household is financially unwell. Its financial situation is very unstable, and adverse events and wrong decisions can easily change its position to financially distressed. However, some opportunities may be available for it become financially exposed.

• Financially distressed. This household is deeply distressed financially. Major outside assistance is required for improvement. 

As indicated in the graph below, the percentages of respondents in the “financially distressed” and “financially unstable” categories remained more or less the same from 2015 (though considerably down from the first year of measurement, 2011), while the percentage of “financially well” respondents increased to 26.3% from about 24%.

The index takes into account five “capital” factors affecting households, scored out of 10:

• Asset capital: the household’s net wealth as determined by its assets (what it owns) and its liabilities (what it owes). This dropped from 5.8 in 2015 to 5.0 in 2016.

• Physical capital: the household’s state of income and expenditure. This rose from 5.4 in 2015 to 5.6 in 2016.

• Environmental capital: the household’s living conditions. This rose from 5.7 in 2015 to 6.6 in 2016.

• Human capital: the household’s education levels, taking into account its qualifications and skills. This rose from 6.2 in 2015 to 6.4 in 2016.

• Social capital: the degree to which members of the household are financially empowered, as determined by their financial decisions and trust in institutions that affect their empowerment.

According to the report, two of these are “inputs” (social capital and human capital), which the household can control and improve on, while the other three (asset capital, physical capital and environmental capital) are “outputs”: the outcomes resulting from those inputs 
over which the household has control, as well as external factors beyond its control, such as domestic and foreign political and economic conditions.

By focusing on those factors over which you have control – your financial empowerment, through activities such as saving and budgeting, and your qualifications and skills – you have a better chance of improving your financial wellness, the report says. The figures back this up as far as education is concerned: only 14.1% of respondents in the “financially distressed” category had a matric qualification or higher, compared with 73.9% of respondents in the “financially well” category.

Gloomy forecast despite index rise

Every day South African consumers are confronted by more disturbing news about the state of the economy, Professor Carel van Aardt says. 

If South Africa’s economic performance between 2011 and 2016 (for which Momentum/Unisa Household Financial Wellness indices are available) is extrapolated through to 2018, a fairly gloomy picture emerges, he says. This includes declining gross domestic product growth, higher unemployment, lower compensation for workers, and higher levels of income and wealth inequality.

Van Aardt says the number of people in employment grew from 14.1 million in 2011 to 15.95m in 2016, and it is expected to grow only marginally (to 15.97m) by the end of next year. The number of unemployed increased from 4.6m in 2011 to 5.9m last year, and will be about 7.2m at the end of 2018, which means there will be about 1.3m more unemployed people at the end of next year than at the end of last year.

Some of the implications are:

• It is going to be tougher to find and hang on to a job this year and next year. “It’s clear from the available employment figures that many businesses are struggling to survive, with the implication that they will, on average, rather shed jobs than create jobs,” Van Aardt says.

• You should prepare for unemployment, because analysts have found that the current situation is “not a cyclical downswing but a self-made recession, which cannot be escaped by means of the regular fiscal economic stimuli”. 

• Many households will find that their expenditure will grow much faster than their income, which will make it increasingly difficult for them to maintain their financial wellness levels, Van Aardt says. Effective budgeting and sticking to a budget will be increasingly important to survive financially.

• Rising unemployment, poverty and inequality will exacerbate political, economic and social instability.

• The historically low rate of saving, the low level of entrepreneurship and inadequate skills make South Africa particularly vulnerable to economic stagnation this year and in 2018. Consumers will be in an even worse position if a significant economic turnaround does not take place by late next year, Van Aardt says.

• High levels of poverty and inequality, together with the current high level of economic stagnation, are having an increasingly negative impact on the legitimacy of institutions such as government, the public sector, the Reserve Bank and the courts. “This could have dire societal implications during the years to come,” he says.

10 things you can do to improve your financial wellness

Many things are beyond your control, but there are things you can do to improve your lot in life, the Momentum/Unisa South African Household Financial Wellness Index report says.

These are:

1. Constantly improve your work-related and financial skills (human capital).

2. Use these skills to start living a more empowered life (social capital), which includes building a large support network of family and friends.

3. Budget and do comprehensive financial planning with specific objectives. Align your budget with the objectives in your plan – and stick to it.

4. Use professional experts/financial advisers to assist with budgeting and planning.

5. Save money to protect yourself against shocks and for retirement – this should be part of your comprehensive financial plan and part of your budget.

6. Manage your debt – live within your means and don’t incur debt you won’t be able to afford. This should be part of your budgeting and planning.

7. If you are unemployed, take up any employment you are offered and gradually work towards what you want to do. (Doing this will also improve your social capital.)

8. Increase your income by doing multiple jobs, but be careful of negative compensation – overspending just because you have more income.

9. Use your income and asset-accumulating debt (such as your home loan) to grow your assets and net wealth.

10. Use your income and assets to improve your living conditions. A healthier life will reduce your financial stress, and you will have lower medical expenses.

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