Figures signalling better-than-hoped-for economic growth in 2017 brought sighs of relief all round after South Africans experienced a tough year financially. But this growth is not nearly enough, and the time has come for all of us to play our part in breathing life back into the economy through a simple yet powerful tool: saving.
According to World Bank statistics, South Africa’s population grew 1.6% in 2016, far outstripping gross domestic product (GDP) growth of 0.3% and abysmally short of the 5.4% targeted by the National Development Plan for driving back poverty and inequality. And although the 2017 figures were slightly more positive, it is expected that South Africa’s economy grew only about 1% last year.
An economy that grows slower than the population it supports is unsustainable. Quite simply, it is a recipe for disaster.
A culture of saving has been a significant contributor to the economic success of countries such as China, whose gross savings rate is nearly 50% of GDP, facilitating investment in businesses and infrastructure.
India is another country whose culture of saving has been the bedrock of its economic growth. A recent Goldman Sachs report predicted that, in a few years from now, India will not need a single dollar in foreign investment to fund its infrastructural improvements, thanks to a household savings rate that was as high as 39% of GDP at the end of 2016.
By contrast, South Africa’s household savings rate, as measured at the end of September 2017, was a pitiful 1.6% of GDP. This is despite the fact that the average South African’s income, or GDP per capita, is three times higher than that of the average Indian’s.
In addition, South Africa’s household debt as a percentage of disposable income is a shocking 72.5%, which means that, for every rand earned, nearly three-quarters is spent on debt.
It’s an unavoidable truth that ours is a consumerist society that values a pleasure-seeking way of life funded by debt, and a growing number of people from all walks of life are living beyond their means. This is compounded by problems such as a high dependency ratio, with breadwinners supporting a large number of family members on a limited income, persistent unemployment, a rising tax burden, the high cost of living, and a lack of confidence in the future.
A key reason for South Africa’s growing credit addiction is the low level of financial literacy, particularly among the youth, which points to the need for financial education.
Economic theory teaches that the young tend to save less and spend more. Given that South Africa has a relatively young population, it is not surprising that we increasingly see people relying on credit to provide for themselves and their families.
To break the cycle of generational debt and the low rate of savings in South Africa, it is imperative that financial literacy be entrenched from as an young an age as possible, encouraging people to save more and spend less.
Tips on how to improve your financial health
• Differentiate between your wants and your needs. Once you have learnt to cut out unnecessary spending by distinguishing between wants and needs, you will find that you’re able to save substantially more money each month.
• Focus on your financial goals. Draw up a list of financial goals that you want to achieve – for example, clearing all your debts, a financially secure retirement, creating an emergency fund, or saving towards a home or car. Set deadlines to achieve these goals and pursue them rigorously.
• Invest in life assurance. Buying life assurance is an investment in your family’s future, providing your dependants with financial protection if the unexpected occurs.
• Pay yourself first. Paying yourself first means putting aside a set amount towards your savings as soon as you receive your salary, in order to avoid the temptation to spend.
• Seek professional financial advice. Many South Africans rely on friends, family and colleagues for financial and investment advice, not realising that their tips do not take cognisance of your individual financial situation and goals. Instead, find an adviser who has the Certified Financial Planner accreditation to guide you through the investment process. It is likely that such an adviser will be better equipped to teach you about the financial world and offer investment advice.
Mbulelo Musa is a wealth adviser at BayHill Capital.