Time to get into the habit of saving
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July is National Savings Month and the focus this year is on alternative savings solutions.
Saving is a habit you should acquire early in life. You should find a savings vehicle that will enable you to achieve your goals.
Lack of awareness, or knowledge, about savings and investment vehicles often prevents people from saving. The Financial Services Board Financial Literacy Report 2011 found that most South Africans use basic products, such as bank accounts, to save, while only 39% are aware of more sophisticated alternatives, such as unit trust funds. The Old Mutual Savings and Investment Monitor found that 80% of respondents wanted to learn more about how to save.
National Savings Month is promoted by the South African Savings Institute (Sasi). Sasi chairperson Prem Govender says the consequences for the economy of the recent credit ratings downgrades will place more pressure on consumers, and they will have to improve their attitude towards saving and their knowledge of how to save.
“Many South Africans are struggling to save, not only due to income challenges, but also because they lack the willpower and commitment. In terms of alternative savings solutions, we are involving employers this year and suggesting ways to facilitate or automate the savings process for those with an income, such as garnishee savings options into a tax-free saving account and 13th cheques structured as a savings tool,” Govender says.
She says that young South Africans are increasingly relying on credit to pay for necessities, and there is a growing culture of people living way beyond their means and becoming trapped in a cycle of short-term debt.
So what alternative savings solutions are there?
One of the most popular is the stokvel, a relatively informal savings scheme run by a group of people who save a set amount, say R1 000 each month. Each member of the stokvel has a turn to receive all the money collected in a particular month.
According to research firm African Response, there are 421 000 stokvels in South Africa, to which 8.6 million people belong, and the stokvels have a combined value of R25 billion.
A formal option for long-term saving is a tax-free savings account. It can take the form of a money-market or fixed-term bank account, a unit trust fund or a JSE-listed exchange traded fund.
You are limited to contributing a maximum of R33 000 a year, or R500 000 over your lifetime. You do not pay any tax on the interest or dividends earned by your investment, and you do not pay capital gains tax on any capital gains.
SAVINGS TIPS FROM SASI
Saving depends largely on willpower and discipline. The South African Savings Institute has the following advice:
• Set a target. Set and write down a goal, such as building up an emergency fund or going on holiday.
• Make it automatic. Set up debit orders so that money is automatically transferred into your savings accounts, investments or a retirement annuity (RA) fund. This will prevent you from spending money that you should be saving.
• Contribute the maximum. If you belong to an employer-sponsored retirement fund, ask your employer to deduct the maximum permitted contribution as a percentage of your salary. Retirement fund contributions are tax-deductible up to 27.5% of the greater of your remuneration or taxable income, capped at R350 000 a year.
• Get a financial coach. Find a financial adviser, preferably one who has the Certified Financial Planner qualification. An adviser can help you to stick to your savings goals, particularly when investment markets are volatile.
• Group savings. Start or join a stokvel or investment club with your family and friends. Being part of a group will help you to develop the discipline to save.
• Buddy up. Find someone who you can meet with regularly to discuss your savings journey. Hold each other accountable.
• Start them early. Get your child’s finances off to a good start by depositing cash gifts into a tax-free savings account or an RA in your child’s name.
• Ensure you’re on track for retirement. Check the statements from your retirement fund to ensure you are on track to reach your retirement savings target.
ARE WE TURNING THE CORNER ON DEBT?
According to the South African Reserve Bank (SARB), over the past 16 years, the household saving rate has declined, reaching a record low of –2.7% in 2013. This means that, on average, we were borrowing 2.7% more than we were saving. There has been a slight improvement off this low base, with the saving rate increasing to –0.3% in the first quarter of this year from –0.5% in the fourth quarter of 2016.
The SARB Bulletin for the first quarter of 2017 shows that growth in household debt slowed from 4.6% in 2015 to 3.9% in 2016, and the ratio of household debt to disposable income edged lower from 76.9% to 74.4% over the same period.
ONLINE TOOLS TO HELP YOU TO SAVE
Many financial institutions have online tools to guide and help you meet your savings targets. For example, Old Mutual has on its website a savings calculator that will guide you in your savings journey. The calculator asks basic questions, such as, How much do you need to save? By when? How often do you want to contribute? What is your expected annual growth?