South Africans are saving just 0.2% of their household income, according to the December 2017 SA Reserve Bank Quarterly Report. Believe it or not, this was an improvement on the previous year.
Meanwhile, ratings firms in India are complaining that India’s overall savings rate has dropped to 30% from nearly 35% in 2012, of which 60% comes from household savings. China has a personal savings rate of 25%.
Vimal Chagan, divisional director for Investment Propositions at Liberty, spent two years working in India. He explains the difference between South African and Asian savings ratios: “It’s a cultural thing. In SA, we are more concerned about consumption. In China, the government has an entirely different problem: they are trying to get people to spend. Savings is so embedded into the Asian DNA because, culturally, savings represents the foregoing of pleasure today for a future benefit. For many South Africans, access to credit and decent jobs is a recent thing, so there is a huge push to spend rather than to save.”
Chagan adds that South African cultural pressures also have a part to play in the low savings rate, one of these being what is known as the ‘sandwich generation’. These are people who earn decent incomes but are forced to support not only their own children, but their parents as well.
South Africans, particularly those in the 21-40 age group, find it difficult to save. For them, retirement is too far into the future. Once enculturated into spending rather than saving, this habit is difficult to break. It means many people in this age bracket will end up working well past retirement age.
Another problem for this generation is the language of the retirement savings industry. It’s a turn-off for many. The word ‘retirement’ itself does not chime with this generation, which has more immediate goals, such as buying a house, raising children, going on an overseas holiday.
Given these well documented problems, how does one foster a culture of saving?
Chagan admits that the retirement and savings industry is part of the problem. The language of saving is arcane, the products are complex and not easily understood, the costs are opaque, and the products don’t easily sell themselves. Proof of this is that it needs a network of thousands of intermediaries to sell retirement products and convince clients that they should forego current spending for a future benefit.
“Your retirement savings protect you from yourself,” says Chagan. “You see people driving around in luxury cars that they probably cannot afford. Many of them are driving around with the fuel gauge on the reserve line.”
If this sounds familiar to you, Chagan says you should probably get rid of the car and reassess your finances. “Getting rid of a car you can’t afford is probably the best loss you could ever make.”
Stashing means paying yourself first
Getting your expenses down is part of living within your means. Once you have done that, Chagan suggests paying yourself first – in other words, putting a percentage of your earnings into savings. A good percentage to work with is 10%, or even more if you can afford it.
It doesn’t matter too much where that money is invested, whether a tax-free savings account, a retirement annuity or other investment vehicle. “The main thing is to start saving,” he says. “Even if it is R100 here and there, this is better than nothing.”
Liberty has come up with a relatively painless way for people to encourage themselves to save with its Stash product.
The Stash app is downloadable to any smartphone, and is configured to round up the user’s spending to the nearest R10, or any other selected amount – it detects every swipe of the user’s debit, cheque or credit card, and collects the ‘spare change’ – stashing it away in a no-fee tax-free account linked to the performance of the JSE All-Share Index (which is tax-free up to R33 000 a year).
Users can also configure the app to stash money away based on how many calories they burn from physical exercise they do, with a further option to boost their Stash at the end of the month by, say, R1 000.
“For people who feel they do not have the discipline to save, Stash is a good way to go,” says Chagan. “After a while you start to realise that you have amassed quite a sum of money in little bits and pieces that you don’t notice at the time. Once you see your savings accumulate, you feel encouraged to do more. It feeds on itself.”
Once the savings culture is established, then, says Chagan, is the time to gain a better understanding of the types of savings products on the market. “I think the investment and retirement savings industry has to take some of the blame for SA’s low savings rate,” he says.
“We have far too many product types and the costs are opaque. People just don’t understand them. We need a simpler, more streamlined and cost-effective product range, and my job at Liberty is to help us get there.
“I think it is more important that people get into the culture of savings first, and then work on how to optimally invest those savings. People should make use of financial advisors, who have a huge role to play in building the savings industry.”
Brought to you by Liberty.
Liberty Group Ltd is the Insurer of Stash and an Authorised Financial Services Provider (FAIS no. 2409). Terms and conditions apply.