South Africans don’t save enough money. This is a truism. But why don’t they?
The answer is a complex mix of macroeconomics (the incomes of many have stagnated over the last few decades), culture (South Africans are notoriously conspicuous spenders), and policies (workers at companies without pension funds face bigger challenges).
But another variable is the challenge of giving up the gratification of immediate spending for the security of future savings. In behavioural economics this is known as ‘present bias’ and is a common reason for people’s disinclination to invest.
Present bias is a straightforward idea. People claim they’re willing to embrace all manner of self control – saving money, working out, cleaning their rooms – if they don’t have to do so immediately.
The commonplace name for this behaviour is procrastination. The only distinction between investing next week and investing right now is the passage of time, yet it makes all the difference to your attitude.
It explains most people’s lack of urgency and commitment to their long-term investment plan (retirement). If one has tight personal finances or little understanding of investment principles, money in hand today may seem much more tangible and important than money that might be earned years from now.
Given that people do not like being told what to do, especially with their own money, it is little wonder that traditional prescriptive measures to get the nation saving for retirement simply haven’t worked.
From another angle, the time aspect also comes into play when volatility rocks equity markets and we see panic selling. That panic is partly fuelled by present bias. The sellers feel the pain of the moment and lose sight of the potential in the future.
Self control, or the lack thereof, is an important reason for us tending to favour the here and now.
Self control is tough in a world filled with stimuli and temptations. Every day most of us are confronted by a plethora of ads or products shouting ‘Buy me!’ And a lot of them can look very attractive thanks to the magic of marketing.
Mostly, we ignore these cries to purchase but, depending on our mood, we might be more susceptible to their influence. When we find ourselves in what is called a ‘hot state’ – a state in which our emotions are a lot stronger than our logic – we become an easy target for stimuli. It’s why they say you should never go grocery shopping on an empty stomach.
One way to overcome this bias is to imagine or even view a picture of what you might look like as an old person. Research indicates that if you can truly visualise yourself in the future, then you are more likely to save money, eat better, exercise and generally plan to take care of your future self.
You won’t take retirement investing seriously if you simply don’t believe you will grow old enough to reap the rewards. Think about what this older version of yourself wants to do and where you want to be living. Consider this person paying the bills in retirement.
By visualising yourself in retirement – and writing down these thoughts to make them more real – you may be far more likely to adequately prepare for being this older person.
The more detail you can visualise about your future self, the better job you will do planning and preparing for that person.
Visualise answers to the following questions for different ages in your future:
- What is your daily routine? Are you working in any way? What are your hobbies?
- How active are you? What are you doing to maintain your health?
- Who do you see on a regular basis? What are your relationships with them?
- What might have gone wrong in your life? Can you do anything now to prevent that from happening?
- Where do you live? What city? What kind of home?
Retirement savings and other positive behaviours increase when the investor can understand that they are saving for an actual person (themselves) with real needs in the future.
Mduduzi Luthuli is the director of Luthuli Capital.