We have just passed everyone’s favourite time of the month – month-end! Perhaps you looked forward to an expected mid-year increase, and shamelessly went ahead and spent your money on all those desirable items before payday. Sobering is that moment when payday arrives without your expected salary increase, in a time when necessities such as electricity and fuel prices are sky-rocketing. Suddenly you find yourself staring at a negative credit card account balance, and the month has barely begun.
Don’t be too hard on yourself for your subjective judgement on spending habits. The entire South African economy has been heading down the same road for quite some time.
With a first quarter GDP growth rate of only 2.1% year on year, the rand weakening by 13% over the same period (not including its recent further weakening) and the Reserve Bank recently announcing that the chances of an interest rate hike are ‘very good’, the rest of South Africa isn’t looking much better.
With incomes falling short, it is no wonder that South Africa’s relatively lower income groups are starting to demand much higher wage increases, which often exceed the combined inflation and productivity increases.
It is perfectly normal to get used to – and to want to get actively involved in – an economic growth process. Your degree of commitment, enthusiasm and drive in your own economic involvement is after all what determines your own personal financial freedom.
What few realise, however, is that economic growth can only take place through either ‘savings’ or ‘loans’. You need capital to create wealth – the old saying that ‘it takes money to make money’ rings true. This means that growth can only realise if the net savings effect yields more money, or if the net financing effect becomes more favourable (i.e. moving financing to a lower rate facility).
Graph 1: Personal savings as percentage of personal income – Source: I-net BFA
With July dubbed National Savings Month in South Africa, it is only appropriate that we take a look at how well we fared with saving in the past. Over the past 20 years, net personal savings as a percentage of personal disposable income has dropped from 11.3% to -2.3% (as at end of 2014). According to all possible benchmarks, this figure is unacceptably low. The period between 1995 and 2000 saw personal disposable income rise by 69%, yet personal savings dropped from R6.2 billion to a mere R2.9 billion. With higher prices and the looming possibility of higher interest rates, it would seem that the ability to save is now less than ever before.
Figures clearly show that South Africans are struggling to save money. Until you examine and become willing to change bad spending habits, you can forget about accumulating significant wealth and securing financial freedom. Here are some possible practical solutions:
1. First, get those bank statements together and analyse your spending habits. Are you a squanderer? Do you remember where all those ATM withdrawals went? Make a point of cutting out the ‘fat’ – and I am not referring to your diet.
2. Next, commit yourself to a plan that will force you to save. Set up a monthly debit order through which you can contribute to your savings.
3. Thirdly, find the best savings framework for yourself. Make use of a tax-free investment, a unit trust investment or a five-year term policy investment. Tax-free investments and unit trusts are fairly flexible when it comes to withdrawals, which is beneficial if you need comfort that you can access your money when you need to. However, if you know you do not have the discipline to save and may easily succumb to the temptation of capital withdrawals, a fixed-term investment may be a better bet.
Ensure that your savings are properly managed to transform your money into an investment with above-average returns. Don’t simply leave your savings in the money market indefinitely, where you will only earn money market rates (currently around 5.5%). This is especially true if your risk profile allows you to invest in higher potential income investments. Rather fix your investments for intervals of between 30 and 90 days to get 6-7% growth, while still retaining some level of liquidity.
Finally, constantly ensure that every rand you save is invested in the best and fastest-growing way possible, as long as it falls within the limits of your personal risk profile.
The opinions expressed in this document are the opinions of the writer and not necessarily the opinion of PSG. These opinions do not constitute advice. Although the utmost care has been taken in the research and preparation of this document, no responsibility can be taken for actions taken on information in this blog.