Instilling a culture of saving in South Africa
South Africans are used to hearing that they have a poor saving culture. This has become more evident as the country battles the coronavirus pandemic. This pandemic has forced many South Africans to reevaluate their relationship with money.
As scores of people queue up for government relief, this has brought back into public discourse the importance of saving money – whether in the long-term, medium-term, or short-term.
July is a National Savings Month and there can never be a better time to start discussing saving for a rainy day than now as the country is plunged in a crisis by COVID19. The national savings month initiative was started by the South African Savings Institute (SASI) in 2001 to inculcate a savings culture and create awareness of the importance of saving in South Africa.
“This initiative was started to raise awareness of fiscal planning and saving and getting citizens informed when it comes to investments and savings.”
Nicholas Riemer, head of investment education at FNB, argues that the national savings month drives to encourage South Africans to put money away in the long-term for retirement and emergencies.
The 2020 national savings month was officially launched on Wednesday, 08 July by SASI and the institute will host a series of webinars throughout July.
Why South Africans struggle to save
The causes of South Africa’s poor saving culture are deep and complex. As more South Africans find themselves with holes in their pockets, the coronavirus pandemic has raised awareness of the importance of saving money and having emergency funds.
High unemployment and poverty
When it comes to savings and investments, South Africans often complain that it is hard to save in a country where there are such high levels of poverty and unemployment. Jennifer Jansin, a business analyst, said that the reason people struggle to save is due to unemployment, and in a case where people are employed, they are over-indebted. As Jansin argued, this often creates a culture of dependency where an employed person has to take care of siblings and aging parents. This is what the Old Mutual Savings and Investment Monitor (OMSIM) calls the “sandwich generation”.
According to OMSIM, the sandwich generation is termed so because “they are effectively sandwiched between an obligation to care for their aging parents – who may be ill, unable to perform various tasks and in need of financial support – and children, who require financial, physical and emotional support”.
OMSIM reported that in 2019, 34% of South Africans were wedged between the sandwich generation. “Their salary is divided up to take care of various household needs and thus resulting in their inability to save for retirement and emergencies – This often increases the likelihood that, because they cannot save for themselves, this problem might be passed onto the next generation.” As a country with such a complicated past where this culture of dependency spurns generations, Jansin says it will take more than financial education to overcome this phenomenon.
A country of spenders
The South African Savings Institute has labeled South Africa a nation of dis-savers. Most South Africans do not believe in delayed gratification. They want things now, even when they have no money and thus end up getting into debt. As Jansin states, most South Africans like to be perceived like they have money and thus live beyond their means.
According to Prem Govender, chairperson of SASI, South Africa has become a nation of spenders and not savers, even when there is no money to spend.
“We have developed a culture of borrowing money to satisfy our desire for acquiring things that we do not need but desperately want. It has become a culture of instant gratification. It is no wonder that South Africans are drowning in debt and using the bulk of their income to service debt.”
Easy access to credit
In South Africa, it is easy to purchase things on credit. Rather than saving and waiting until they can afford a product, South Africans instead can’t resist the urge for instant gratification.
Speaking at the launch of savings month, award-winning financial journalist Maya Fisher-French stated that unlike in most countries where people save to buy a product, South Africans look at how they can access credit.
“In other countries, they put money away and create a savings pool. In South Africa, however, we don’t save; we have a culture of consuming today and paying later.”
Fisher-French said it is best to save for a product rather than buying on credit and end up paying more in interest.
“Rather than buying on credit, put money away for a certain period to avoid paying off products over long periods and paying huge interests and fees, which you can allocate to your future. You don’t need credit; you can save to achieve your goals.”
Impulsive buying behaviour
Dr. Ian Zimmerman describes impulsive behavior as when the urge to purchase a product outweighs the willpower to resist it.
“Our culture of consumption enables us to succumb to temptation and purchase something without considering the consequences of the buy.”
Financial journalist, Arabile Gumede, has urged South Africans to ensure that the way they spend their money is not reckless.”
“There is a difference between buying something and affording it. Have a look at specials and promotions and if you can’t afford something, wait until you have enough money to buy it.
“Sometimes the way you save is how you spend. Savings is not always about money. It is also about your behavior as a consumer,” added Gumede.
What covid19 has taught us?
As Prem Govender stated at the launch of savings month, our finances were not in shape before the lockdown. But what has COVID19 taught us in terms of saving and having emergency funds available?
Many South Africans were caught without rainy day funds upon the lockdown. This pandemic has presented many with an opportunity to learn about the importance of saving and letting money sit and accumulate interest.
Riemer said the pandemic has demonstrated the imperativeness of having both short-term and long-term savings.
“To have emergency funds available to get you by during a pandemic as opposed to having to dip into your longer-term funds makes a huge difference as taking money out of your long-term investments may result in penalties.”
As people’s movements were limited because of the lockdown and less money was spent on eating out and entertainment, Riemer says the lockdown gave South Africans time to ponder about and understand budgeting processes.
“With us having extra time in lockdown, we must fully understand everything we are saving and investing through. We must know what our goals are and understand exactly what we are looking for.”
Ways to save
Tax-free savings accounts
The South African government introduced Tax-Free Savings Accounts (TFSA) in 2015 to encourage a savings culture. “They are part of non-retirement savings and help to maximize tax relief.”
The total contribution that qualifies for tax exemption is R30 000 and SASI recommends that savers “invest the maximum amount permissible every year for at least 16 years”.
Riemer said South Africans are now taking up educational content to research what can be done with this type of savings and investments.
“TFSA is a very powerful tool that can be used to reduce taxation exposure which will allow money to grow without being taxed.”
Long-term Saving vehicles
According to Riemer, savers who are looking to invest or save their money in the long-term might not get the best yields as interest rates are down due to the pandemic. However, there are risk-free vehicles like government bonds that offer better returns, added Riemer.
The National Treasury describes a bond as “investment with the government which earns fixed or inflation-linked interest for the term of the investment”.
On the equity side, Riemer said there is little risk because of where the market is at the moment. “There are lower risk vehicles like unit trusts where you are just looking to beat inflation than looking to outgrow and return 10 or 15%.
Riemer further stated that if the goal is to beat inflation, there are different saving and investment vehicles to choose from.
“If we are looking to beat inflation by 3% without taking too much risk, there is a range of saving and investment vehicles to suit that. We need to ensure that we have exposure to all those so that our risk is diversified as well as getting our best possible chance of achieving long-term goals.”
The earlier you save, the better
According to Riemer, if you save for retirement from a young age, you are going to be able to maintain your current lifestyle.
“If you have tons of money saved going into retirement, you are going to be able to spend and support yourself. This increases spending capacity over 30 years as opposed to spending bits and pieces as a youngster and getting to withdraw from the economy upon retirement through social welfare.”