By Sherwin Govender, 26 September 2022
“We save so little in South Africa, while saving is part of the culture in so many countries. For example, the Chinese save almost half (45.5%) of their household incomes, which ensures that people have emergency funds or a nest egg in old age, and this culture of saving adds to the economic growth of that country. So, it is important to understand what prevents us from saving in South Africa”, says Sherwin Govender, Business Development Manager at Glacier by Sanlam. “Saving is a big step towards personal financial freedom and facing your future with confidence”, he says.
He unpacks the top five pitfalls that prevent successful saving. “These negative attitudes result in reduced financial health”, says Sherwin. They are mindsets that sabotage our financial success, and we will need to change them if we hope to realise our personal goals and dreams. It’s important for us to know if we’re guilty of any of them and then to do something about it.
The most common response to why people do not save is that they cannot afford it. The economic conditions in our country have made it a challenge for most of us to make ends meet, so building a nest egg becomes less of a priority. Even higher-income earners do not always have the type of savings and investments that you would expect. Most of us have a multitude of monthly expenses that take precedence over savings. What this implies is that these expenses are valued higher than a savings plan.
That raises the question: “What is the value of savings?” In short, savings plus the growth it generates, is the only way to “pay yourself”. If done correctly, your savings can be transformed into property, education, travel, healthcare, and financial independence. When you automatically save 10% from the first day you earn an income, you learn to build your spending habits around not having access to that money. Every rand saved is a sacrifice but strengthens your financial fitness. Financial fitness leads to less stress and anxiety which leads to a happier life.
Many people do not see the true value of professional financial advice. The younger generations especially have been known to take a “do-it-yourself” approach to financial planning. Others follow the latest trends or the advice of friends and family. Going this route becomes dangerous to your financial wellbeing. Financial planning is complicated and deeply personal. Much like medical, legal or tax advice, it is always recommended to use an appropriately authorised and registered financial adviser. The most basic advantage of having an adviser is that if you were advised badly, (which is unlikely if they are qualified), you have recourse with the FSCA or an ombudsman. The true value of a professional adviser is that they take a holistic view of your personal finances – your income, expenses, needs, shortfalls, risk appetite and goals. A good adviser becomes a coach and partner in your journey to financial fitness.
South Africans are some of the most indebted consumers in the world. Debt and indebtedness seem to be the norm. Of course, there’s healthy debt like a mortgage bond for your home or debt that is sometimes necessary such as vehicle finance. However, if you are using credit to finance a lifestyle you cannot afford – such as clothing, luxury items, or your social life – then you have unhealthy debt. This becomes a drain on your income and financial health. It is important to remember that paying for something on credit is forking out two, sometimes three times the actual cost. Having savings in place becomes ineffective if you are using more of your hard-earned money every month to service debt and credit.
When markets go up, people with FOMO want to buy in. When markets go down, they sell out. You want high returns, but when negative returns happen, you switch investments or buy out. You will end up buying into the market when it is expensive and selling when it is cheap. This behaviour literally destroys your savings. FOMO investors are also more likely to buy into “trend” investments like cryptocurrencies, non-fungible tokens (NFTs) or investments in a blockchain, forex and unregistered assets which promise returns well above those expected from banks and investment providers. These returns are so attractive that we often do not see the risks associated with them. Unfortunately, many of these avenues have led to tremendous losses suffered by investors.
Investing is a long-term pursuit. We tend to want instant gratification and want results today. However, money takes time to grow. The more time you give your investments, the more your money grows. For example, saving R500 every month for 10 years can grow to R103,276. Five years after that, it can more than double to R208,962. This example illustrates the “magic” of compound interest, and you only see its benefits in the long term. Also, most investments recover after down-markets and no market condition is permanent. It is important to know that you will not benefit from recovery if you sell out during a down-market period. Much like becoming physically fit, becoming financially fit needs time and consistency. However, if you stick to your long-term plan, designed for you by your adviser, it is arguably much easier.
This article first appeared on Glacier Insights.
Assumed growth rate of 10% per year (a moderate aggressive risk profile assumed) and applied monthly.