How South African’s are approaching the need to save
19 August 2016
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On mobile, on digital, on demand, this is Old Mutual Live, the Money Coach edition. Hello and welcome, my name is Chris Gibbons. Joining me now from Old Mutual in Johannesburg is Lynette Nicolson, Research Manager at Old Mutual. Lynette, welcome, good to have you with us.
Lynette Nicolson: Morning Chris.
CG: The focus in this edition of Old Mutual Live Money Coach, the recently released 2016 Old Mutual Savings and Investment Monitor; one of the most in depth studies on how, where and why South Africans save. I guess the first question for this edition Lynette, is are we still saving with confidence in the South African economy at an all-time low. How are we approaching the need to save? What’s the broad overview?
LN: Chris, we are still saving, well, there are certain people that are still saving. When we ask people what savings vehicles they’re using, we do see that that is still happening. However, there are 49%, let’s round it off to one in two people saying that they are saving less than they were a year ago.
Now, last year if you had asked me the same question I would have said that savings isn’t great then, it wasn’t great then either, or the year before or the year before. Actually, for one in two to say I’m saving less is rather worrying.
Debt hampering the ability to save
CG: Can we dig down a bit into this. The amount of household income being taken up by servicing debt, what does that look like?
LN: That’s increased year on year, from 12-16%, bearing in mind that’s exactly as you said, it’s servicing debt. We’ve had to have, so if everything adds up to 100%, for a household, we had to have another category that had to give way.
That category was really just the broad consumption category which gave way and that went down to 63%. There are a number of things that could have influenced that. Perhaps people are just cutting back, which we have seen is happening, or maybe, on the other side, people just aren’t making it in terms of their income.
CG: Low income households, presumably, more affected by this problem than those with high incomes?
LN: Yes, certainly although they do tend to have less debt, their consumption expenditure as a proportion, obviously, is much higher. So that goes up to 73-75% of income. They do have less debt, but certainly they are quite hard pressed, yes.
Are people trying to get rid of debt?
CG: Are many people trying to pay down debt?
LN: I think everyone has a good intention of doing that. When we look at debt payment patterns there’s a broad, and it’s consistent across all debt categories. That more and more people are just paying the minimum of the debt instalment that they need to pay. Fewer and fewer people are paying more, or extra. So, in answer to your question, I think people would want to, but whether they can is another issue.
CG: What about understanding the need to save?
LN: I think that people know, like we all know, perhaps, we all know that it’s good to save. So when you ask people, would you like to learn more about saving? Of course, of course, over 87%, of course I want to learn more about saving.
But whether we actually get down and buckle down and do it on a monthly basis, that’s the issue. I think that’s where we talk about the willingness to save. Are we willing to give up the cappuccino every morning so that we could save R400 a month? I don’t know.
The need to create a buffer
CG: That’s a big question, the morning cappuccino. Let’s talk about savings as a buffer for emergencies. Lynette, how do people feel about the need for a buffer and what in fact constitutes a buffer?
LN: Our economists tell us, or they have in the past, that a household needs at least three months’ salary, or equivalent salary as a buffer for emergency expenses. We put the question to South Africans as we said: How much do you think you need as a buffer? Only about one in two said three months or more.
The remaining said less than three months. So either people just don’t think about it, or maybe they just feel they can’t do it. But the provision for emergency expenses is quite dismal when you start breaking it down. People just really, and it doesn’t matter where in the income bracket you go, cause it’s all relative, people really don’t have that much available, if something does go wrong.
CG: That’s emergencies, what are the other broad savings objectives?
LN: Well, people are saving towards funeral policies, is a big one. I think when you say objectives, rather than vehicles, savings objectives, I think people are saving for funerals. A big one, and especially in South Africa where funerals are a very important issue.
Then we also have people are saving for retirement and those are the pension, provident ones. However, having said that, only around 54% of these working metropolitan people said that they are saving for a pension or a provident fund.
CG: Do savings objectives change with age and income bracket?
LN: They do, they do, I think you have the big ones on top, funerals, pension, provident funds. Saving for education, obviously when you have kids, that does come into it. I think interestingly, this year we had Lobola as quite an interesting saving objective, for the first time it was quite significant amongst black households, it came to 12%.
What are the popular savings vehicles?
CG: Okay, so if we are saving then, what vehicles are we using?
LN: Funeral policies at the top, pension, provident funds, although I said only 54%, we are also saving some cash bank savings. But fixed deposits, money markets, all dependent on income though. So I’m giving you the very broad brush strokes here and then quite a lot going into informal savings.
CG: You’ve also picked up a sharp increase in endowment policies?
LN: I think we must just be a little bit careful of that result. There was a slight change in the definition year on year. I think we must just treat that one with a little bit caution.
CG: Overall though, if you look back to 2009, when this survey originated, when it began. The trend towards retirement planning, saving for retirement has increased?
LN: Yes, not massively, but certainly as a trend. Which is a great thing, it’s a really great thing. So, I think the segment that is still lacking in that activity is our younger people.
Making provision for your kids education
CG: What does education fit into the savings objective, is that education policies?
LN: We track two things, we track education policies, which is obviously contractual and we track discretionary. So you know, people saying, ag, I’m just putting R100 away a month for my children’s education. I think the overall, when we add the two together, there’s been a slight increase year on year, which is good as well.
So people feeling a little bit more pressurised to put away for education, which we all know is a good thing. However, as a whole, when we look at parents as a whole, there’s still a large proportion of parents that haven’t even thought or made provision for education.
CG: You’re listening to Old Mutual Live, the Money Coach edition, on demand, visit dogreatthings.co.za. I’m talking to Lynette Nicolson, Research Manager at Old Mutual. Lynette, what role is being played in the current savings landscape by informal savings?
LN: Informal savings Chris, we have four buckets that we put in there. The one is stokvel, next is burial societies, next is grocery schemes and the next one is unbanked cash savings. Money under the mattress, in the cookie jar, a massive role.
In fact, two or three years ago we estimated and we corroborated it with another source, that just stokvels, as a pot and irrespective of whether some of it’s banked or circulated or whatever. But as a pot, in South Africa per annum, accounts for about R40 billion.
CG: That’s a huge amount of money. Precautionary savings and I’m talking here about things like medical aid and short term insurance, where do they fit in?
LN: I think these two categories, precautionary savings, it is quite biased, or skewed towards the upper income groups. Kind of almost like a privileged saving. About one in three overall have short term savings. But that is, as I said, skewed towards the upper income groups where it does increase to 60-70%, but yes, they are income related.
CG: Final question Lynette, is there anything left in the kitty for saving, via things like unit trusts, equity based savings in other words?
LN: You know, as a whole, those categories are quite low Chris. In fact, we even track things like art and other issues, other types of investments which are even lower. But I think once again, it’s very much an upper income saving, you can see. But even amongst upper income, I think it’s only around 14% say that they’re saving unit trusts. Still something that I think can get traction cause it is a very good vehicle to savings.
CG: This has been another edition of Old Mutual Live Money Coach, my name is Chris Gibbons and with me on the line from Johannesburg has been Lynette Nicolson, Research Manager at Old Mutual. Lynette, thanks for having been with us.
Remember, please feel free to get in touch any time, if you have any questions for me, or topics you would like covered on Old Mutual Live Money Coach, just feel free to send them direct to me at email@example.com. I would be delighted to hear from you. Until the next time, thank you for listening. Old Mutual Live, on mobile, on digital, on demand.