The Old Mutual Savings Monitor is a bi-annual study of financial savings trends in South Africa, tracking and evaluating the financial habits and attitudes of 1 000 working urban households through face-to-face
interviews conducted by independent research house Peppercorn Research. Here are some of the findings of the Old Mutual July 2011 Savings Monitor from research conducted in April and May.
The recession has forced South Africans to become more conscious of the need to save, with one in five people commenting that the recession made them realise the importance of saving to build up a buffer against hard times, the Old Mutual July 2011 Savings Monitor shows.
According to the survey, 65 percent of South Africans are saving either more or the same than they were a year ago.
While this figure is down from the 69 percent of South Africans who were saving either more or the same in November last year, it is still in stark contrast to the first Old Mutual Savings Monitor published in July 2009, in which 52 percent of South Africans said they were saving less.
This highlights the effects of the recent recession and is backed up by the fact that 82 percent of South Africans in the Old Mutual July 2011 Savings Monitor say they have felt the effects of the recession, regardless of their income levels.
Just under a third (29 percent) of those who are saving more attribute the fact that they are saving to a shift in mindset driven by a recognition of the importance of saving and a growing awareness of the need to watch their expenses and budget carefully.
This shift in mindset is highest among households with a total income of more than R40 000 a month.
In 2010, South Africa’s financial climate was characterised by decreasing interest rates, negotiated wage increases, inflation within the government’s target range of three to six percent and general euphoria round the 2010 Soccer World Cup.
However, this year the general cost of living has rocketed, with increases in the cost of electricity, food and petrol. Demand for residential property has declined and consumers are financially less confident than they were just six months ago.
The Old Mutual July 2011 Savings Monitor reflects that although the effects of the recession have been felt across the board, the effect has been weaker among lower-income groups. This does not mean that poorer households are not struggling – on the contrary, they are – but some of these households feel nothing has changed for them, because they have always struggled financially. Some low-income earners are of the perception that the recession is something that only affects people in a high-income bracket.
Because recessionary effects have kept salary increases to a minimum, households are struggling to make ends meet, and a common complaint is that people simply can’t buy what they used to before the recession.
Young people aged between 18 and 30 are most likely to claim little effect from the recession, with a number reporting that they were still being supported by their parents during the worst of the recession in 2009. It is important to bear in mind that these are young working adults and many are working and earning their own money for the first time. It is also important to consider South Africa’s high unemployment rate, which means that these young working adults are better off than their unemployed peers.
The survey shows that the vast majority of young people (75 percent of them) were still affected by the recession to some extent and cited the same factors as other age groups – inflationary pressures, more cautious budgeting, cutting out extra expenses and a renewed appreciation of the importance of saving.
The Old Mutual Savings Monitor has revealed that people have reacted to the recession in two different ways. In the first group, people have become so unnerved by the state of their finances that they’re ignoring them and thus aggravating their problems. This group has been named the “Panicked Procrastinators”. The people in the second group have taken cognisance of the need to act and are doing so. They are known as the “Contented Organisers”.
Since the Old Mutual July 2010 Savings Monitor, the Contented Organisers have increased by nearly a fifth, from 20 percent to 24 percent, while the Panicked Procrastinators have increased from 30 percent to 40 percent. Respondents who fall between the two categories decreased from 50 percent to 36 percent.
According to the Old Mutual July 2011 Savings Monitor, 53 percent of South Africans who are saving less than a year ago say this is due to inflationary pressure – that is, the cost of living has increased to the extent that there is no discretionary money left to save. Another 22 percent of South Africans are saving less than a year ago due to retrenchment or reduced commission or unemployment, which has affected them either directly or indirectly.
South Africans appear to have become more cautious with their finances in the past six months, and the percentage of people who believe the only way to improve their finances is to take risks decreased from 66 percent in the second half of 2010 to 61 percent.
The percentage of people who are optimistic about their financial future dropped from 86 percent in the November 2010 Savings Monitor to 81 percent this year, while the number of people who tend to make financial decisions quickly based on their “gut feel” dropped from 57 percent to 48 percent.
More than 82 percent of the South Africans surveyed want advice on overall money management.
Households that are saving more than a year ago attribute this to more funds being available for savings due to a number of reasons. These may include more household members working, improved salaries with new jobs, children leaving home, debt having been paid off or debt being sufficiently under control to free up money for savings.
The Old Mutual November 2010 Savings Monitor showed that 38 percent of consumers rated their satisfaction with their financial situation between seven and eight out of 10, indicating a high level of optimism. The July 2011 monitor reflects that 27 percent of consumers rated their satisfaction with their financial situation between one and four out of 10, while only eight percent rated their satisfaction between eight and 10.
Those with low levels of satisfaction complained of a hand-to-mouth existence, with feelings of insecurity that stem from having few savings set aside for future needs.
Those who were more satisfied with their financial situation commented on the relief that financial security brings. Their higher satisfaction appears to be driven by a heightened awareness of the need to budget and keep a handle on their expenses, having the comfort of a savings buffer, and being able to get to grips with their debt levels.
Some of the other key findings of the Old Mutual July 2011 Savings Monitor are:
* 14 percent of people aged 18 to 30 support both their children and their parents or other older dependants (see “The sandwich generation”);
* 51 percent of people either currently support their parents or plan to do so;
* 38 percent of South Africans have no formal retirement savings (see “Planning for retirement”);
* 63 percent of store card holders pay only the minimum due every month (see “Debt: how you’re handling it”);
* 51 percent of parents have their children’s education as their savings priority (see “What you’re saving towards, and what vehicles you’re using”).
THE SANDWICH GENERATION
The term “sandwich generation” refers to those people who are supporting not only their children but also their parents or other older dependants. The sandwich generation accounts for 20 percent of people interviewed for the Old Mutual July 2011 Savings Monitor, and they are numbered highest among black households, falling mainly between the ages of 35 and 49.
The study shows that 56 percent of young people aged between 18 and 24 are still living at home with their parents, largely because it is more affordable for them to do so. Staying at home allows them to build up savings for when they do ultimately want to live on their own and, in many cases, they contribute to the pool of household income, easing affordability pressures for their parents.
Almost half (48 percent) of young adults aged 18 to 30 surveyed in the Old Mutual July 2011 Savings Monitor continue to live at home. It is not that they left home and have returned but rather that they have yet to leave for the first time.
Among young adults aged 18 to 30, 37 percent have dependant children and 28 percent provide financial assistance to a parent or older family member, while 14 percent qualify as part of the “sandwich generation”.
One in two South Africans who have parents or older family members who are still alive, foresee that they will have to support them for the rest of their lives.
HOW NOT TO BUDGET
Research from the Old Mutual July 2011 Savings Monitor shows that just under a third (28 percent) of people find that they are more careful with their money – budgeting and planning more than before.
It is important to budget properly – and this means taking note of all your expenses, including incidental expenses, and then ensuring that your expenses do not exceed your income.
The Old Mutual July 2011 Savings Monitor used the following example of a financial month in the life of a “much better off than average” South African consumer to illustrate how easily you can run out of money each month by failing to budget properly and not living within your means.
Mr and Mrs Smith each earn R15 000 a month. They have one child who attends a public school and they own only one car. They each own a cellphone, they have a compact satellite TV package and they have a domestic worker coming in once a week. Their combined take-home pay after deducting their tax, pension contributions and medical scheme contributions is R22 700.
The Smiths’ monthly spending is R22 600 and the amount of discretionary money left to them each month is R100!
The scary part is they have failed to budget for gym fees, holidays, clothing, make-up and hair, extra medical expenses that may not be covered by their medical scheme, the cost of aftercare for their child, garden services or any contributions to parents or other family members.
The Old Mutual July 2011 Savings Monitor shows that 78 percent of South Africans feel their finances are never properly organised and 53 percent leave financial decisions to the last minute.
Living expenses as a percentage of income expenditure have decreased from 63 percent in the first half of 2009 to 57 percent currently. South Africans are using more money to pay their debt – debt payments have increased from 15 percent of income expenditure in the first half of 2009 to 17 percent, the July 2011 Savings Monitor shows.
DEBT: HOW YOU ARE HANDLING IT
The Old Mutual July 2011 Savings Monitor shows that urban working South Africans appear to be more aware of the importance of debt management, with some being wary of taking on new debt and trying to pay off existing debt faster or at least trying to make payments on time to avoid additional interest charges.
However, despite this heightened awareness of the importance of debt management, some households are taking on debt as they struggle to meet their financial commitments.
The percentage of people who feel they have no alternative but to get into debt to make ends meet increased from 61 percent in the second half of last year to 66 percent this year. In the same period, the percentage of people who pay off their credit cards in full at the end of each month decreased from 38 percent to 31 percent.
The Old Mutual July 2011 Savings Monitor reflects that South Africans prefer to establish a nest egg rather than pay off their debt, with a trend towards debt reduction slowly starting to appear over time. When respondents were asked to allocate money from an actual windfall, they opted for a mix of debt reduction and actual savings.
In the second half of last year there was some indication that some households were using easing economic conditions as an opportunity to reduce their debt levels. There was a marked increase at that time in the number of people paying additional money into their home loans.
The findings of the November 2010 Savings Monitor suggest the increase was probably a result of urban households maintaining their monthly repayments at historical levels instead of cashing out the saving resulting from reduced interest rates.
However, the Old Mutual July 2011 Savings Monitor shows that the percentage of homeowners paying the minimum only has increased from 49 percent to 59 percent in the past six months.
Short and medium-term debt
The use of credit cards has increased marginally, mostly in the R20 000 to R39 999 income bracket, while the use of store cards has decreased. The decrease in the use of store cards is most evident in households earning more than R40 000 a month, where it has dropped from 68 percent to 51 percent.
Looking at previous Old Mutual Savings Monitor surveys, there is evidence of attempts to chip away at store card debt, with a significant increase in the proportion of consumers trying to pay a bit extra over and above the minimum required on a monthly basis. But these improvements in payment patterns have not been sustained, and store card holders appear to have largely reverted to minimum payments. Overall, only seven percent of store card holders clear their accounts in full at each month end, and while this percentage increases with income level, only 12 percent of those earning more than R40 000 a month clear their store cards in full each month.
South Africans appear to be more disciplined when it comes to their credit cards, with a higher evidence of balance settlements compared with store cards.
There has also been a sharp increase in the use of car finance and overdraft facilities for households earning more than R40 000 a month. However, the Old Mutual July 2011 Savings Monitor shows that consumers are trying not to let their use of car finance and overdraft facilities get out of hand, and a proportionally higher percentage are paying extra each month compared to previous Old Mutual Savings Monitor results.
WHAT YOU’RE SAVING TOWARDS, AND WHAT VEHICLES YOU’RE USING
According to the Old Mutual July 2011 Savings Monitor, South African urban working people are saving mainly for their children’s education, followed by emergency expenses, while saving for retirement comes in third on the list of priorities.
There is an increased trend towards retirement savings and funeral savings, while the survey reflects a decrease in holiday savings. This is a reflection of tougher economic times, with more pressing goals being given priority over holidays.
What people are saving for largely depends on their age or stage of life. For example, of the people surveyed, 60 percent of those aged 50 and older are saving for their retirement, but only 16 percent of those aged 18 to 24 are doing so.
People in the 25-to-34 age group have made saving for their children’s education a priority, with 35 percent listing this as their primary saving goal. People aged 18 to 24 are more likely to be saving for a deposit on a home or a new car.
Savings for home improvements have increased in the middle-income category (specifically households earning around R20 000 a month). However, this may be a sign of the weak South African property market, with people choosing to improve their homes rather than to sell them at low prices.
The use of savings and investment vehicles, such as bank savings accounts, fixed deposit accounts and money market bank accounts, as well as equity-based investments such as shares and unit trusts, has decreased marginally.
The Old Mutual July 2011 Savings Monitor shows that although there has been an overall decrease in the use of bank savings products, there is a marked drop at the lower-income end of the market (households with a monthly income of less than R14 000, and a significant increase in the use of bank savings products by high-income households (earning more than R40 000 a month).
This does not mean that urban households earning more than R40 000 a month are now pulling out of equity-based investments, but rather that more cautious cash holdings are being favoured in place of new equity-based investments.
There is also an increase in the use of life assurance and disability policies.
According to the survey, 45 percent of urban working South Africans feel that “death, funeral and disability cover is more important to me and my family than saving”. This sentiment is particularly strong among lower-income households, with 55 percent of those earning less than R6 000 a month agreeing with this compared with 28 percent of those earning more than R40 000 a month.
Precautionary savings refers to short-term insurance and health cover, and here urban working South Africans appear to be shopping around and trading down to cheaper insurance options rather than giving up their insurance cover completely.
People earning less than R6 000 a month have far less insurance and health cover than those earning R40 000 a month but are saving the same percentage of their income each month. However, the lower-income groups are making use of informal products such as stokvels and funeral polices for their savings.
Generally speaking, young adults between the ages of 18 and 30 have fewer savings and investment vehicles overall, which is not unexpected as they are still building up their investment portfolios.
Two of the most significant factors affecting financial attitudes and behaviour remain income and education, according to the Old Mutual July 2011 Savings Monitor.
The following trends were observed among working households:
* Upper-income households and better educated South Africans are better planners and plan further in advance. Households that earn more than R40 000 a month showed a sharp upswing in planning ahead by five to 10 years.
* Lower-income households, by contrast, are less organised and more likely to be confused by the world of finance. These households are less likely to plan in advance, not necessarily because they do not realise the importance of this but because their economic reality forces them to live in the here and now.
* Older consumers appear to be better planners. But the main differences relate to current savings goals, which differ from younger consumers because older consumers are focused on saving for retirement, while younger consumers are more focused on saving for a car, a deposit on a home or their children’s education. Older consumers have also had a longer period over which to build up their savings portfolio.
PLANNING FOR RETIREMENT
South Africans close to retirement are focused on saving for their retirement, according to the Old Mutual July 2011 Savings Monitor.
However, those close to retirement who have other financial commitments may find that they do not have enough time to “catch up” with their saving.
More worrying is the fact that, according to the monitor, there has been an increase in the number of low-income households who believe that the government will provide for them in their old age.
A shocking 38 percent of people across all age groups surveyed for the Old Mutual July 2011 Savings Monitor have no formal retirement savings.
A third of people surveyed feel that their children should look after them when they are old and a further third feel that the government will look after them if they are unable to take care of themselves.
What is of great concern is the sharp rise (increasing from 39 percent in the second half of last year to 53 percent this year) of households in the lower-income bracket, earning R6 000 a month or less, who feel that the government will look after them. Whether this is a genuine belief or is born out of desperation or wishful thinking is up for debate.
At the upper-income end of the spectrum, the trend is in the opposite direction – that is, there are declining expectations of government support.
The use of pension and provident funds has increased, but this is due to employers offering retirement benefits rather than actively chosen investments.
The Old Mutual July 2011 Savings Monitor shows that 62 percent of respondents in the survey have either a private retirement annuity (RA) or are a member of a retirement fund through their employer, 15 percent have an RA and belong to an occupational retirement fund, and 38 percent have not invested in either an RA or a retirement fund. A general pattern shows increasing use of pension and provident funds, moving from 41 percent in the first half of 2009 to 53 percent currently.
SAVINGS TIPS
Old Mutual offers the following advice to improve your saving habits:
* Live economically. Don’t buy things you don’t need and don’t try to keep up with friends and neighbours. Everybody’s needs are different. Live according to yours.
* Saving is a mindset. Save water, electricity and money. Don’t waste anything of value – recycle, pass on old clothes, swap children’s toys with other parents instead of buying new ones and convert things you no longer use into money by selling them.
* Teach your children to save from an early age. They need to know about the household budget. Set them to work for their pocket money. Help them learn that making a financial decision is about weighing up the value of one thing against another and choosing which one to forgo.
* Look after the things you have. Take pride in what you have worked hard for. Respect your own efforts and feel good about what you have achieved.
* Don’t make excuses about why you don’t save. Saying “I am too young” or “I’ll save next month” or “Only rich people can save” won’t get you anywhere.
* Start early for retirement. Start saving consistently and seriously for your retirement years fom the day you get your first job. Learn the magic of compound interest. Put aside at least 15 percent of your income each month in a safe investment.
* Use credit sparingly and carefully. It’s cheaper and more rewarding to wait until you have saved the funds yourself. It’s better to spend money you have earned than spend money you still have to make.
* If you are in debt, pay it off as fast as you can. Handle your credit cards and store cards very carefully. And remember, cuts in the interest rate should be used to settle debt first, not to take on more debt.
* Shop around before you buy. Compare prices and benefits. Question the value of each purchase as you make it. “Will it build my assets? Is it just to show-off? Is it cheaper elsewhere?” Don’t ever be afraid to ask questions when you want to know more.
Your five-step savings plan
You can follow five easy steps to plan and save for a specific goal:
1. Clearly state your dream. Think about the future and what you want for you and your family.
2. Write down your short-, medium- and long-term goals. Set yourself a time frame to achieve them.
3. Develop a savings plan. Decide how much money you’ll need to put aside every week or month to reach your goals and where you’ll save or invest it to get the best returns on your money. You may need to use different products to help you meet your different goals.
4. Draw up a household budget together with your family. Know where every cent of your income goes and where you can cut back on consumption to help you meet the commitments of your savings plan. Revise your budget regularly to keep your eye on the future.
5. Stick to your plan. Make saving a habit. Tell people close to you about your dream. Talking about your dream makes you commit to it. Do not let challenges deter you from pursuing your dream. Remember that your savings plan is your path to financial freedom. By focusing on that long-term goal, you can ward off unnecessary spending and progress towards achieving your dream.