By: Momentum Multiply

Understanding the connection between financial literacy and saving habits 

There is a myth among South Africans that this country’s households have a poor savings culture. Momentum economist and researcher, Johann Van Tonder, says that the situation is more nuanced than just calculating savings as a percentage of income. The reality is most South African households don’t save enough because they simply don’t earn enough.

“The Momentum-Unisa Financial Wellness survey revealed that 60% of households have a monthly income of less than R10 000 per month,” says Van Tonder. “This is barely enough to cover normal expenses, let alone saving.”

To put it a different way, while 40% of households earn enough to save a bit, 44% actually do save or invest. “This shows that South African households know that they need to save money and that they are trying to do so. With that in mind, our nation’s alleged savings problem is actually an income problem. So, we need to refrain from the view that South Africans - in general - spend too much and that they don’t save enough.”

Van Tonder says that a large part of the household income problem can be related to some of the country’s economic policies which make it difficult to create enough jobs. Stats SA’s latest labour market numbers revealed that South Africa’s expanded unemployment rate increased to almost 40% in the first quarter of 2020. Put differently, 10.8 million of the 27.2 million strong labour force were unemployed. Moreover, only 41.5% of the labour force is working in the formal sector. This means that almost 60% is either unemployed, or work in the informal or household sectors. They barely earn enough to save.  

This situation has recently been exacerbated by COVID-19 and the resulting lockdown. A recent survey by five universities, the NIDS Coronavirus Rapid Mobile Survey, estimated that about 3 million jobs have been lost due to the rampant economic impact of COVID-19. This would have reduced households’ ability to save and invest even further. 

SARS statistics show that approximately 5 million South Africans contribute towards a pension/provident fund or annuity to make provision for retirement. “Around 80% of these individuals belong to mandatory employer sponsored pension or provident funds and earn around R15 000 a month. As they don’t have a choice and must contribute to the employer’s retirement fund, this makes it compulsory savings. If they lose their jobs, they will not be able to save, further impacting South Africa’s household savings,” says Van Tonder.

He adds that the 2019 Momentum-Unisa Financial Wellness survey revealed another reason for South Africa’s savings struggle – households don’t always possess the necessary knowledge and skills to save and invest appropriately. The financial services industry has a role to play here and can help address this through effective Corporate Social Investment (CSI) programmes. For example, Momentum Metropolitan Holdings recently partnered with tech company FinEazy, in a campaign to make personalised financial learning accessible to the general public.  

We also possess the problem of living up to the Jones-family. For instance, around one million South Africans who can save for retirement, simply don’t, according to the 2019 Momentum-Unisa Financial Wellness survey. There might be several reasons for this, but chief among them is that they are living beyond their means.

Van Tonder says one of the most basic financial literacy skills required to bolster savings is, and always will be, aligning the household budget with the household financial plan. “The financial plan is the long-term savings and insurance target of the household, but proper budgeting is necessary to achieve these targets. When setting long-term savings and insurance targets, households need to budget for these savings and insurance. Budgeting is essentially a short-term spending and savings plan for the family and helps us to save and insure enough to reach our long-term targets."

Van Tonder says, “Should the situation arise where our outlays exceed our income, we should not immediately let go of our long-term targets and cut down on savings and insurance. There are many innovative options to actually make your money go further.”

One such option is to tap into a rewards programmes you may already be a part of, or have access to, through an existing product such as your medical aid. For example, Momentum Multiply helps you stretch your income through receiving cashbacks on the daily, essential spending you are already doing, and then earns you interest on such cashbacks. 

Multiply also makes your insurance cheaper with big discounts and cashbacks on certain Momentum insurance policies. From an employee benefits point of view, you can earn up to 60% in returns on qualifying FundsAtWork insurance premiums, which you can use to boost your FundsAtWork retirement savings account.

On top of rewards programmes being a sure way to save money, Van Tonder says that financial advisers can assist South Africans to make smarter money decisions by learning how to create a clear budget and reach their short, medium and long-term financial goals. “A financial adviser can bridge the financial literacy gap and professional advice is more affordable than most South Africans think. Not only can they help you plan for your future better, they can help you get there every step of the way,” he concludes.