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By Karin Muller, 1 July 2015
South Africans may have become almost accustomed to being called “a nation of poor savers”, but a recent report by the World Bank gave us the unenviable reputation of being the biggest borrowers in the world.
Indeed, the World Bank’s 2014 Global Findex database report shows up our dismal performance at living within our means – even if many South Africans legitimately borrow money in order to put food on the table and send their children to school.
Karin Muller, Head of Sanlam Growth Market Solutions, says borrowing to fund a preferred lifestyle or borrowing one’s way out of debt can become a vicious circle that is bound to end in trauma and disappointment.
Statistics released by the National Credit Regulator (NCR)* at the end of last year indicate an increase in the value of new credit to consumers, causing concern that more people may become reliant on credit. The statistics also show that 57,4% of people are not up to date with their credit repayments.
“At some point, people’s levels of indebtedness become so severe that this impacts their personal and financial welfare. Sadly, for most this will mean playing catch-up on their finances for years to come. Many will suffer the consequences of their high debt levels all the way into their retirement.”
In fact, Sanlam’s latest Benchmark Survey on retirement found that 51% of people who cashed out their savings at some stage used the money to pay off short-term debt like credit cards and personal loans. When they reach retirement, these individuals usually end up with a reduced income. They are often caught off guard when they have to pick up the cost of, for instance, medical aid cover – especially when they didn’t plan for it.
In fact, the survey showed that medical expenses become pensioners’ third biggest expense in retirement after groceries and utility bills. As many people are preoccupied with servicing debt before retirement, they do not factor this into their financial planning, hence the finding that 45% of retirees actually experience a shortfall between their monthly income and expenses.
Muller says people often don’t believe they have the ability to save money when they are young. This is supported by research conducted by Sanlam into the reality and impact of inadequate financial planning. Yet, in retrospect, they tend to acknowledge their flawed perceptions.
She says the starting point to prevent financial hardship is to have a robust financial plan, appropriate cover for life’s eventualities (like death, disability, loss of income and so on) and to start saving for an emergency fund equal to between three and six months of your monthly salary. “This will surely help people to gain a longer-term perspective and to think carefully about borrowing money to fund short-term debt and desires.”
The Sanlam Benchmark Survey on retirement further supports the call for concern, as it reveals great apathy amongst South African youth about saving and about their retirement plans. The Survey shows that single people and those who don’t have children tend to spend money easily and to spend it on themselves as a reward for hard work.
Muller says the worrying aspect is that these individuals did not think it was realistic to save for the future and were quite blunt about the fact that they had a standard of living to maintain and wanted their money “now”.
She says financial intermediaries play a significant role in engaging with people about their finances, and their ability to inform and educate people about the benefits of responsible financial behaviour certainly has impact.
Given the regulatory environment in which intermediaries work, the benefits of and access to financial advice deserve to be positioned positively to South Africans in order to encourage them to access the services of an accredited financial intermediary.