Household Wealth Index: Save more; spend less
According to the findings, determining the household balance sheet (which comprises of the liabilities, assets and net wealth of the household) is an important step in determining the financial wellness of a household.
Johann van Tonder, economist and researcher at Momentum told Justmoney that “a personal wealth indicator is probably the most important economic indicator around.”
He added that it helps to show how rich a person or country is, as well as what choices people are making as to how they use their money. In other words: do they save or consume?
Furthermore, it indicates whether people can retire financially well or not.
“The index clearly shows that South African consumers are making the wrong choices, [that is to say] they consume too much in relation to what they need to save. In other words, when they have to make a choice between purchasing something and saving, they mostly choose the purchase. So, they give up their chance of enjoyment after their work life for enjoyment now. As such, the majority of consumers will experience financial trouble after retirement,” said van Tonder.
The net wealth of a household is determined by subtracting its liabilities from its assets. The Index reveals that the value of the net wealth of South African households at the end of 2014 was approximately R7.943 trillion, which is an increase of 7.8% (R574.4 billion) from the period ended 2013.
This increase exceeded the inflation rate of 5.3%, which means that the real value of South African household’s net wealth was 2.4% higher than it was in 2013.
During this time, real household wealth per capita also increased (from R113 634 in 2013, to R114 547 in 2014). However, this growth was smaller (only 0.8%) as the population also increased during this time.
The importance of saving over spending
Momentum pointed out: “Analysis shows that in 2014 households on average apportioned 23.48% of their after-tax income to repay debt (capital, interest and fees). In contrast, compulsory savings in the form of contributions (employer and employee) to official and private retirement funds amounted to only 4.55% of total after-tax income.”
The discrepancy between the percentage of salary used to repay debts and the percentage that is placed into savings has been a downward trend since 2010, according to Momentum.
Van Tonder highlighted: “These two percentages show the problem – debt and savings are different sides of the same coin and the numbers clearly point to an in favour of debt. And debt for other purposes than purchasing a property has surpassed mortgages as the main source of consumer debt.
“The percentages clearly point to required intervention. On the savings side employers can play a role by increasing the contributions to retirement funds (to be negotiated by unions), while employers who don’t provide retirement options to their employees should start doing so.”
One of the reasons for this downward trend in saving versus spending is that consumers increase their debt by much more than they increase their savings amount. Added to that, consumers may not have the knowledge required to develop a financial plan to help them manage and monitor their money effectively.
In addition, the cost of living has also increased, and that has “made it more difficult to save more without lowering the standard of living. However, lots of consumers are poor and are not able to save and there is no information suggesting that they are declining in number terms,” added van Tonder.
The pros and cons
According to the Index, the net wealth of households was negatively affected by a decline in the value of their net wealth during the second half of 2014. Van Tonder explained that the main reason for this is due to the decline in the value of financial assets.
“The decline in the value of financial assets can be attributed to the decline in share prices (listed at the JSE) and as their contributions to retirement funds are invested in these shares, the value of their financial assets declined,” noted van Tonder.
The declines in the share prices can be attributed to many factors. However, van Tonder emphasised that “the most important are expectations of lower international economic growth suggesting lower profits by companies that will affect their share prices; the electricity shortage in South Africa that negatively affects production and therefore the profits of companies and thus their share prices; and any other factor that negatively affects production, [such as] labour strikes.”
While van Tonder noted that not all the results in the Index were negative, growth still needs to occur on a much faster basis.
“We need to increase our net wealth to income ratios to the levels of developed countries, that is to above 600% and we are at 350%. Otherwise the majority of consumers will remain financially unwell,” he said.
The impact on consumers
As the Index is relatively new, and many consumers in South Africa do not know how to manage their finances properly, van Tonder pointed out that the results of the Index have had very little impact on consumers to date.
“Consumers in South Africa are relatively uneducated and uninformed compared to, for instance, developed countries on issues such as managing their personal finances. The key for every consumer is to have a financial plan that will ensure their financial wellness during their working life and after retirement. The only way we can change consumer habits is to educate them.
“Unfortunately it is not happening at school level, while not everyone has access to a financial advisor to explain the importance of financial knowledge. We need a shift in the thinking of policy makers ([such as the] Department of Education), as well as in the minds of employers and unions, if we want to change habits. We all need to educate consumers on why they need to build wealth and avoid expensive debts,” explained van Tonder.
A key tip that van Tonder offered was the importance of having a financial plan that suits your personal financial situation.
“If you can’t compile one yourself, find somebody that can. This plan is the key to determine how much one should save and how much debt one can afford - and then stick to that plan – until your situation changes to a degree that a new plan is required.
“For instance if a person gets a promotion and receives a higher income and want to purchase a house, it will require a new plan with a new affordable instalment and higher contributions to a retirement fund or acquiring other assets that will yield a return.”