Savings vital for the individual and the country

Savings by individual South Africans are as important to their personal financial well-being as they are to the health of the country’s economy, according to Dave McCall, Executive of Investments, Retail and Business Banking at Nedbank.

He says people who have savings are better able to overcome economic setbacks and shocks such as a loss of income, and are less likely to have to borrow or rely on credit to cover unexpected expenses.

“Savings also enable people to start their own business or finance their children’s education and training.”

McCall says personal savings enable the country to develop and grow by enabling banks to lend to businesses and finance investments.

“Conversely, if people don’t save it can have a negative impact on the country’s economy as it could lead to insufficient financial investment for long-term growth and a reliance on foreign investment, which can lead to financial market volatility,” explains McCall.

He says unfortunately the general consensus is that South Africans are poor savers.

South Africa’s Gross Savings Rate was measured at 15.8 % in December 2017, compared with 16.0 % in the previous quarter, according to CEIC Data. The country’s savings rate reached an all-time high of 42.4 % in March 1980 and a record low of 14.4 % in December 2012. South Africa’s Gross Savings Rate between March 1960 and December 2017 was an average of 20.6 %.

In comparison, China’s saving rate, at 46 percent of GDP, is among the world’s highest while India’s gross savings rate was measured at 30.0 % in Mar 2017.

McCall explains that a country’s savings rate indicates its financial state to fund growth as household saving is the main source of government borrowing to fund public services and infrastructure development.

“In most cases, only countries with a high Gross Savings Rate can maintain a high rate of socio-economic development. High saving rates in a country can translate into funds being available for socio-economic growth including the building of factories, shopping malls, and hotels, which contribute to growing our economy and creating new jobs.

“Furthermore, a higher gross savings rate allows for a larger percentage of a country’s debt to be financed domestically, which is a more sustainable option than foreign financed debt.

“Conversely, a low rate of domestic saving could limit a country’s rate of investment, restrain the rate of economic growth and make the country much more vulnerable than it would otherwise be to foreign direct investment shifts.

“Although foreign direct investment flows can complement domestic saving, the volatile character of the global capital market limits the availability of sustained foreign investment,” says McCall.

On the flip side of the coin, according to Trading Economics, household debt in South Africa decreased to 71.90% of gross income in 2017 from 74.40% in 2016. Household debt to income in South Africa averaged 57.58% from 1969 until 2017, reaching an all-time high of 86.40% in 2008 and a record low of 40.30% in 1980.

In other words, most of what South Africans earn is owed to someone else and the combination of being in debt and not saving makes households vulnerable when interest rates increase, which could result in families losing their houses or motorcars. Whereas having a savings account means that higher interest rates may actually work in your favour, because you earn more interest instead of having to pay more.

Nedbank’s PrimeSelect deposit, for example, pays an interest rate that is directly linked to the prevailing prime overdraft rate.

McCall contends that there is definitely room for improvement in South Africa’s savings culture and reducing the propensity for buying without having the reserves to pay for the item and therefore having to buy on credit, which results in the negative consequences of compound interest increasing your debt instead of working in your favour and growing your savings.

“Despite on-going efforts by government and the financial services industry to develop a savings culture in the country, South Africans still aren’t saving enough. In fact, a recent survey by FinScope - which tracks the use of financial services products in South Africa - revealed that as many as 62% of South Africans simply don’t save at all.

“National Savings Month is a reminder that we should always try to save and do so on a continuous basis. You never know when you will need it,” says McCall.

As a guideline, Nedbank recommends maintaining a savings level equal to three times your monthly salary to ensure you have a buffer to cater for temporary shortfalls such as insurance excesses, medical expenses, or for those rainy days when the geyser, toaster or any other appliance becomes faulty and breaks. These can all add up and soon you may find no other option but to take out debt. Saving a little each month could ensure that this does not happen.

McCall says saving should be part of your monthly budgeting. He gives the following reasons to save:

To help with those unforeseen times when you suddenly need extra cash;

To provide for your retirement and to be able to enjoy your twilight years; To help towards the deposit on your home or car; To help towards your children’s education; To protect yourself and have enough saved should you lose your income; To have enough to start your own business; To go on that dream holiday with your family or loved ones.