We’re financially healthier than in 2015, but ...

The deteriorating economic climate does not bode well for South Africans’ financial well-being this year and next. Martin Hesse reports

SOUTH African households in were in a healthier financial position last year than in 2015, but we have a long way to go in educating and empowering ourselves, and our economy needs to pick up considerably, before we can begin considering ourselves financially well as a nation.

This is an underlying message in the report that accompanied the release last week of the Momentum/Unisa South African Household Financial Wellness Index for 2016, which rose to 67.3 from 66.3 in 2015.

Professor Carel van Aardt, who heads the Household Wealth Research Division of Unisa’s Bureau of Market Research, is largely responsible for producing the index. He says that although the index, which refers to 2016, is up, South Africa’s economic situation this year has deteriorated, and this does not bode well for South Africans’ financial health this year and next (see “Gloomy forecast despite index rise”, right).

The report defines people or households as financially well if they “continually plan and manage their money so that they can afford their expenses and reach their goals over their lifetime”.

The index was constructed from a nationally representative sample of 2 688 households. Based on how they answered a questionnaire, the households were grouped into four categories of financial wellness:

• Financially well. This household is financially well in the current political/economic/ social climate. However, negative developments may cause the household to become financially exposed.

• Financially exposed. Although the household is financially unwell, negative or positive changes will cause it to become either financially unstable or financially well.

• Financially unstable. This household is financially unwell. Its financial situation is very unstable, and adverse events and wrong decisions can easily change its position to financially distressed. However, some opportunities may be available for it become financially exposed.

• Financially distressed. This household is deeply distressed financially. Major outside assistance is required for improvement.

As indicated in the graph, the percentages of respondents in the “financially distressed” and “financially unstable” categories remained more or less the same from 2015 (though considerably down from the first year of measurement, 2011), while the percentage of “financially well” respondents increased to 26.3% from about 24%.

The index takes into account five “capital” factors affecting households, scored out of 10:

• Asset capital: the household’s net wealth as determined by its assets (what it owns) and its liabilities (what it owes). This dropped from 5.8 in 2015 to 5.0 in 2016.

• Physical capital: the household’s state of income and expenditure. This rose from 5.4 in 2015 to 5.6 in 2016.

• Environmental capital: the household’s living conditions. This rose from 5.7 in 2015 to 6.6 in 2016.

• Human capital: the household’s education levels, taking into account its qualifications and skills. This rose from 6.2 in 2015 to 6.4 in 2016.

• Social capital: the degree to which members of the household are financially empowered, as determined by their financial decisions and trust in institutions that affect their empowerment.

According to the report, two of these are “inputs” (social capital and human capital), which the household can control and improve on, while the other three (asset capital, physical capital and environmental capital) are “outputs”: the outcomes resulting from those inputs over which the household has control, as well as external factors beyond its control, such as domestic and foreign political and economic conditions.

By focusing on those factors over which you have control – your financial empowerment, through activities such as saving and budgeting, and your qualifications and skills – you have a better chance of improving your financial wellness, the report says. The figures back this up as far as education is concerned: only 14.1% of respondents in the “financially distressed” category had a matric qualification or higher, compared with 73.9% of respondents in the “financially well” category.

By focusing on saving and budgeting and on your qualifications and skills, you have a better chance of improving your financial wellness.