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Women count money at a Stokvel meeting in Nhlazuka. (John Robinson, AP file)
Referring to the article SA is saving - but not the Western way, Fin24 user Siviwe Mazwana writes:
This is a great article; very informative about the informal mechanics of the SA savings base. While I always knew about these savings instruments, I never appreciated the quantum of the numbers involved. The amounts are astounding. Considering the current non-existent savings rate, the upside is mind-boggling.
I think we must add other dimensions to this discussion – the difference between saving, investing and financial literacy. Saving is an opposite of spending and is good for the economy, but not always good for the saver.
This is because saving is letting your money work for someone else and you sit on the sidelines hoping to get some piece of the benefits. Investing is making your money work for you and you are in the thick of things directly accruing the long term.
The two are related but vastly different. Financial literacy is knowing the difference just mentioned and acting systematically to achieve life's changing financial needs.
The majority of the population saves so that they can achieve financial freedom whichever way we choose to define it – retirement, send kids to university, set of trust funds for future generations, buy a yacht, etc.
As stated before, savings is the opposite of spending. It is the first (and necessary) but not sufficient step towards financial freedom; unfortunately it ends there – it’s just the first step. Think about the interest rate that you are currently earning on your bank balance; that is saving.
If you compare that to the level of price increases for necessary goods (inflation rate), you realise to are left wanting. Your saved balance is constantly buying less and less of the same goods - soon you won’t afford the life you are living.
That is therefore working against your objective of financial freedom. To quote an extreme, money under the mattress is still savings (the opposite of spending).
A high savings rate is however great for the economy. It assures big industry of a stable and cheap source of investment capital. With a high savings rate, banks are able to use your money to lend to industry captains and they make great profits for their owners (investors).
Big industry is able to cheaply fund most of its future growth projects. The industry benefits accrue to the owners (investors). The SA government is able to finance its projects cheaply, meaning with your money they can do more – think retail savings bonds.
All these are positive outcomes and eventually lead to high employment, a stable currency and better living conditions for all. This is a desirable state for our country. The problem however is that the saver may or may not benefit from this bonanza. The saver has just helped finance other people’s dreams; his dreams will be met at a roll of a dice.
This brings us to the definition I ascribed to saving: saving is letting you money work for someone else and you hope for indirect benefits. The informal savings instruments mentioned in this article (stokvels) exacerbate the adversity of these outcomes.
Informal savings instruments are mostly short-term focused and can best be defined as delayed consumption than savings instruments.
What our saver was supposed to have done was having taken the most important step (saved); the next step is to invest. This means putting your savings with financial institutions that are able to lend to at substantially higher rates than yours.
This means being the owner of the banks, indeed the SA industry that will be the driving force behind the future economic growth of our country. The economic participation is more deliberate than circumstantial. Hence the definition: investing is making your money work for you and you accrue the benefits directly. Note that the indirect benefits are still there for the taking.
How do people invest rather than just save is therefore where the biggest gap remains. Financial institutions are not doing much to stem the tide. My wife once observed that 10 out of 10 cold calls she gets from financial institutions are supposed to protect her when she is not around – like send our kids to university in case she is not around (God forbid).
She asked me what happens on the most likely event that she is alive and our kids have to go to university. Financial institutions don’t want to tackle this; after all, it’s a hard sell. It does not carry the same amount of emotional weight as death. Instant gratification is a powerful force working against investing. In a world of short-term profit maximisation we try and appeal to what is going to sell now. Tomorrow will take care of itself.
The reality is that at 32 years, my wife is more likely to be around to see our kids than dead – this is after taking into account the Aids epidemic and violent crime in our country. Therefore, while it is important to protect just in case death occurs (low probability but high financial impact), it is far more important that she prepares in case life occurs (high probability and high financial impact).
This brings me to my last point regarding the trust issues mentioned in the article. In my university days I got used to the conventional wisdom that insurance is sold, not bought. This was a noble statement. It has now been perverted to imply product push.
Customers are emotionally blackmailed into buying funeral policies - no underwriting (which should read - high premiums because we are going to assume you are HIV+), no waiting period - we can conclude the deal over the phone and you know you are protected. This is the opposite of what is needed for saving and indeed investing. An investor has to be financially and physiologically matched to the investment strategy.
This is what financial advisers are supposed to do. The travesty is that only the top end advisers are able (both in know-how and economic sense) to do this to their customers. The difference between an average adviser and a top end adviser is chalk and cheese. The average R210 a month customer is just not in that calibre adviser radar and thoughts – economically it does not make sense and socially they live in two polar ends.
An average South African is therefore left to his own devices or has to assume the ill advice from commission-chasing product pushers. The results are likely to be similar – devastating financial outcomes and a breakdown of trust. We therefore need to empower the average investor so as to better assess the quality of the advice they are paying for.
We have trip advisers for holidays; price check for internet shopping, etc. What do we have to assess whether we are being advised to financial freedom? This is a gap.
It is amazing how much more reading we do before we buy a mobile phone than before we make life-changing decisions. I postulate that we happy to take the expert advice because we feel helpless - we don’t really know much and there are no tools to help us assess the quality of the advice given.
The savings industry must close this gap.
- Fin24
* Siviwe Mazwana is head of research at Stanlib multi-manager and is writing in his personal capacity. Views expressed are his own.
This is a great article; very informative about the informal mechanics of the SA savings base. While I always knew about these savings instruments, I never appreciated the quantum of the numbers involved. The amounts are astounding. Considering the current non-existent savings rate, the upside is mind-boggling.
I think we must add other dimensions to this discussion – the difference between saving, investing and financial literacy. Saving is an opposite of spending and is good for the economy, but not always good for the saver.
This is because saving is letting your money work for someone else and you sit on the sidelines hoping to get some piece of the benefits. Investing is making your money work for you and you are in the thick of things directly accruing the long term.
The two are related but vastly different. Financial literacy is knowing the difference just mentioned and acting systematically to achieve life's changing financial needs.
The majority of the population saves so that they can achieve financial freedom whichever way we choose to define it – retirement, send kids to university, set of trust funds for future generations, buy a yacht, etc.
As stated before, savings is the opposite of spending. It is the first (and necessary) but not sufficient step towards financial freedom; unfortunately it ends there – it’s just the first step. Think about the interest rate that you are currently earning on your bank balance; that is saving.
If you compare that to the level of price increases for necessary goods (inflation rate), you realise to are left wanting. Your saved balance is constantly buying less and less of the same goods - soon you won’t afford the life you are living.
That is therefore working against your objective of financial freedom. To quote an extreme, money under the mattress is still savings (the opposite of spending).
A high savings rate is however great for the economy. It assures big industry of a stable and cheap source of investment capital. With a high savings rate, banks are able to use your money to lend to industry captains and they make great profits for their owners (investors).
Big industry is able to cheaply fund most of its future growth projects. The industry benefits accrue to the owners (investors). The SA government is able to finance its projects cheaply, meaning with your money they can do more – think retail savings bonds.
All these are positive outcomes and eventually lead to high employment, a stable currency and better living conditions for all. This is a desirable state for our country. The problem however is that the saver may or may not benefit from this bonanza. The saver has just helped finance other people’s dreams; his dreams will be met at a roll of a dice.
This brings us to the definition I ascribed to saving: saving is letting you money work for someone else and you hope for indirect benefits. The informal savings instruments mentioned in this article (stokvels) exacerbate the adversity of these outcomes.
Informal savings instruments are mostly short-term focused and can best be defined as delayed consumption than savings instruments.
What our saver was supposed to have done was having taken the most important step (saved); the next step is to invest. This means putting your savings with financial institutions that are able to lend to at substantially higher rates than yours.
This means being the owner of the banks, indeed the SA industry that will be the driving force behind the future economic growth of our country. The economic participation is more deliberate than circumstantial. Hence the definition: investing is making your money work for you and you accrue the benefits directly. Note that the indirect benefits are still there for the taking.
How do people invest rather than just save is therefore where the biggest gap remains. Financial institutions are not doing much to stem the tide. My wife once observed that 10 out of 10 cold calls she gets from financial institutions are supposed to protect her when she is not around – like send our kids to university in case she is not around (God forbid).
She asked me what happens on the most likely event that she is alive and our kids have to go to university. Financial institutions don’t want to tackle this; after all, it’s a hard sell. It does not carry the same amount of emotional weight as death. Instant gratification is a powerful force working against investing. In a world of short-term profit maximisation we try and appeal to what is going to sell now. Tomorrow will take care of itself.
The reality is that at 32 years, my wife is more likely to be around to see our kids than dead – this is after taking into account the Aids epidemic and violent crime in our country. Therefore, while it is important to protect just in case death occurs (low probability but high financial impact), it is far more important that she prepares in case life occurs (high probability and high financial impact).
This brings me to my last point regarding the trust issues mentioned in the article. In my university days I got used to the conventional wisdom that insurance is sold, not bought. This was a noble statement. It has now been perverted to imply product push.
Customers are emotionally blackmailed into buying funeral policies - no underwriting (which should read - high premiums because we are going to assume you are HIV+), no waiting period - we can conclude the deal over the phone and you know you are protected. This is the opposite of what is needed for saving and indeed investing. An investor has to be financially and physiologically matched to the investment strategy.
This is what financial advisers are supposed to do. The travesty is that only the top end advisers are able (both in know-how and economic sense) to do this to their customers. The difference between an average adviser and a top end adviser is chalk and cheese. The average R210 a month customer is just not in that calibre adviser radar and thoughts – economically it does not make sense and socially they live in two polar ends.
An average South African is therefore left to his own devices or has to assume the ill advice from commission-chasing product pushers. The results are likely to be similar – devastating financial outcomes and a breakdown of trust. We therefore need to empower the average investor so as to better assess the quality of the advice they are paying for.
We have trip advisers for holidays; price check for internet shopping, etc. What do we have to assess whether we are being advised to financial freedom? This is a gap.
It is amazing how much more reading we do before we buy a mobile phone than before we make life-changing decisions. I postulate that we happy to take the expert advice because we feel helpless - we don’t really know much and there are no tools to help us assess the quality of the advice given.
The savings industry must close this gap.
- Fin24
* Siviwe Mazwana is head of research at Stanlib multi-manager and is writing in his personal capacity. Views expressed are his own.
