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Johannesburg - Have a look at your bank statement and calculate how much of your monthly salary goes to repaying debt. Imagine if, apart from your mortgage, you had no debt repayments (think of all the money that would be available for savings).
The reality is that we have already spent our future savings on cars, credit cards, personal loans and store cards. Rather than allowing our savings to compound and grow in value, our debt compounds and absorbs an increasing amount of our potential savings.
Take, for example, a washing machine bought on hire purchase. A R2 900 washing machine financed over 24 months will cost you about R7 000 in total, or R300 a month.
If you decided to save for a washing machine by putting away that R300 instalment every month instead of buying it on credit, it would take about 10 months to save R2 900. Once the machine was purchased, you would be able to continue to save the R300 for either another item or for the future. The money remains in your pocket and also forms part of your savings.
But if you buy the machine on hire purchase, you will spend two years paying the store R300 a month. All your potential savings have now gone to whoever you bought the item from. Stores grow their profit from the money they make from the interest and other finance charges, and the money goes from your pocket to their shareholders.
Their shareholders are those people who never buy on credit and rather invest their money in companies like retailers and banks – which make their money out of people who borrow money to fund their lifestyles. In effect, South Africans are saving in a very skewed sense, through a transfer of wealth from borrowers to investors.
We consume our savings
A study by Professor Carel van Aardt, research director at the Bureau of Market Research at Unisa, found that while the global trend is for people to save more as their income increases, a higher income did not translate into higher savings in South Africa.
He found that South Africans spend far more on consumption than people in other countries do. For example, the research showed that higher-income households tended to buy a new car every two years and upgrade to new homes every five to 10 years, rather than work on reducing their debt.
Figures from vehicle financier WesBank show that the average customer sells their car within three years. In comparison, a report by business news channel CNBC found that before the financial crisis began in 2008, Americans would hold on to their cars for an average of five years, but were keeping their cars for even longer now.
Online automotive repair resource company AutoMD.com’s 2014 Vehicle Mileage Survey found that only 3% of Americans surveyed would sell their car within three years, and nearly 80% said they would hold on to their cars for 10 years or “until it died”.
When it comes to cars, South Africans are more consumerist than the world’s most consumer-driven nation. The result is that South Africans find themselves deeply indebted in their forties and fifties – a time when they should be free of debt and saving their additional income for retirement.
So why are we so addicted to debt? Perhaps it is simply because we can get it. One of the key differences between South Africa and other emerging markets is that South Africa has a very sophisticated lending environment. Credit is far more available and pervasive than other countries that are at a similar level of development. This could account for why South Africa has such a low savings rate when compared with our peers – we don’t have to save up for the things we want because we can have them today. Unfortunately, this comes at the cost of our long-term financial wellness.
With the SA Reserve Bank and National Treasury finally waking up to the reality that South Africans have been gorging themselves on excess credit, the clampdown on lending could see a shift away from the credit mind-set to one of saving – like our counterparts in India and China – but I am not so sure.
Human nature is such that we get used to living a certain lifestyle and will do everything in our power to maintain it. A survey conducted by a life insurance company found that when faced with financial constraints, a household is more likely to cancel insurance policies before a DStv subscription.
As individuals, we will need to start shifting our mind-set to understand that our real financial value sits in our investment account and not in a luxury vehicle or branded clothing. Only then will we start to break the debt addiction.
