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Johannesburg - There is certainly no debate that ‘saving for a rainy day’ is the right thing to do. It would be near impossible to find a sensible argument not to save (or invest).
Where there could be quibbling is how much to divert away from current consumption – in other words, how much to save and when to start saving - but not whether it should be done or not. To save and invest is what everyone should be doing, from as soon as they begin to earn an income. The best time to start is always, now.
An area of decision-making that is also open to debate and choice, are the financial products (or platforms or instruments) that are best for each person’s savings and investment needs.
There are many ways to service every individual’s specific needs. Settling on the best solutions requires consideration and, almost always, help from people well-versed in the business of appreciating both the individual’s specific circumstances, and the financial instruments that will best accommodate their needs.
Lezanne Human, CEO of Savings & Investments and Fiduciary at FNB says, “One of the reasons most governments, including ours, legislate rules of engagement between financial services providers and the public, is to manage the difficulty of clients to make informed decisions in a very complex market place.
While it is difficult for a lay person to make full sense of all the possible solutions to their financial needs, they are the most informed of their circumstances and needs, and should ensure that whatever is proposed to them is apt,”
“July is designated as South Africa’s ‘Savings Month’, with the theme, ‘Promoting a savings culture.’ While such initiatives and campaigns are useful instruments to highlight South Africans’ saving deficit and to encourage more responsible savings behaviours, it should be remembered that saving and investing is an ongoing behaviour, not something that is done for a month or a brief moment.”
Each person’s circumstances are unique, it is impossible and inappropriate to provide advice in an article that is person-specific. However, what is useful is to illustrate possible options for our typical saver ‘Ms Khumalo’.
There are ever more South African women entering the labour market. This is a positive dynamic, both socially and economically. Some of these are professionals and single mothers who take on the responsibility of maintaining a multiple-generation household. Sole income-earners are often under severe pressure to defer saving and investment for a hoped-for better future; when it is assumed ‘things will be easier’.
Some of the key parameters that Ms Khumalo needs to take into account in her decision-making include the following:
• Her age;
• The nature of her income – largely fixed monthly or largely variable;
• Her first level gross income (after tax); and her second-level gross income (after any employer-based medical aid (insurance) and / or retirement and / or life assurance contributions);
• Depending on the situations pertaining to the above, she needs to provide for these conditions, in their absence, particularly retirement (defined as the time when she will not be able to maintain her income as per her normal employment);
• Work out what she needs to save for short- to-medium-term, unpredictable but probable eventualities such as medical insurance payment gaps, household emergencies or vehicle repairs. Such savings options are discussed further below. If she has been saving already, she needs to assess her current savings relative to her income and normal expenditure and adjust it accordingly;
• Appreciate her capacity to take risk on savings (trading off potential risk of capital loss for possible higher returns), which is probably low;
• Work out whether she needs to supplement any employer-based long-term investments, and if she has been doing this, review her situation;
• (Assuming Ms Khumalo is starting from a clean sheet, although this would be unlikely) Then cover her expenses starting with the unavoidable ones, such as mortgage bond or rent, food, rates and taxes, car hire purchase or transport, fuel, school fees, and clothing; and lastly;
• Allocate income to variable and discretionary spending at a secondary level - such as entertainment, communications, and vacations.
Most people tend to absorb whatever income they earn, no matter whether it's R10 000 or R100 000 per month. That is why principles are so important, although in practice it is easier to save from a larger income than a smaller one. Here are the principles behind Ms Khumalo’s decision-making.
• What she does regarding expenses must be consistent with her circumstances;
• Investment and savings are made before expenditures – if this is not done, there is never any income ‘left-over’ to save;
• Investments are for the longer-term and savings for the short- to medium-term and generally have a different use;
• Other critical needs are the next items to be expensed; and
• Consumption is the last priority, not the first.
“Not all savings accounts are the same, so it would be important for each person to appreciate their circumstances and needs, then match these to a most suitable solution,” concludes Human.
