Cape Town - At least once in the past year, 57% of South Africans found that their income did not cover their living expenses.
This statistic, recently released in the 2016 Old Mutual Savings and Investment Monitor (SIM), highlights that consumers are understandably struggling to stretch their household budgets, and that many South Africans are not being as financially astute with their spending as they could be.
This is according to Derick Ferreira, head of product management at Old Mutual Personal Finance, who says that the SIM recorded an increase in the proportion of household income used to service debt, from 12% in 2015 to 16% in 2016.
"This suggests that when expenses exceed income, households are increasingly taking up loan offers and accessing credit lines, rather than curbing their spending. This shift was particularly noticeable among middle-income households, seriously hindering their ability to save and thus diminishing the potential for medium to long-term wealth creation."
In light of savings month, Ferreira says that the behavioural science behind an increased propensity for debt is key for consumers to understand, and emphasises the importance of developing better spending habits.
Consumer behavioural science plays a key role when South Africans want to avoid overspending and important to consider the next time you shop in-store or online, says Ferreira.
According to a report conducted on behalf of Old Mutual on consumer behaviour, South Africans should be aware of retail tactics that may lure you to spend more.
Some of the retail tactics affecting consumer behaviour
- A psychological trick called the
"left-digit effect" that makes you think you’re paying less for
something is important to be aware of. In a test, up to 44% of participants
were taken in by this 1c trick. For example, R3.99 vs R4.
- Buy three get one free. Do you really need
four? What you are more than likely doing is overspending. Retailers call it
the "open the wallet" concept, this tactic is also behind those 50%
off specials on things you don’t need.
- Retailers play on your five senses to make you
spend more. For example playing love songs when you go grocery shopping to get
you to buy more for your loved ones. Researcher Martin Lindstrom pumped the
smell of apple pie into an appliance store and sales went up by 23%.
- Stores deliberately place essentials such as
bread and milk at the back to increase impulse buying as you walk through the
- Be aware of the temptation corridor. Checkout
aisles have been designed to tempt you and your kids with treats and sweets
while you’re bored and waiting to pay, this is an impulse sales tactic.
- Shopping centres and retailers encourage you
to bring the kids along, as research proves that parents spend 29% more when
the kids are around. This is according to a study of nearly 3000 consumers
carried out by Lindstrom.
- "Limited edition" tactic is often used
to create a sense of urgency and make you buy on impulse.
- Stores use layout science and "line of
sight" to push you to buy selected products. The stock, often more
expensive, that they’re trying to move will be displayed at eye level.
With rising interest rates, the cost of debt is continuously growing, making high-interest short-term debt such as credit cards and store accounts particularly expensive, says Ferreira.
"With the prime lending rate having increased by a further 0.25% in March 2016 to 10.50%, consumers relying on credit may struggle to stay on top of their growing repayment responsibilities."
This rings true to the SIM finding that only 13% of South African households are paying their credit card off in full at the end of the month. "There has been a decrease noticed in the proportion of people who pay more than the minimum amount required on their credit cards.
Looking at store card repayments, as has historically been the case, the incidence of accounts being cleared monthly is even poorer than for credit cards, sitting at 6%.
"During tough times, the temptation to get further into debt is a challenge, but it’s during times like these that minimising debt and maximising savings should be made a priority," Ferreira adds.
How to beat the retail strategy to lure you into overspending
- Save 29% by not taking the kids along when you
- Leave your credit cards behind. Avoid temptation
at all costs, especially impulse buys
- Avoid just popping into the shopping mall that
can easily get you into overspending. Avoid the temptation by planning better.
- Wait 48 hours before buying. On larger
purchases, give yourself time to think about whether you really need it.
- Do not meet up at the mall. Instead of meeting
friends at the mall, rather meet at the park or beach or outside. It’s
healthier and cheaper.
- Shop wisely by writing a shopping list and stick
to it, avoid going from aisle to aisle and buying on impulse
- Buy needs not wants.
The Old Mutual SIM also reveals that South African consumers do, admit that they may not always be making the most informed financial decisions.
"There has been a decline in consumer confidence when it comes to financial decision making. While just under half of working metro dwellers claim that they have to forego 'pleasure spending' a lot of the time, incidence of sticking to a budget is rare, especially among younger and lower-income households."
Ferreira says that one of the most significant definers of differences in attitude and behaviour is income.
"There is often an unfortunate perception that only wealthy people can afford to see a financial adviser. This is not true and forms a barrier for the people who most need advice on how to begin saving effectively.
A financial adviser is able to help these consumers to understand their unique needs and circumstances in order to formulate a plan based on their goals and priorities."
Ferreira confirms that the secret to a stable financial future lies in consumers’ everyday spending decisions and financial habits.
"It’s a fact that goals give us direction and remind us to stay on track and can help us turn our spending habits into savings habits. Once you know your goal, sit with your adviser and create a dynamic financial plan that’s tailor-made for your current life stage and lifestyle."