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FINANCE 101: THE IMPORTANCE OF SAVINGS

Article © CA(SA)DotNews by DotNews

 “The rich rule over the poor and the borrower is servant to the lender”  Proverbs 22:7

Finance 101
In South Africa we do not have a culture of savings and we have one of the lowest savings rates in the world. This has been steadily declining since the late 1970s. In 1979 our savings rate was 33% of Gross Domestic Product (GDP) and now it is less than 14%. At a household level our savings as a percentage of disposable income are negative whereas in China for example they are more than 30%.

This is particularly bad for South Africa because as a developing country we need to build up our infrastructure; but our poor savings mentality makes this more and more difficult to achieve.

What does this mean for us? At a macroeconomic level this means that in order to finance capital projects, South Africa needs to borrow funds from abroad. As this level of borrowings rises we become more dependent on foreign capital and so our risk profile increases which pushes up the cost of these borrowings. This in turn contributes to the declining value of the Rand. Effectively, the national balance sheet becomes progressively weaker.

At a household level, the effects are similar. As we increase our level of borrowings, so our cost of borrowing increases until we become too high a credit risk. Many households then borrow from micro lenders (at prohibitive costs). Our household savings to disposable income was 6% in the mid-1990s and is now -1%.

Having savings cushions people against shocks such as losing one’s job.

What can you do to fix it?   

Clearly, we need to get more people to save. Much can be done at the macro level such as increasing the employment rate. But what can we do as individuals?

A starting point is education – the importance of saving and becoming financially independent needs to be disseminated to those who do not save. Whilst there is poverty in South Africa, there is also plenty of wasteful expenditure such as gambling and buying unnecessarily extravagant products.  Think tanks propose that we advocate that people develop a savings mentality, have a household budget and stick to it.

So it is important to educate and encourage your staff and people around you to save. It will have substantial benefits for the economy and for South African households.

 

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