A Savings Culture is Not Enough

A Savings Culture is Not Enough

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Building a savings culture is not enough. The country has to move to the next level – an investing culture – or risk a backlash from disenchanted savers.

The danger of ‘thrift fatigue’ has been highlighted by Imara Asset Management, a Johannesburg-based wealth management and financial planning firm that believes a ‘why-bother?’ mindset may soon threaten the savings and investment sector.

South Africa’s low savings rate is a continuing concern for national strategists as is the high rate of household debt to disposable income. The last Monetary Policy Committee statement from the Reserve Bank said this ratio was still at the 75% mark.

Official efforts to encourage greater thrift continue, but Imara fears they may not be enough.

Fake savings

Lara Warburton, managing director of Imara Asset Management, South Africa, says a “wealth-depleting mix” of rising inflation, tax on interest earnings and bank fees can result in “fake savings” that create the illusion of wealth building.

Ultimately, consumers who put total faith in simple cash-saving products will realise their efforts have been significantly diluted by this mix of adverse factors. Disillusionment could then set in, with some people turning their back on savings for good.

She adds: “Efforts to build a savings culture should be applauded. As a nation we don’t save nearly enough. But it is vital to include messages about investing and the real returns achieved over the long-term by various asset classes.

“At the moment, consumers believe saving through a simple cash instrument is good enough. But once a family has built a solid cash reserve, it should be complemented by an investment component intended to achieve gains that over time will outstrip the effects of inflation, tax and fees.

“Ultimately, that means equities – but this message is not going out.”

Warburton says it is especially important to get this point across at a time when interest rates remain at historical lows yet inflation continues to rise and this year is expected to reach 6,6%.

Cash backlash

Inflation of 6,6% halves the value of a “cash stash” in less than 12 years and the interest earned after tax cannot maintain the purchasing power of that stash.

Warburton acknowledges that equity investments – most commonly through unit trusts – carry the risk of short-term capital loss. But history shows that the market recovers in time and moves to new highs.

“Recent JSE experience illustrates this,” she notes. “In 2008, it lost 40%, but since then has recovered and in recent weeks moved to record highs.”

Her concern is that people who make a big effort to become savers may simply give up if they see that despite years of self-denial and discipline they simply can’t beat the taxman and inflation.

“The way forward is through better consumer education,” says Warburton.

“But at the moment the issue of wealth depletion goes unaddressed. Consumers get only half the story – ‘save, save, save’. That message has to be amended to ‘save, save, invest, invest’.”

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