Saving is one of the most important tools we can use to provide equal opportunities to all our people. But it is imperative that all of us save enough: government, business and private households. We cannot live as if there is no tomorrow. If anyone of the parties does not save enough, it has serious consequences – not only for individuals but for the entire country.
What happens when a nation does not save enough?
Research has shown that countries where families, businesses and governments did not save enough, suffered more severely in the economic meltdown.
In the United States people were borrowing money as if it was going out of fashion. People overspent on the wrong items with borrowed money. When too many people and institutions could not pay back their debts the US economy collapsed – with dreadful consequences for the rest of the world.
In Spain, the shortfall in household and corporate savings also had serious consequences for the government. The Spanish government was forced to borrow huge amounts of money at high interest rates. In France, families saved enough but businesses had high debts. As a result businesses closed; people lost their jobs; taxes increased and there was less money for service delivery.
Consequences of irresponsible borrowing and not saving:
When businesses go bankrupt (close their doors because they cannot pay back the money they have borrowed), it has serious consequences. Not only does it result in job losses (no income for households) but it also does not make pay tax money to the state.
This in turn impacts negatively on the government: when people do not work, government gets less money (from taxes) to spend on services for its people and have to pay more in grants to families, who have no jobs.
If we save too little as a nation, we cannot invest in projects that will result in growing the economy, e.g. factories, roads, bridges, power stations, etc. Our schools and hospitals will also suffer and government will have to pay many more grants because people are so poor.
Is South Africa a saving nation?
South Africa has a good and sound financial system, which helped us from losing more jobs during the recession. But a good financial system alone cannot provide a better life for all.
Currently our households are among the worst savers in the world: a dismal 1.5 percent of total household income last year. We have too many debt repayments for an emerging nation that hopes to achieve sustained growth and realise the goal of a better life for all.
Government wants to provide all our people with water and sanitation, enough roads, schools, clinics, libraries, etc. However, if we do not receive enough tax money, we have to borrow money. Borrowing money is very expensive because you pay interest – more than what you borrow. This puts government in a debt trap and takes money away from what could have been spent on services for our people.
What happens when a nation saves?
What sets China apart from the rest of the world is that the rising aggregate saving has reflected high savings rates in all three sectors: corporate, household and government. Each has contributed to the rise in gross national saving. As a result the country exceeded its targeted 8 percent growth rate in 2009– in the middle of a global recession! Households in China saved 38 percent in 2009 of their country’s income. There is no need for government to borrow money and it can spend more on service delivery for its people.
No country in the world has created more jobs and reduced unemployment with economic growth. Why do we want to follow a bad example rather than a good example?
Job creation and poverty reduction through saving and economic growth
When the economy grows – by establishing more flourishing businesses and through trade with other countries – more jobs are created. South Africa’s current economic growth rate touches on 3 percent. But to grow sufficiently to provide enough jobs and a better life for all people, Finance Minister Pravin Gordhan said South Africa’s economy must grow at 7 percent for 20 years.
For the South African economy to grow at 7 percent we (government, corporate and private households) have to save collectively at least 15 percent of our income per year. A country with prolonged economic growth creates enough jobs, which reduces poverty.
Becoming the world’s best savers
Three key principles of saving:
- Protect what you have first (look after your assets: your house, your school, your clothes, etc.
- Put money away (in a bank, stokvel, retirement annuity, etc)
- Spend less and use money to pay debt faster, e.g. paying off your car or home loan.
Start saving:
Start by saving the first five cents. Do not look down on the “coppers.” I have seen people walking over five cent pieces, refusing to pick it up because it was not fifty cents or a rand. A cent saved, is a cent earned. By not spending money, you are saving money – money which will grow from cents to rands. You can start investing once you have money saved.
Know what you want to do with your saved money. Are you saving for a specific reason like a car or retirement? Are you building a nest egg so you can start your own business?
Why does government have to save?
A bankrupt government cannot help its people. Therefore it is crucial that government also saves on unnecessary items.
Government must spend the tax payers’ money but we must ensure that we always get value for money by spending the money wisely. We cannot waste the money, e.g. on food and high cellphone bills for staff members. We need to spend the money on core service delivery programmes. We must also invest in projects that will grow the KwaZulu-Natal economy, e.g. the King Shaka International Airport and Dube Trade Port.
The KwaZulu-Natal government has been praised for the way in which we have brought down our debt. Through cost-cutting measures we have reduced our projected debt from R5.6 billion for 2009/10 to below R1.7 billion. And we are on our way to wipe out all debts. The National Cabinet is so impressed with our success that it told all national departments and provinces to follow our example. Likewise we appeal to our people – businesses and households - to get out of their debt traps and start saving.
How business saves
Businesses that do not save enough close their doors eventually. You have to keep part of your profit to plough back into your business and to grow it. If you do not do that, the quality of your product or service will suffer and or you will not be able to expand to serve more customers and clients.
I was truly disappointed when I read that only 7 percent of South Africans are saving to start their own businesses. Our country needs entrepreneurs. It is crucial that we find ways to improve our people’s levels of self-employment. This will improve their own levels of income, as well as creating jobs for other people. Instead of being “job takers,” let’s become “job makers.”
Cooperatives and small businesses have to play an important role in fighting poverty and the rising food prices. Government has identified these as one of the important tools to take farmers, presently in the second economy, into the first economy. We want you to succeed. Government realises that one needs capital to start a business. Therefore loans are available to kick start viable businesses and cooperatives.
But it is not enough to provide finance. Understanding certain concepts will help your business to reduce costs and increase profits:
- Adequate records in a proper accounting system
- Don’t be fooled by thinking if you sell many items you are making a big profit. There can be behind-the-scene expenses eating up the profit. Don’t confuse profit with turn-over
- Check your cash flow daily
- Become financially literate
How households save
South African households save way too little. We don’t save enough for our children’s education, for our houses and most of us discover with a shock when it is far too late, that we will not have enough money to live on when we retire.
Too many South Africans are drowning in debt. Most people need to borrow money to big items such as a car or a house - therefore we need to borrow money. But we must distinguish between good debt and bad debt.
Difference between good debt andbad debt:
Good debt is the kind of borrowing you to buy something that will become more valuable, e.g. a home loan or getting a study or business loan for expansion. Bad debt is borrowing money to buy things which will not last or which value will not improve, e.g. borrowing money to buy alcohol or to throw a party.
Getting into the habit
To say you cannot save money because you don’t earn enough is too easy. In fact, research has indicated that it is often found that people in lower income groups save more than some of their higher-income people. There is a trend that South Africans have to break: the habit of thinking that when I earn more, I must spend more.
We have to get into the habit of saving before we start spending. Therefore we must do it at the beginning of the month. Saving will prevent us from borrowing money irresponsibly and incurring bad debts.
How much can I spend on repaying my debts andhow much must I save?
Rule of thumb:
- Not more than 40 percent of income should be spend on paying debts (good debts)
- Save at least 15 percent of your income.
Danger of borrowing
It is very expensive to borrow money because you have to pay back the money plus interest and you end up paying more than the money you have borrowed.
Be aware of loan sharks. Do not let your family members get you into trouble by borrowing money from these people. If you start borrowing money to pay debt you are in big trouble. It is heart breaking to see how some loan sharks will wait in their vehicles at the pay points to ensure see that their “clients” pay them first. With the excessive interest they have to pay they immediately have to borrow more money.
Sometimes we have do not have enough money to buy items such as television sets, fridges, lounge suites or beds. We can get ourselves into serious trouble if we don’t plan our purchase properly. Let us say the price of a television set is R1 200 and you sign a contract to pay back the money over three years, paying R84 per month. Now let us do some quick calculations: if you pay R84 for 36 months (three years) then your total will be R3 024. How much does the television set cost? R1 200. How much extra will you pay for the television set according to the loan agreement? R1 824! If you had paid cash, you could have bought two television sets and still had some change with the money you paid for one television on loan agreement.
Now if you have saved R84 a month for 14 months, you will have enough to pay cash for the television. It helps to be patient and plan ahead. It is also important to involve your children and talk about sacrifices that each one must make to buy the television. Then you save for it as a family.
The more money you borrow, the more you pay back. When you pay cash you can also negotiate the price. Lay by is also a cheaper option. That is why it is always better to buy cash.
Getting out of the debt trap
Savings are sometimes found in unexpected places:
- By planting trees strategically you can either keep your house cool in summer or protect it against the cold in winter. So will using a kettle rather than boiling water on a stove reduce electricity costs.
- Using the right wattage of bulb will also save electricity. Switch off unnecessary lights
- If you are not sure where the money is going, keep a spending diary. Make a note of everything you spend, even if it is 50 cents.
- Distinguish between needs andwants. Get your children involved in some of these decisions. It will make them feel like they’re helping you and it’s a good way to teach them about money
- Don’t let your children bully you into buying them expensive brand clothes that you cannot afford. That is why it is important that you let them be part of the budgeting process
- Public schools cannot deny a child education because his or her parents cannot afford to pay school fees. Orphans are automatically exempted but guardians must inform the school that the child is an orphan. If you cannot afford your child’s school fees, apply for either partial or full exemption and show the school proof of your income
- Get better value for money: by comparing prices and quality; buying in bulk; looking out for sales and specials
- Group saving: If you join a stokvel, make sure that the rules are followed and that you know and trust each other.
- Individual saving: If you end up getting child support grants for your children or grand children and don’t need to use all the money for daily necessities – start a college/university savings plan for the children. Alternatively you may want to set up a guardianship or trust account for your children to receive their benefits
- Let your children take food from home to school rather than buying “something” at school. You can put anything on sandwiches – even a spoonful of spinach or potatoes that was left of dinner. It is not only cheaper but also healthier
- Start your own vegetable garden and to keep chickens. Then you don’t even have to buy spinach or eggs
- You can also save by giving – not just out of generosity but also by agreement to receive the favour back when needed example you can offer to help your neighbour to plant or harvest his vegetables but by doing this you expect him or her to help you when you need to plant or harvest.
Teach your children to save:
Teach your children to save. Then they are taking ownership of their own future.
- Use grocery shopping to help demonstrate wise spending. They must know what the budget is before entering the store
- When withdrawing money from an ATM, explain to a very young child that it is hard-earned money, not money that comes out simply by pressing a few buttons
- Give the child a small allowance: even small amounts can teach valuable money management
- Have family financial meetings to talk about saving goals, as well as needs and wants.
Remember: Unplanned splurging will rob you of a chance to later fund something meaningful, like a child’s education or to provide for a comfortable retirement. Saving today will pay for tomorrow.
But we need to plan financially for that day. One of the riches people in the world, Warren Buffet, said, "Someone's sitting in the shade today because someone planted a tree a long time ago."
