South Africans have long been considered as being amongst the world’s worst savers, but the reasons may have more to do with high levels of indebtedness rather than a poor savings culture.
“The reality for many middle-income South Africans is that once they’ve paid for essentials most if not all of what’s left is spent repaying debt. That makes saving difficult, if not impossible,” explains Benay Sager, head of DebtBusters.
The company’s most recent quarterly Debt Index found that people applying for debt counselling with take-home pay of over R20 000 per month are spending 60% of their monthly net income servicing debt. Their debt-to-income ratio is over 130%.
He says the reason for this is that consumers is that real income has declined by 17% over the past five years as a result of inflation and the latest CPI numbers will exacerbate the situation. Consumers are borrowing to make up the shortfall. Evidence of this is the 76% increase in unsecured debt levels since 2016 amongst consumers earning over R20 000 or more.
“Clearly the situation is unsustainable,” says Sager. “Lack of savings makes consumers vulnerable should they be faced with an unexpected expense, lose their income or are forced to stop working or retire. It also has broader economic implications. To be able to grow, the country is disproportionately reliant on foreign investment rather than domestic savings.”
He says that debt counselling is an effective way to restructure debt, protect consumers from creditors while they get back on their feet and ultimately put them in a position where they are able to save towards a sound financial future.
Interest rate reductions during 2020 are benefitting people who successfully apply for debt counselling. The record-low rates enable debt counsellors to negotiate reductions of over 90% on interest rates for unsecured debt, from an average of 21% to 1.2%.
“These reductions provide substantial savings for consumers, freeing up some income to pay off debt regain some financial equilibrium and ultimately build some financial reserves.”
He adds that the client support team, which all reputable debt counsellors should offer, is available to provide guidance and advice throughout the debt counselling process, but importantly also after a clearance certificate has been issued.
“Part of what we do is to help people who have successfully completed debt counselling put in place a plan and budget that includes saving some money each month as a cushion against unexpected events and to invest in their future.”