Investec experts René Grobler and Ebeth van Heerden unpack the differences between savings and investment and share practical ways to improve your financial health. It’s a must-listen for those starting out on their wealth creation journey. 

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The absence of a culture of saving in South Africa owes its roots to several factors including: the high cost of living, widespread unemployment, unsustainable debt, societal pressures to maintain appearances, and a dearth of financial literacy and awareness about saving and investing avenues. 

According to Investec Chief Economist Annabel Bishop, South African consumers continue to feel the strain of higher inflation and interest rates.

“Average salaries continue to fall both in real and nominal terms on the year, with the latest BankservAfrica’s Take-home Pay Index data for June showing a -5.7% y/y drop in real take home pay, as the real reduction of households purchasing power continues,” says Bishop.

Moreover, says Bishop, according to Debt Busters, 70% of consumers spend more than 30% of after-tax income on debt repayments.

Bishop expects rates to remain unchanged for the rest of the year, with a 25 basis point cut in the repo rate in January next year.

FNB/BER consumer confidence index vs household consumption expenditure

Sources: Investec Group Economics, BER, SARB

Growth in compensation of employees vs CPI inflation rate

Sources: Investec Group Economics, StatsSA

This situation, facing millions of citizens, was discussed at length  by René Grobler, Head of Investec Cash Investments, and Ebeth Van Heerden, Head of Distribution for Investec Investment Management at Investec Wealth & Investment.

Grobler says income levels undeniably dictate the state of a nation’s savings culture, and the South African case is no different. 

With many citizens caught in the jaws of poverty and struggling to afford necessities, the idea of saving becomes an alien concept. While saving 20% of income is a good benchmark, personal circumstances differ significantly, hence, the need for tailored professional financial advice.

She says recent hikes in interest rates might seem like a step towards encouraging savings for those privileged with disposable income, but the grim reality is that it further squeezes those with existing high debt levels. Unfortunately, it is common to find individuals juggling debt and savings simultaneously, an approach that is far from financially optimal.

Savings opportunities

Grobler believes that when it comes to exploring savings opportunities, it boils down to an individual’s risk tolerance and liquidity needs. South Africa currently presents attractive interest rates on low-risk savings options like fixed deposits or notice accounts. However, the choice of the most suitable savings vehicle should hinge on an individual’s risk appetite, time horizon, and savings goals.

René Grobler, Head of Investec Cash Investments

As Einstein said, ‘Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it’. And really it is about saving early. – René Grobler

When to save and when to invest

Van Heerden says saving and investing are two sides of the same coin, each vital. Savings are short-term oriented, ensuring fixed returns and capital stability. Investing, conversely, is a long-term game and involves higher risk growth assets such as equities. It is essential to have a well-diversified, professionally managed investment portfolio tailored to your specific goals.

When are unit trusts or cash a good idea?

Van Heerden believes that unit trusts have emerged as a gateway for average investors into the financial markets. They offer an opportunity to invest in professionally managed portfolios, aligning with specific investment objectives. The accessibility and flexibility of unit trusts make them a viable option for a broader spectrum of investors.

And where does cash fit into the equation? Both concur that cash, though a perfect cushion for short-term liquidity needs, is a poor long-term store of value. Inflation invariably chips away at the purchasing power of cash, making it ill-suited for long-term wealth accumulation. Cash should serve as a liquidity buffer, emergency fund, or a means to achieve short-term savings goals.

How to boost your savings

Grobler says the ability to save is dependent on a range of factors: economic conditions, interest rates, and personal financial circumstances. With the associated investment risks of market volatility and investor behaviour, it is prudent for new investors to establish a financial plan, keep a cash buffer, consider tax-efficient investing options, and maintain a consistent investment strategy. Again, professional financial advice is important to fully understand your options.

Ebeth Van Heerden, Head of Distribution for Investec Investment Management

A good investment portfolio is well diversified. It’s managed by a qualified, experienced and professional investment management team and, very importantly, it is managed according to every investor’s specific individual investment goal. – Ebeth Van Heerden.

Offshore investing

Van Heerden says that when it comes to offshore investments, it is critical to factor in the diversification benefits and access to global markets. Although the fluctuating exchange rate of the South African rand against the US dollar may seem daunting, focusing on broader investment goals is the key. 

The main incentive for investing offshore should be to gain exposure to different regions and sectors outside the local market. The suitability of offshore investment is best determined by professional financial advice tailored to an individual’s circumstances and goals.

Both believe South Africa needs to brace itself for a savings culture overhaul, catalysed by improved financial literacy and a commitment to adopt sound financial practices. Investing for the future should become part of our lives – a culture handed down from generation to generation. Only then can we start seeing a positive shift in our national health savings. DM/BM