Interest rates don’t build wealth, good financial habits do

For nearly a century, a foundational assumption has quietly governed how policymakers think about household financial health: raise interest rates and people will save more. The logic is simple: higher rates increase the reward for deferred consumption, making the future more attractive than the present.

This classical theory dates back to the turn of the 20th century, yet it took the seminal work of John Maynard Keynes in the aftermath of the Great Depression to upend this fallacy. Keynes knew, looking at stagnant economies, that the only way to uplift an economy in distress is to increase the aggregate demand and that needed to come in the form of a public stimulus package. The Obama administration used Keynes’s playbook to tackle the 2008 financial crisis.

Keynes’s intuition, which predated economic theorists by nearly half a century, is that human nature is surprisingly stubborn. And what may seem rational on paper – save today to have more tomorrow – is rarely put into practice. South Africa has run something of an accidental experiment on this theory.

Over the past decade the South African Reserve Bank lifted the repo rate substantially to rein in inflation that had been stoked by global supply shocks and a weakening rand. Since 1994 the repo rate has fluctuated wildly, from highs of 21.85% in 1998 to lows of 3.5% during the Covid pandemic. By conventional theory, the highs should have boosted household savings. Yet, they did not.

The correlation that the textbooks promised simply did not show up in the data. Over the past decade there has been a strong negative correlation: higher rates in this period coincided with deeper lowest household savings. And since 2022 it’s been negative, meaning that people are spending more than they earn.

And while economists can point to various mitigating factors – stagnant wage growth, eye-watering unemployment, rising living costs and structural inequality – the broader observation remains: higher interest rates alone have not translated into materially better savings behaviour.

This raises an important question: have we overestimated the influence of macroeconomic variables on personal financial outcomes? I believe the answer is yes.

Economics often assumes that individuals behave like rational optimisers, carefully weighing costs and benefits before making financial decisions. The reality is considerably messier.

Most people do not wake up in the morning and calculate whether a 50-basis-point increase in interest rates justifies reducing consumption and increasing savings. Financial decisions are shaped by habits, emotions, social norms, family influences, cognitive biases and the practical realities of day-to-day life.

Behavioral economists have received due praise for documenting this gap between theory and reality in the past few decades.

Humans consistently prioritise immediate rewards over future benefits. We procrastinate. We follow social cues. We struggle with delayed gratification. We make financial decisions based on mental shortcuts rather than spreadsheets.

In this context, it becomes easier to understand why interest rate changes often have a limited effect on household saving behaviour, particularly in a country where millions of people are navigating financial stress.

For many South Africans, the question is not whether saving has become more attractive. It is whether saving is possible at all. But even this explanation tells only part of the story.

Recent evidence from the Franc Wealth Index Report, one of the largest studies of financial wellbeing conducted in South Africa, suggests that income itself may not be the most important determinant of financial wellbeing either.

The report, based on responses from about 4,000 South Africans, examined the factors most closely associated with positive financial wellbeing outcomes. While income certainly matters, the data reveal something striking: regular saving and investing behaviour is between two and three times more predictive of financial wellbeing than income levels alone. In other words, what people do with money appears to matter more than how much money they earn.

Saving behaviour is shaped less by rational economic calculation than by a combination of early-life habits, psychological bandwidth, social norms and self-identity – and is most reliably sustained not through willpower but through systems that make saving automatic and frictionless. People who save consistently tend to have either inherited the habit, removed the decision from their daily lives through automation or built an environment where saving is the default.

This finding challenges one of the most common assumptions in personal finance and public policy alike that higher incomes automatically lead to better financial outcomes. However, in a country like South Africa with some of the highest wealth and income inequality in the world, there is tremendous social pressure to display wealth, as opposed to building real wealth. So it should be unsurprising that we have one of the highest ratios of vehicle financing debt to total debt in the world.

Lifestyle inflation is remarkably powerful. As incomes rise, spending rises. Bigger salaries frequently fund bigger houses, more expensive vehicles, higher discretionary spending and more sophisticated consumption rather than greater wealth accumulation.

The result is a phenomenon familiar to financial planners: individuals earning vastly different incomes can experience surprisingly similar levels of financial stress. Conversely, people who establish consistent financial habits often build resilience regardless of income level.

Someone who automatically saves a portion of every paycheque, invests regularly and plans deliberately for future goals is likely to accumulate substantially greater financial security over time than someone earning more but saving inconsistently.

The mathematics of compounding helps explain why. Small, repeated actions produce disproportionately large outcomes over long periods. A modest monthly investment sustained for decades can generate more wealth than sporadic contributions made during periods of higher income. The critical variable is not the amount alone but the consistency of the behaviour.

This is where the conversation around financial wellbeing gets messy. Public debate focuses on growth rates, inflation figures, unemployment statistics and interest rate decisions. And while these are undoubtedly important, they only determine the environment within which households operate. They have little impact on money habits.

Human behaviour is decidedly more stubborn. Economic policy can create favourable conditions for prosperity, yet it cannot create the habits required to take advantage of those conditions.

The reality is that although a central bank can raise or lower interest rates. It cannot automate a savings contribution. And although policymakers can pursue economic growth and expand financial access, they cannot teach delayed gratification.

The implication is not that economic policy is irrelevant. Far from it. A growing economy with low inflation, rising employment and stable institutions remains essential for improving living standards. And tackling these should remain the focus of our Government of National Unity. However, if we want to improve financial wellbeing at scale, we may need to pay greater attention to behavioural interventions alongside traditional economic levers.

Research from around the world consistently shows that simple behavioural tools can have outsized effects. Automatic enrolment into savings programmes dramatically increases participation. Statutory requirements for employment benefits with default contributions improve retirement outcomes. Goal-based planning increases savings persistence. Small friction-reducing interventions often outperform financial incentives alone.

These lessons are encouraging because financial wellbeing is driven primarily by the money habits we develop as individuals. Policymakers should look to these case studies and consider how they might educate, encourage and stimulate developing good money habits.

Because at the end of the day, while interest rates matter, inflation matters, economic growth matters, but so do the everyday decisions people make with their money. And as South Africa continues to debate how best to achieve economic prosperity for all, we should resist the temptation of the simplistic theoretical Keynes’s view and acknowledge that prosperity is shaped by two forces operating simultaneously: the economic environment we live in and the financial behaviours we practise within it.

And while policymakers and central banks can influence the first, the second is in our control and may ultimately prove more powerful. DM