High debt levels number one reason why South Africans are unable to save
JOBURG – Debt counselling is the most effective and sustainable way to restructure debt.
South Africans have long been considered as being among the world’s worst savers for retirement, but the reasons may have more to do with high levels of indebtedness rather than a poor savings culture.
“Most South Africans want to save for their retirement, but the reality for many middle-income South Africans is that once they’ve paid for essentials most of what’s left is spent on repaying debt. Debt repayments make up a substantial portion of what consumers need to spend. That makes saving difficult, if not impossible,” explained 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 were spending 60 per cent of their monthly net income servicing debt. Their total debt-to-income ratio was more than 130 per cent. While in other countries the total debt-to-income ratio is similar, most of the debt in other countries is low-interest bond debt – in South Africa, most of the debt is high-interest unsecured debt.
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He said there are a few reasons for this. One of the main ones was that real incomes have declined by 17 per cent over the past five years as a result of inflation, and the latest CPI numbers will exacerbate the situation.
A related reason is many consumers had to take significant and in some cases permanent, salary cuts during the past year to keep their jobs. At the same time, the cost of essentials has gone up, forcing the consumers to borrow to make up the shortfall. Evidence of this is the 76 per cent increase in unsecured debt levels since 2016 among consumers earning more than R20 000 or more.
“Clearly the situation is unsustainable,” said Sager. “Lack of savings makes consumers vulnerable should they be faced with an unexpected expense, lose their income or are forced to stop working. It also has broader economic implications. Ideally, consumers should build savings of three-to-six months’ worth of salary, but currently, this is almost impossible as a result of high debt levels.”
He said debt counselling was the most effective and sustainable way to restructure debt, allowing consumers to spend less of their net income on debt repayments and giving them the opportunity to save towards a sound financial future.
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“These reductions provide substantial savings for consumers, freeing up some income to pay off debt and regain some financial equilibrium and ultimately build some financial reserves.
“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.”
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