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Keep on saving!


A savings culture is relevant for all seasons. So says Arrie Rautenbach, Absa Head of Retail Markets. He was responding to the SA Reserve Bank's announcement that the repo rate would be reduced to 5 percent.

Rautenbach says Absa will decrease its prime over-draft rate and mortgage rates by 0,5 percent to 8,5 percent respectively.

“According to South African Savings Institute (SASI) household savings as a percentage of disposable income has fluctuated between 2.7 percent in 1991 and -0.2 percent in the first quarter of 2012 with debt to disposable income ratio reaching a high of 83% in 2008 and continuing to remain high,” said Rautenbach.

“The ratio of net household saving to income being in negative territory for a number of years indicates that consumers do not have surplus funds available when experiencing financial difficulty.”

Rautenbach adds: “Although consumer confidence would be buoyed by the decision to reduce rates, it has become evident that there is a dire need to stimulate consumer investment and raise the nation’s savings rates lest the household sector risks entering the next interest rate hiking cycle with a still-high debt-to-disposable income ratio that could very quickly manifest itself in severe financial instability.”

“We should not be deceived by the effect of very low interest rates, and by a lower inflation rate, into believing that we now have a financially strong household sector. Very significant household financial risks still exist. The lowering of the debt-to-disposable ratio and raising of the savings rate, is a key requirement to strengthen household financials,” he adds.

Rautenbach said the low interest rate environment had caused mortgage finance to become more affordable, impacting positively on property transactions.

However, he cautioned consumers to bank the savings that they have realised on their mortgage finance instalments since the reduction of interest rates began in 2008. He urged consumers to concentrate on using any excess income to make additional repayments on their existing debt and to start saving in order to help build up financial reserves and assets they can tap into in their senior years

Johan Gouws, Head of Multi Management at Absa Investments, echoed Rautenbach’s sentiments and stressed that defining one’s short, medium and long term financial aspirations was a practical step towards creating a savings habit.

“Once you know how you would like your financial affairs to reflect in 10, 15 or 20 years, it becomes easier to choose the relevant savings and investment vehicles and map out the exact returns you need to realise from each investment source,” Gouws explained.

“For example, an individual looking to ‘park’ their investment and access it at short notice cannot afford to take any risk or tie their savings or capital in for long periods of time.”

“Such an investor would be better served investing in bank deposits, term deposits or Money Market unit trusts where funds are easily accessible and can be used towards any emergencies,” Gouws said.

He explained that investors with a long-term investment horizon (in excess of five years) who need to grow their capital, should invest in flexible and well regulated products such as unit trusts as they provide exposure to the equity and listed property market and are able to beat the effects of inflation in the long run.

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