It’s hard to go a day without hearing an advertisement encouraging you to save, or pointing out that consumers need to make their money work for them.
What these advertisements all too often neglect to spell out, is just how someone can save when they are living from paycheque to paycheque, or are already in serious debt. Or just how saving R100 a month will turn into far more down the line.
Saving doesn’t work when there is nothing to invest to start off with, and many South Africans are not in a position to save.
Figures provided by Statistics South Africa show that consumers are simply not saving. In the second quarter of 2020, consumers were putting away 0.1c for every R1 they earned.
While allowances can be made for the fact that consumers were under even more strain than usual because of the Coronavirus and the lockdown imposed to curb its spread, the saving rate was hardly fantastic before then.
In fact, it went into negative territory, which is a fancy statistical way of saying that people were spending more than they were earning.
The question then is how people can save when they aren’t earning enough, and quite possibly going into debt to make ends meet.
Turning the tables
To get to the point where it is possible to save, the debt must be trimmed first.
“One way of doing that is to pay less for the money you do borrow, or access your wages early if that’s possible,” says Paymenow head of business development, Bryan Habana.
For example, if someone takes out a R3 700 payday loan, they will end up paying R800 in fees a month. Alternative solutions, like those that allow staff responsible early access to already earned wages, will charge R160, or a fifth of the cost.
Loan costs mount up rapidly and it’s easy for them to spiral out of control. For example, the fees paid on a loan could cause debit orders to bounce, at a cost of R100 per bounced debit order, as well as expensive reconnection or penalty fees.
This adds up to a relatively substantial R900 of what is effectively wasted money if a consumer bounces debit orders because of an unexpected payday loan.
And unfortunately this may happen each month.
Compounding savings
Imagine if the money spent accessing a payday loan could instead be invested? Something many consumers don’t realise is how a small amount of saving can turn into a much larger amount over time.
“What many companies don’t explain is the concept of compound interest,” says Paymenow MD Deon Nobrega, “which is how money grows and starts working for you.”
If, for example, you invest R100 at 10%, you would have R110 at the end of a 12 month period. Investing that entire amount means you’ll earn another R11 in the next year.
“While it is unlikely that anyone will earn 10% in the current economic climate, this simple example shows just how compound interest works. Simply put, the more you invest, the more you earn,” states Nobrega.
If the amount effectively wasted on a payday loan, at our mythical figure of ten percent, was invested each month (R900 – R160 = R740 p/m) in an option providing a decent return, the consumer would have saved R8,880 over the year and earned an additional R500 in interest.
Getting out of a debt cycle can be done by taking advantage of more cost-effective solutions, which allow your money to keep growing, making bigger ticket items such as education viable.
As the adverts often say, saving is the point – although the point is all too often lost when consumers are unable to get out of a debt trap and start putting money away in the first place.