Imagine having a personal safety net, always ready to catch you if life throws you a curveball.
By Professor Mark Nasila, chief data and analytics officer in the FNB chief risk office
That’s what saving money can do for you. It’s like having a superpower that provides you with a sense of calm, knowing you’re covered if life decides to go off script. With savings tucked away, you can breathe easy and dodge stress because you’re equipped to handle unexpected situations without getting into a financial bind.
But the benefits of saving go beyond just weathering storms. Think about your dreams and your bucket list. Want to own a home someday, drive your dream car, or retire comfortably? That’s where your savings come in. It’s the fuel that propels you toward your goals and gives you the means to pursue the things that matter to you. It’s not just about you, though. With a robust savings account, you can make dreams come true for your children too, giving them a head start in their education or enabling you to help them take advantage of opportunities that come their way.
Saving isn’t only about preparing for rainy days or dreaming of the future, it’s also about enjoying the present. Whether you’re planning a vacation or a household renovation, your savings can make it happen. And, should something unexpected happen — like a health crisis or job loss — a solid savings habit can ensure your family is cared for. Building an emergency fund should be on everyone’s to-do list, because it’s like an insurance policy for life’s inevitable surprises.
Saving, especially for retirement, can also reduce your tax burden. Most countries offer incentives for investing in retirement vehicles, and many employers also offer to match contributions up to a certain threshold, providing additional incentives.
On the more altruistic front, having a well-stocked savings account can empower you to help friends, family, or causes you believe in.
How people around the world save
* Argentina – In the last two decades, Argentina has faced numerous economic hurdles, including bank runs, recessions, austerity measures, salary and pension cuts, and currency devaluations, alongside a world-record sovereign debt default. The relentless inflation of close to 25% makes budgeting a challenge, and traditional saving mechanisms, such as savings accounts and time deposits, struggle to outpace it. Notably, the interest rate on 30-day time deposits was 15.1% in November, lower than the inflation rate. Despite this, Argentineans held about $150.3 billion pesos ($25.2 billion) in savings accounts and about $355.1 billion pesos ($59.5 billion) in time deposits.
* France – Taxes in France are notoriously high, to the point where French actor Gérard Depardieu once attempted to renounce his citizenship. The country’s wealth redistribution model sees taxes such as a 45% income tax, a social security tax of up to 12%, and a Value-Added Tax (VAT) of 19.6% on most goods funding public benefits. The French are known for their high savings rates. Bank deposits are the most common form of savings, totaling 634.7 billion euros (approximately $857 billion) at the end of August, 2013, and representing around 16% of income. The French also have access to various savings accounts with tax-free interest, such as the popular Livret A account.
* The United States of America – The US economy, the world’s largest with a 2012 GDP of nearly $16.25 trillion, provides limited government benefits in comparison to other developed nations. Americans fund their retirement via Social Security and personal savings, while healthcare is a mix of government subsidies, employer contributions, and private funds. Despite the slow recovery from the Great Recession, Americans have begun saving more, with a personal savings rate of 4.6% as of August 2012. Regarding investments, most Americans hold stocks and bonds, typically via retirement savings plans. As of Q2 2013, $13.6 trillion was invested in mutual funds.
South Africans’ saving habits
According to the inaugural FNB Retirement Insights survey’s results, an alarming 89% of those surveyed plan to continue working or work part-time due to a lack of retirement savings. While 74% of respondents claim they have a plan in place to help them prepare for retirement, many of those, particularly those in lower-income brackets, are not confident that their plan will deliver the results they want due to barriers such as age and current financial constraints such as the high cost of living. This appears to be corroborated by the fact that 39% of respondents who don’t currently have a retirement plan in place will rely on alternative income sources for retirement, such as selling assets, family support, or government social grants.
Before the global Covid-19 pandemic, FNB data showed that middle-income South Africans heavily relied on debt, with some using up to a quarter of their monthly income to pay interest on debt. Furthermore, over half of middle-income consumers spend their income in less than five days after receiving it. Meanwhile, Sub-Saharan Africa holds the lowest savings rate in the developing world, averaging about 18% of GDP in 2005, as per World Bank estimates.
Why South Africa has inadequate retirement provisions?
South Africans’ inadequate retirement provisions can be attributed to several factors. Primarily, the country grapples with the world’s highest unemployment rate, which was further exacerbated by the Covid-19-induced lockdown measures, leading to business closures and increased unemployment.
Additionally, South Africa experiences some of the world’s highest interest rates, including as a percentage of GDP, and the limited tax base of about five million taxpayers is burdened by continuous tax increases, impacting individuals’ disposable income. South Africans also contend with significant debt levels.
Savings barriers
Africa’s low savings rates can be attributed to several factors including inadequate financial services. Furthermore, banks’ high minimum balance requirements and account maintenance costs deter many people, while the extensive documentation required to open an account presents challenges, especially for those in the informal sector and rural areas.
Additionally, the negligible incentive to save discourages people from setting aside extra money. In countries like Ghana, the interest paid on savings is insignificant, while loan interest rates are high. The limited formal savings deposits restrict banks’ lending capabilities, allowing them to charge high-interest rates. Consequently, businesses in sub-Saharan Africa fund a significant portion of their new investments from internal company savings.
Lastly, financial literacy, or lack thereof, contributes to the low savings and high indebtedness. While some countries have achieved higher savings rates, these are not enough to meet the region’s investment needs, necessary for poverty reduction, according to the UN Economic Commission.
How AI can help encourage saving
The fintech space in Africa, and particularly in South Africa, has seen significant innovation recently, offering alternatives to traditional modes of saving. The post-COVID shift towards digitalisation has encouraged the development of mobile, user-friendly savings options. Open banking is one such innovation, allowing third-party users to create apps that utilise personal data. This technology liberates consumers from reliance on traditional financial institutions. Moreover, artificial intelligence (AI) has made inroads into personal finance, providing data-driven saving advice.
AI’s potential to enhance saving habits lies in its ability to analyse patterns in comprehensive financial data. AI can examine an individual’s income, spending, and saving habits, offering strategies to optimise them. Many savings AIs calculate affordable saving amounts based on the individual’s typical income and expenditure, adjusting as the paycheck varies. Apps like Digit assist this process, examining a user’s income, spending, and bills, and transferring the predicted surplus to a savings account.
Financial institutions, such as the Royal Bank of Canada and Israel Discount Bank, have incorporated AI into their services to aid customers in saving. NOMI Insights, for instance, monitors customer spending habits and offers breakdowns of expenditures. NOMI Find & Save employs predictive technology to set aside affordable amounts into savings automatically. NOMI uses account data to estimate the amount a customer can save, moving money into dedicated savings accounts every few days. The user can rate each insight, helping NOMI deliver more relevant and useful financial tips.
AI saving assistants
AI saving assistants, functioning without the limitations of human motivation, can execute transfers more frequently, allowing for smaller yet more consistent savings. These assistants usually come in two forms: advice bots, which monitor finances and offer suggestions, and account management bots, which actively transfer money between accounts. While advice bots are helpful for making financial decisions and expenditure analysis, account management bots are more useful for implementing savings strategies.
“Cleo” is a financial advice AI designed to help users better understand their finances and identify savings opportunities. This is achieved by linking to users’ bank accounts and analyzing financial data. “Charlie”, presented as a virtual penguin, is an AI that provides financial management advice through Facebook messenger and SMS, identifying savings opportunities and tracking unusual spending.
“MintZip” is an AI-powered fintech app offering end-to-end financial solutions. Its flagship product, ‘Misa’, is a conversational AI-based financial companion designed to provide tailored responses based on a user’s specific financial situation.
Lastly, “Olivia.ai”, founded by Cristiano Oliveira and Lucas de Moraes, is a free app that finds spending patterns in users’ finances and uses those to devise strategies to help users save more. Olivia also sets up challenges to help users change their habits and gain better control of their finances over time.
AI can also help with goal setting
AI can assist in goal setting for individuals aiming to save for significant expenses like a home or business. Through reinforcement learning, a machine learning approach, AI can suggest actions that maximise rewards based on a customer’s transactional behavior, thereby helping financial institutions tailor their products to meet customer needs.
A study by Aite Group indicated a high interest across age groups in utilising a digital financial wellness coach. Users prefer timely alerts and advice regarding their financial decisions rather than after-the-fact notifications. AI-driven financial forecasting tools are being utilised to provide real-time, personalised advice based on income, bank balances, and upcoming obligations, helping users avoid financial issues like overdrafts and late fees. This mirrors the customised, digital experiences consumers have with tech giants like Amazon and Netflix.
Maximise your money
In the US, Intuit uses machine learning in its TurboTax application to assist users in maximising their tax refunds. For example, a custom machine learning model helps users choose between standard and itemised deductions. The model is trained using the U.S. tax code, allowing it to adjust to tax code changes and provide users with the best options each year.
Intuit’s Mint app uses machine learning to monitor transaction activity for personal bank accounts, credit cards, and loan balances. This automatic categorisation of information helps users monitor their spending, budget, and identify savings opportunities.
For businesses, Intuit’s QuickBooks utilises machine learning to categorise transactions into “personal” and “business” expenses, ensuring accurate taxable income and maximising deductions. This helps avoid errors and painful audit processes. QuickBooks also uses cash flow forecasting to aid in financial management.
By studying a business’s spending habits and using predictive intelligence, it can forecast future finances, assisting business owners in ensuring they can cover expenses such as rent and payroll. This helps avoid the common pitfall of poor cash flow management, a key factor in 82% of business failures within the first five years.
These solutions aren’t unique to the US, however. Many of them could work in South Africa, too.
Adapting to the gig economy and tomorrow’s trends
Intuit’s machine learning models are adapting to support the growing gig economy and the unique financial management challenges faced by freelancers. Freelancers, particularly prevalent in the US, UK, Brazil, and Pakistan, often have untaxed contract work and fluctuating income, which complicates tax filing and expense tracking. Intuit’s models, as used in TurboTax, help categorise personal and business expenses, assisting users in filing appropriate tax claims.
There is an increasing demand for personalised recommendations in financial products due to the rise of the gig economy. People need tools that adapt to their unique financial situations. Machine learning allows Intuit’s products to respond seamlessly to trends, including tax code changes and shifts in work patterns. The company’s successful use of these technologies continues to drive exploration into different applications for their products.
This is just the beginning for AI-powered financial services, and they have the potential to not only help banks offer new, customised services to customers, but to create incentives that help customers meet their unique savings goals.