The recently released South African Household Wealth Index for the third quarter of 2016 identified some interesting trends around household wealth accumulation.
The findings by Momentum and UNISA which issue the report showed that while South African households are actually reducing their debt, their overall net wealth has declined.
Household net wealth is calculated by subtracting your liabilities (debt) from your net assets (such as your house, retirement fund and other investments). In order for a household to improve its net wealth it needs to increase its assets and reduce its debts – or at least keep debt at affordable levels.
The report found that over the last two years the increase in debt levels has been slowing significantly to the extent that the ratio of household debt to disposable income has actually declined to 74% compared to 75.8% a year before.
Given that households are containing debt levels, we would expect the net wealth of households to be stable or even to have increased in value. Yet the report found that despite lower debt take-up, the ratio of household net wealth to disposable income actually declined from 389.6% to 378.8% over the last two years. This means that for every R100 000 of income, the average household’s net assets have decreased from R389 600 to R378 000. This would include equity in their home as well as retirement savings. This declining figure means that relative to the amount of money we earn, the value of our assets has declined – we are basically not accumulating wealth.
An argument can be made that we have had sluggish investment markets, with the JSE All Share Index only 1.3% higher than it was a year before. However, the real culprit is that we are not investing in assets. The Momentum/UNISA analysis found that contributions to retirement funds and annuities declined from 12.9% to 12.1% of after-tax income.
Spending rather than investing
In a nutshell, too much of our money is going to day-to-day expenses and not enough into assets that can grow and provide us with income and capital in the future.
With the substantial increase in the cost of essentials such as groceries, electricity and school fees, it is understandable that we have less to put into savings. But what little we do have, we need to invest correctly.
Take a house and car as an example. There are some households who will spend money on a luxury car but continue to rent their property – paying the landlord instead of boosting their net wealth. It is often only once we have bought that car that we realise that those repayments, insurance and petrol costs impact our ability to borrow money to buy a home.
When we do invest, we tend to avoid high-growth assets such as funds that invest in the stock market, preferring the “safety” of cash. What we don’t realise is that cash is anything put safe – it underperforms inflation and will never help us to create wealth over time.
If you want to improve your household net wealth and see your household balance-sheet grow over time, you need to start investing. Whether it is by increasing the contributions to your retirement fund, opening a debit order with an investment fund or putting a deposit down on a home, you need to make your money work harder than you do.
This article first appeared in City Press.