Don’t break the bank – break the cycle of debt

Savings month is often a month filled with plenty of spirited discussions, however we tend to swiftly move on from without applying the advice that has been shared. In black communities the culture of saving has been characterised by the collective group savings system of stokvels. They have sent kids to university, fed families during Christmas and ensured that January was not a heavy month. 

Over the years, whether through telemarketing, presentations at work, or our own research, some of us have also learnt about the various financial and investment products offered by financial institutions. And others have taken it a step further where their jobs have made it mandatory to save a portion of their salaries. These efforts have alleviated pressure from surviving family members when the breadwinner has died, or allowed many to retire with dignity, knowing that they were cushioned financially through their pension savings. 

Over time, financial institutions caught on and launched massive stokvels that have accumulated billions, called collective investment schemes and, yes, that is the fancy way of saying “stokvel”. And these are managed by fund managers who invest the funds into the JSE-listed companies. 

Most of us have maintained the status quo of keeping our stokvel money in banks, earning low interest and withdrawing the funds monthly, quarterly or annually. However, with the knowledge that we have amassed from observing the market, some have flipped stokvels around. They registered companies, bought stock in the JSE and presented over R100,000 to invest in Section 12J funds. They have taken their stokvel and savings to a different level. 

But, in a country like South Africa, saving is not easy for countless reasons that stem from our social inequalities. As a result, companies have included employee benefits and, in those benefits, they offer provident and pension funds that have, over the years, allowed people to save for their later lives. But within these structures some have exploited the loopholes that allow them to access those funds sooner than when they are intended for. These are people I describe as RRs — the people who resign and return. These employees will look at the pension they have accumulated over a 15-year period sitting at (typically) R500,000 and see it for the taking. 

We need start having open and honest conversations about preservation funds with the people our decisions are going to affect 

BREAKING THE CYCLE AND SAVING 

Some of the reasons behind this decision are that they need the funds to pay for their children’s university fees, as well as debt. Unfortunately, this creates a cycle of black tax as they find themselves financially vulnerable in the sunset years of their lives and they need their children to take care of them. 

RR is also evident in the younger workforce where people often resign in shorter periods and fail to reinvest their preservation funds. Based on my interactions, these preservation funds pay for trips to Bali, buy new cars and settle credit card debts. Perhaps it’s time to break the cycle so that we don’t pass on the burden of being part of sandwich generation to our children, where the financial burden is felt from both sides — from our parents and our children. 

The first step towards breaking this cycle is that we need to demystify money. We need start having open and honest conversations about preservation funds with the people our decisions are going to affect. We need to familiarise ourselves with concepts like life annuities and living annuities and the idea that we spend 45 years working so we can save the 20 years that follow, post-retirement. 

But as we talk savings month, Covid-19 should have woken us up to the culture of saving for the unforeseen. Based on previous columns where I’ve explained these concepts at length, here are some of the saving fundamentals were should all apply to protect ourselves and our children: 

• Emergency savings: To sustain our expenses in case of a loss of income. It should be a minimum of six months. 
• Goals savings: Saving for a trip or an asset that you have always wanted. 
• Educational savings: Saving for our children’s education, which is different from buying and educational plan. 
• Retirement savings: Where you should be saving for your later years of life. 

The challenge you will consistently have is that you do not get paid enough to save. But if you introduce the culture of saving your money first before anything else, you will see what a difference this makes in allowing you to prioritise where you spend the money you have left.