By Anna Rich
South African households collectively grew about R1 trillion wealthier between the beginning of the second quarter and the end of 2020. The figure is in real terms: the effects of inflation have been taken into account to reflect the actual value of money in purchasing power. If net wealth is measured in current prices, the increase is estimated at almost R2 trillion.
This is according to the recently released South African Household Wealth Index (HWI) for the fourth quarter of 2020. Momentum and the University of South Africa (Unisa) compile quarterly reports on their research into the state of consumer finances: the Household Financial Wellness Index, the Household Wealth Index and the Consumer Financial Vulnerability Index.
The rise in net wealth has occurred in spite of the fallout from the Covid19 pandemic in the form of job losses, and a contraction in the economy.
There was a sharp drop in real net wealth of about R772.8 billion by the end of the first quarter of last year, when the initial effects of global lockdowns set in, but household wealth increased markedly thereafter.
The authors of the HWI report say this huge increase in net wealth is mainly a result of the strong growth in the value of financial assets, such as shares and bonds. Higher share prices were driven by lower interest rates, the injection of liquidity into financial markets, news of a vaccine and a reasonable recovery in employment.
“The pension funds and financial investments of households benefited immensely from the increases in these financial instruments,” says economist Johann van Tonder of Momentum’s Insights Division.
Although the HWI looks at our net wealth collectively, some insights from the research can be applied to individual households:
◆ Use the right yardstick to measure your wealth. Don’t confuse net wealth with the difference between income and expenditure, say the authors of the report. The latter will show you only the amount you are able to save, but unless you take the next step of using these savings to invest in a pension fund or other financial instruments, they will not translate into wealth.
Net wealth is total assets less total liabilities. Simply put, it’s what you own minus what you owe. Specifically, the total of the amounts invested in pension funds, retirement annuities (RAS), shares, bonds, unit trusts, residential property and cash, less the unpaid portion of your home loan, vehicle or personal loans, credit card debt, store card debt, alimony or child support, and any unpaid accounts, such as your municipal account, give the net wealth figure.
Vehicles, furniture, appliances and clothing may signal wealth, but channelling the best part of your after-tax income into these is not the path to real wealth. The wealthiest 10% of households in the Momentum-unisa household finance database have accumulated savings in retirement funds and other financial instruments, while their debts were affordable.
◆ Don’t mistake a good income for wealth. When the researchers looked at the distribution of wealth, they found that 50% of the net wealth of South Africans is in the hands of the wealthiest 2%. However, they emphasise that a high income cannot necessarily be equated with wealth. “Some high-income earners have outstanding debts in excess of the value of their assets, because they use their income sub-optimally from a wealth-creation point of view,” says Van Tonder.
The research found that many middle-income households are part of the wealthiest 2%, “because they have saved, invested, and insured in the right way, and have not borrowed more than they can afford”.
◆ Stay in the game. Net wealth fluctuates over time – as illustrated by the fall and rise in the market last year. Staying invested when the markets declined in the second quarter paid off when markets bounced back.
For most people, retirement savings in pension funds or RAS comprise their biggest savings. As these savings can’t generally be accessed before retirement age (except when resigning from their jobs), this prevents emotional reactions to market fluctuation.
◆ Control what you can. Although you cannot control market performance, saving more by minimising debt and cutting spending, then investing savings, leverages better financial outcomes.
The lockdown was a major wake-up call for many South Africans, says Janine Horn, a financial planner at Momentum. “The data shows that once households realised that they could not control the greater economic situation, they started to take an interest in their finances in an effort to maintain financial support for their loved ones,” says Horn.
PERSONAL FINANCE