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Press Offices > Associations

Association for Savings and Investment South Africa
Press Office Feature : Building a financial legacy as a teen in three steps

Company: Association for Savings and Investment South Africa
Author:Lucienne Fild
Email:[email protected]
Posted:24 Aug 2015

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South Africans are among the biggest borrowers in the world

For most teens the term ‘financial planning’ is a foreign concept better left to the distant world of adulthood.

But according to Peter Dempsey, deputy CEO of the Association of Savings and Investments South Africa (ASISA), it is critically important that teens are taught the importance of spending responsibly and saving for those unexpected life events before they leave home.

Dempsey says South Africa’s household-debt-to-disposable-income ratio of 78.4% is a sure indicator that the majority of families fund their lifestyles with borrowed money.

“This means that the majority of teens in this country grow up without any appreciation of the real value of money and the dangers of buying on debt. To them a plastic card can buy anything they desire – so why bother saving.”
 
A recent report published by the National Credit Regulator states that there are currently over 23 million South Africans consuming on credit, of which over 10 million have impaired credit records.

And the recent 0.25% increase in the interest rate is likely to increase the number of over-indebted people as debt becomes even more expensive.
 
Noting these concerning figures, Dempsey states, “Explaining how budgeting works, why it is important to save and why it is important to be in a position to deal with unexpected events is probably one of the best legacies you can give your children.”
 
“If we don’t teach our teens the importance of budgeting and saving before they leave home, we are creating yet another generation of adults unable to save, funding their lifestyles with debt.”   
 
Dempsey urges families to break out of a downward spiral of spending and debt while simultaneously teaching their teens to manage finances more wisely, beginning with three basic steps.
 
Create a budget
 
Dempsey notes that in order for families to take control of their finances, they need to begin with gaining control of their finances with a budget. 
 
“Very few people can tell you what they spend in a particular month and where they spend it. The first step is to get a complete picture of exactly what you spend your money on with a really honest budget.”
 
He suggests families begin by recording their spending, writing down exactly what they spend their money on every day, as well as monthly recurring costs.
 
He acknowledges that getting started with a budget is always the hardest part since it is not only time consuming, but also often depressing as the true state of your finances is laid bare.

He points out that there are a range of apps and tools available for you and your teens to make this task simpler.
 
According to Dempsey, parents should also talk more openly about their saving and expenditure in order for teens to gain a deeper understanding of responsible financial decision-making and the repercussions of debt.
 
“We need to teach teens that if all is going well, you’re spending less than you’re earning. If you’re not, you need to relook at your spending and really endeavour to bring this in line with your income,” says Dempsey.
 
According to Dempsey, parents can teach their children this skill by setting teens an allowance for consumer ‘wants’ like entertainment or clothes, and refusing to step in when this amount is depleted, showing teens the value of saving and spending more wisely.
 
“You wouldn’t throw a toddler into the deep end and expect them to swim. Today your children might be fine because you are their safety net, but what happens tomorrow when they can’t afford their own basic needs because of their designer lifestyle?”
 
A recent World Bank Global Findex database study stated that South Africans are among the biggest borrowers in the world, as 86% of South Africans took out a loan between 2013 and 2014.

Recent Old Mutual research even suggests that 70% of people earning annual incomes of over R800 000 are overspending and generating substantial debt. 
 
Dempsey says that these figures demonstrate that South Africans need to teach their children how to break out of a debt cycle by matching their expenditure to their income, and making sure they are spending less than their allowance.
 
Make savings a ‘must-do’
 
The next step, says Dempsey, is to prioritise savings and set these aside as a monthly expense.
 
South Africa’s excessive consumption is compounded by statistics that show that household savings as a percentage of disposable income is -2.3%, while South Africans are underinsured by a staggering R24 trillion for death and disability.
 
These figures, notes Dempsey, demonstrate that most South African households put little provision towards future emergencies or setbacks.
 
“Savings should be one of those must-do expenses, the fruit and vegetables of your budget, just like your mortgage repayments, rent, transport or food. If you prioritise savings as a necessity, you will save and invest first and spend what is left, as opposed to spending and saving what is left – which is usually nothing.”
 
He warns that saving is necessary even from a young age, as young adults will face various financial pressures and difficulties in their attempts to enter the workforce.

Referring to recent Statistics South Africa reports, Dempsey points out that many youths may face significant periods without income as they seek work.
 
According to Statistics South Africa, the official expanded unemployment rate (including discouraged work seekers) in the second quarter of 2015 was 34.9%.

Unemployment is particularly concentrated among youths, as the expanded unemployment rate for South Africans between 15 and 24 years was as high as 63.1%. The percentage of unemployed youths between 15 and 34 years with tertiary qualifications was 8.1%.
 
Dempsey also notes that many youths may need to fulfil internship roles with little or no salary before finding employment, while still repaying student loans and trying to cover basic living expenses.
 
He emphasises that unexpected events such as these are why young South Africans must be taught to develop a habit of saving long before they leave the nest, and that the best way to teach young people is by example.
 
“Saving is about deferring spending for other things – and these other things may be to provide for times when you don’t have an income,” states Dempsey.
 
Invest
 
Instead of padding children’s wardrobes with expensive clothes or gadgets and indulging your children’s sweet-tooth for spending, Dempsey suggests that parents and teens work together to ensuring their children’s financial futures by encouraging them to save and invest.
 
Dempsey points out that there are many investment options that require small monthly contributions and that are flexible. He advises parents to negotiate with teens to contribute half of the required minimum investment amount.

In place of purchasing expensive or unnecessary special occasion gifts, parents could also offer to top up these investments.
 
With the power of compounding, he notes that smaller investments over longer periods may earn more than larger investments over shorter times, ensuring your child’s financial independence well beyond the latest consumer crazes.
 
There are, however, an overwhelming number of investments available and Dempsey says that seeing a financial advisor to secure your child’s finances as well as your own is “non-negotiable”.

He states that with saving and financial planning, the ability to deal with unexpected events can make a significant impact on a child’s future – even as far as retirement.
 
“That’s a wonderful legacy for children – to understand the importance of being able to deal with the shocks that life can and mostly likely will bring you.” 
 

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