South Africans know they need to save, or save more, but despite the best of intentions, a healthy nest egg eludes them, according to Estelle Scholtz-Mare, head of Momentum Retail Financial Planning and Financial Wellness Marketing for Momentum.
South Africans find themselves on the lower rungs of the global savings ladder, saving less than 2% of their incomes. This raises the question of why South Africans do not save or save more. The answers could be found in behavioural economics.
The big challenge in human decision-making is our inability to follow through on our intentions, because life gets in the way.
There’s often a huge (what experts call) an “action implementation or planning gap”. One plans to do the right thing, but just don’t get down to doing it.
One can use a simple equation to kick off the process of saving: Look at the present net value of your future income stream, coupled with the estimated present net value of your future consumption stream, and then you set your savings decision such that the present value of those two numbers is the same.
The tricky part is estimating the variables: How long will you live? How many kids will you have? What lifestyle will you live? How much money will you spend on holidays and accommodation? One also has to make a call on the economy, because this will dictate interest rates and growth in capital markets – ultimately affecting the returns on investments.
It is little wonder that people shy away from saving, there is simply too much information to process, and when people are faced with information overload, they tend to avoid making decisions.
“We are constantly battling ‘should versus want’ decisions. We ‘should’ save, but we also ‘want’ the new cellphone or our weekend entertainment. It is not that people don’t know what they should be doing. They simply behave in a seemingly irrational manner when faced with an appealing purchase opportunity,” said Scholtz-Mare.
Planner and doer
One has dual elements to one’s processing systems: The “planner” and the “doer”, according to researchers Richard Thaler, Hersh Shefrin and Dilip Soman.
The planner is foresighted, realises the consequences of current decisions and charts out an optimal path. The doer, on the other hand, lives in the moment, is myopic and pushes for the action that gives them the greatest value in the present.
In Thaler and Shefrin’s model the planner controls the doer’s desire through willpower. In general, the model suggests that when people are asked about their preferences, their planner comes forth and they respond with a “should” option. However, when they are faced with a tempting purchase opportunity, the doer comes forth and pushes the individual towards the want option.
“This is just scratching the surface of human decision behaviour, but the bottom line is that if we are to stick to our plans of saving, we need to implement mechanisms that will circumvent our lack of willpower,” says Scholtz-Mare.
“For example, setting up a debit order on our current account for a savings plan, or using envelopes to keep our entertainment money in, so we don’t overspend. Using a financial adviser can also help because they form a barrier between you and your money which should stop an impulsive withdrawal from funds.”
By becoming aware of these decision traps, it is much easier for an individual to keep on track. The gremlins are much easier to tackle if they are visible and top of mind. So people should not beat themselves up for dropping the ball, they just need to understand the dynamics of what caused the ball to slip through their fingers.
“This savings month, people should not just make the decision to save, they should look for aids that will help them stick to their plan,” says Scholtz-Mare.