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The best journeys start with a good plan - small changes can make a world of difference The Momentum Unisa Household Financial Wellness Index (2015 results)

Momentum  |  14 September 2016

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The fifth edition of the Momentum/Unisa Household Financial Wellness Index uncovered a large amount of disorder in the personal financial planning and -management process that contributed to South Africans being in a poorer financial state that they should have been.

Such disorders, also called negative entropy, combined with a poor macroeconomic performance – where economic growth declined and unemployment remained very high - to reduce the average value of the Index from 66.6 points in 2014 to 66.3 points in 2015. Prior to this decline the Index was on an upward trend since its inception in 2011, when it registered an average of 64.2 points.

Consequently the proportion of Financially Well households declined to 23.2% in 2015 from 27.9% in 2014. At the same time the share of the Financially Exposed households increased to 42.2% from 38.4% in 2014. The main difference between the Financially Well and financially exposed households is that the latter’s financial situation will be compromised by unexpected events such as thefts, accidents, disability or death. The proportion of households in the Financially Unstable category increased to 32.2% from 29.4%, while those in the Financially Distressed category decreased to 1.9% from 4.3%.

According to Prof. Carel van Aardt from Unisa’s Bureau of Market Research, negative entropy (or disorder in the system) occurs when things don’t happen as expected. For instance, it would be expected for a household who earns a high income, who have at least one person who possess a tertiary education, occupy a well-respected job, lives in a good environment and contributes to a retirement fund to be Financially Well. However, the research indicated that a significant number of these type of households are not Financially Well, even though they possessed the required resources (sufficient income and assets as well as a good living environment) and capabilities (education, skills and the ability to take control of their finances) to be financially well. Van Aardt said the latter, namely households’ inability to take control of their finances – also called their social capital – was one of the main reasons for the decline in the average financial wellness score in 2015.

Van Aardt however also noted that positive entropy was encountered in the research – that is where households without the necessary resources and capabilities managed to rise above their situation and performed a lot better than would have been expected.

He says positive entropy caused households who should have been in the Financially Distressed category to be either in the Financially Unstable, Financially Exposed or Financially Well categories, or those in the Financially Unstable and Financially Exposed categories to be in better categories. Similarly negative entropy contributed to for instance households who should have been Financially Well to be either Financially Exposed, Financially Unstable or Financially Distressed.

The research uncovered a number of reasons why households’ personal finances are in disorder. These include that they are not following best practices and not adjusting their behaviour towards these best practices, namely:

  • Do adequate financial planning, starting with a budget – 68% of households don’t have a financial plan and 10% don’t have any form of a budget. If you don’t know how, start with research on the internet or ask a financial expert to assist;
  • Be aware of what your household can afford and don’t live beyond that as it will certainly come back to haunt you;
  • Ensure that your financial plan includes objectives such as protecting you against unexpected shocks or emergencies as the unexpected always happen. Only 18% of the households indicated that they will be able to cope when an unexpected shock of R20 000 hits them, while only 17% had a financial plan with multiple objectives;
  • Ensure you are saving sufficiently for retirement and that this is part of the objectives in your financial plan. If you don’t know how to do this, make use of a financial advisor or expert to assist. Only 16.5% of households indicated that they save sufficiently for retirement;
  • Don't borrow money you can’t afford to repay. Your budget should assist you in determining how much you can repay and from there you can determine the maximum amount you can borrow. Too much debt is one of the main causes of financial unwell-ness as it inhibits you from optimising your resources and capabilities and as such prevents you to save sufficiently for retirement or insure yourself against unexpected expenses;
  • Always have a will ready and up to date. Should something unexpected happen to you, your legacy to your family or community will be lost without a proper will. Only 17.4% of households indicated that they have a will;
  • Actively manage your budget, expenses and financial plan as circumstances change frequently. Adjust your behaviour to these changes and don’t hope for things to change. Rather take control of the situation than allowing it to control you;
  • Show you care and take responsibility for your and your family's health. Being unhealthy can contribute to large medical expenses, which in turn can cause negative entropy and financial stress. In addition, by following the best practices will reduce your financial stress and have a positive impact on your health.
  • Build a social support structure that can assist in times of need;
  • Make time for financial wellness – if you don’t allocate time towards planning and managing your finances, it won’t make time for you.

To conclude, the research found a strong correlation of 0.94 between the Financial Wellness score and economic growth. This indicates that more Financially Well households are needed for stronger economic growth. Given the negative entropy uncovered in the research it means that households will - by following best practices - not only improve their own situation, but also those of other households and as such contribute to a better economic environment and growth rate.

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