South African household net wealth increased last year
By Anna Rich
South African households collectively grew by around R 1 trillion richer between the start of the second quarter and the end of 2020. The figure is in real terms: the effects of inflation have been factored in to reflect the real value for money in purchasing power. If net wealth is measured at current prices, the increase is estimated at nearly one trillion rand.
This is revealed by 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 on the State of consumer finances: the household financial well-being index, the household wealth index and the consumer financial vulnerability index.
The increase in net wealth has occurred despite the fallout from the Covid19 pandemic in the form of job losses and a shrinking economy.
There was a sharp decline in real net wealth of around R772.8 billion at the end of the first quarter of last year, when the first effects of global lockdowns were felt, but household wealth fell. markedly increased thereafter.
The authors of the HWI report claim that this huge increase in net wealth is primarily the result of strong growth in the value of financial assets, such as stocks and bonds. The rise in stock prices was due to lower interest rates, the injection of liquidity into financial markets, the announcement of a vaccine and a reasonable recovery in employment.
“Pension funds and household financial investments have benefited enormously from the increase in these financial instruments,” says economist Johann van Tonder of Momentum’s Insights division.
Although the HWI examines our net wealth collectively, some information 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 expenses, say the report’s authors. The latter will only show you how much you are able to save, but unless you take the next step of using those savings to invest in a pension fund or other financial instruments, they will not. will not translate into wealth.
Net wealth is total assets minus total liabilities. Simply put, it’s what you own minus what you owe. Specifically, the total amount invested in pension funds, retirement annuities (RAS), stocks, bonds, unit trusts, residential properties and cash, minus the unpaid portion of your home loan, car loan or personal, 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 can be a sign of wealth, but channeling the best part of your after-tax income to these isn’t the path to real wealth. The richest 10% of households in the Momentum-unisa household finance database accumulated savings in retirement funds and other financial instruments, while their debts were affordable.
◆ Don’t confuse good income with wealth. When the researchers looked at the distribution of wealth, they found that 50% of South Africans’ net wealth is in the hands of the top 2%. However, they point out that high income cannot necessarily equate to wealth. “Some high-income earners have outstanding debts that exceed the value of their assets because they are using their income sub-optimally from a wealth creation perspective,” says Van Tonder.
The study found that many middle-income households are in the top 2%, “because they saved, invested and insured the right way and didn’t borrow more than they could. to permit”.
◆ Stay in the game. Net wealth fluctuates over time – as evidenced by the fall and rise in the market last year. Staying invested when markets fell in the second quarter paid off when markets rebounded.
For most people, saving for retirement in pension funds or RASs is their greatest savings. As these savings are generally not accessible until retirement age (except in the event of resignation from their job), this prevents emotional reactions to market fluctuations.
◆ Control what you can. Although you cannot control the performance of the market, saving more by minimizing debt and reducing expenses, and then investing savings, results in better financial results.
The lockdown has been a major wake-up call for many South Africans, says Janine Horn, financial planner at Momentum. “The data shows that once households realized that they could not control the economic situation as a whole, they began to take an interest in their finances with the aim of maintaining financial support for their loved ones,” Horn said.