Poor spending habits hamper consumers’ savings

Nonhlanhla Kunene
By Nonhlanhla Kunene July 18, 2016 11:20
Derick Ferreira, Old Mutual | 18 July 2016
Derick Ferreira, head of product management at Old Mutual Personal Finance

Derick Ferreira, head of product management at Old Mutual Personal Finance

At least once in the last year, 57% of South Africans found that their income did not cover their living expenses. Recently released in the 2016 Old Mutual Savings and Investment Monitor, this statistic highlights that consumers are understandably struggling to stretch their household budgets, and that many South Africans are not being as financially astute with their spending as they could be.

This is according to Derick Ferreira, head of product management at Old Mutual Personal Finance, who says that the monitor recorded an increase in the proportion of household income used to service debt, increasing from 12% in 2015 to 16% in 2016. “This suggests that when expenses exceed income, households are increasingly taking up loan offers and accessing credit lines, rather than curbing their spending. This shift was particularly noticeable among middle-income households, seriously hindering their ability to save and thus diminishing the potential for medium to long-term wealth creation.”

In light of savings month, Ferreira says that the behavioural science behind an increased propensity for debt is key for consumers to understand, and emphasises the importance of developing better spending habits.

Consumer behavioural science plays a key role when South Africans want to avoid overspending and important to consider the next time you shop in-store or online says Ferreira, a speaker at the annual Old Mutual Advice Matters Roadshow. According to a report conducted on behalf of Old Mutual on consumer behaviour, South Africans should be aware of retail tactics that may lure you to spend more.

So what are some of the retail tactics affecting consumer behaviour?

  • A psychological trick called the ‘left-digit effect’ that makes you think you’re paying less for something is important to be aware of. In a test, up to 44% of participants were taken in by this 1 cent trick e.g. R3.99 vs R4.
  • Buy 3 Get 1 Free. Do you really need four? What you are more than likely doing is overspending. Retailers call it the ‘open the wallet’ concept, this tactic is also behind those 50% off specials on things you don’t need.
  • Retailers play on your five senses to make you spend more for example playing love songs when you grocery shop to get you to buy more for your loved ones. Researcher Martin Lindstrom pumped the smell of apple pie into an appliance store – sales went up by 23%.
  • Stores deliberately place essentials such as bread and milk at the back to increase impulse buying as you walk through the aisles.
  • Be aware of the temptation corridor. Checkout aisles have been designed to tempt you and your kids with treats and sweets while you’re bored and waiting to pay – this is an impulse sales tactic.
  • Shopping centres and retailers encourage you to bring the kids along, as research proves that parents spend 29% more when the kids are around. This is according to a study of nearly 3 000 consumers carried out by researcher Martin Lindstrom.
  • Limited edition tactic is often used to create a sense of urgency and make you buy on impulse.
  • Stores use layout science and ‘line of sight’ to push you to buy selected products. The (often more expensive) stock they’re trying to move will be displayed at eye level.

Ferreira says that, with rising interest rates, the cost of debt is continuously growing, making high-interest short-term debt such as credit cards and store accounts particularly expensive. “With the prime lending rate having increased by a further 0.25% in March 2016 to 10.50%, consumers relying on credit may struggle to stay on top of their growing repayment responsibilities.”

This rings true to the Monitor finding that only 13% of South African households are paying their credit card off in full at the end of the month. “There has been a decrease noticed in the proportion of people who pay more than the minimum amount required on their credit cards. Looking at store card repayments, as has historically been the case, the incidence of accounts being cleared monthly is even poorer than for credit cards – sitting at a dismal 6%.

“During tough times, the temptation to get further into debt is a challenge, but it’s during times like these that minimising debt and maximising savings should be made a priority,” Ferreira adds.

So how can you beat the retail strategy to lure you into overspending?

  • Save 29% by not taking the kids along when you go shopping.
  • Leave your credit cards behind. Avoid temptation at all costs, especially impulse buys.
  • Avoid just popping into the shopping mall that can easily get you into overspending. Avoid the temptation by planning better.
  • Wait 48 hours before buying. On larger purchases, give yourself time to think about whether you really need it.
  • Do not meet up at the mall. Instead of meeting friends at the mall, rather meet at the park/ beach or outside. It’s healthier and cheaper.
  • Shop wisely by writing a shopping list and stick to it, avoid going from aisle to aisle and buying on impulse.
  • Buy needs not wants.

The Old Mutual Savings and Investment Monitor also reveals that South African consumers do, however, admit that they may not always be making the most informed financial decisions. “There has been a decline in consumer confidence when it comes to financial decision making. While just under half of working metro dwellers claim that they have to forego ‘pleasure spending’ a lot of the time, incidence of sticking to a budget is rare – especially among younger and lower-income households.”

Ferreira says that one of the most significant definers of differences in attitude and behaviour is income. “There is often an unfortunate perception that only wealthy people can afford to see a financial adviser. This is not true and forms a barrier for the people who most need advice on how to begin saving effectively. A financial adviser is able to help these consumers to understand their unique needs and circumstances in order to formulate a plan based on their goals and priorities.”

In conclusion, Ferreira confirms that the secret to a stable financial future lies in consumers’ everyday spending decisions and financial habits. “It’s a fact that goals give us direction and remind us to stay on track and can help us turn our spending habits into savings habits. Once you know your goal, sit with your adviser and create a dynamic financial plan that’s tailor-made for your current life stage and lifestyle.

First published by FA News

Nonhlanhla Kunene
By Nonhlanhla Kunene July 18, 2016 11:20
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