Financial literacy is once again making headlines as South Africans begin to withdraw from their retirement savings under the new two-pot system. Under the new legislation, members of retirement funds may withdraw up to a third of their retirement savings (subject to various conditions). South Africans chose to apply to withdraw a staggering R4 billion in just the first few days under the new system.
While there are certain conditions under which it is valid to make such a withdrawal, financial experts would caution against such an action under most circumstances and many experts are concerned that South Africans in general do not have sufficient financial literacy to fully understand the implications of an early withdrawal. But is it true that financial literacy is so low?
Financial literacy, simply put, is the ability to make good financial decisions. People who are financially literate are able to analyse their present financial situation and effectively manage their day-to-day finances to achieve their financial goals. This involves a sound knowledge of budgeting, saving, and smart spending, and an understanding of financial products such as loans, insurance, and bank accounts.
Denise Neethling, Head of Marketing at marketing leading Earned Wage Access company, Paymenow, says, “Financially literate people can plan for future expenses and use credit wisely. This means their financial future is built on a solid foundation. But people who lack these financial skills are far more likely to make short-sighted financial decisions based on incomplete knowledge, unaware of the long-term consequences.”
A concerning number of South Africans lack basic financial literacy. For example, a study from Stellenbosch University found that 40% of participants (who all earned above R15 000) lacked basic knowledge about the difference between gross and net income. These same participants also displayed a lack of awareness of their day-to-day financial situations and costs of living. As a result, these consumers took on new debt without understanding how repayments would affect their monthly cash flow.
As a result, Neethling says, “Many South Africans, especially those in lower-income households, have also fallen victim to predatory financial practices. Payday loans are a notorious example of predatory lending, charging desperate consumers extremely high interest rates. Vulnerable consumers are granted loans they cannot afford and lack the financial literacy to understand the implications. This leads many people to become unwittingly trapped in a cycle of debt.”
A comprehensive study into financial literacy across South Africa conducted in 2018 found the lowest financial literacy rates are typically found among women, black South Africans, people without a matric-level education, and young adults (18–29 years). Students and the unemployed also have lower financial literacy levels, as do those whose income is from government grants and informal sources. “These are some of South Africa’s most vulnerable citizens and equipping them with the skills to take control of their lives and avoid exploitation is paramount.”
Further research shows that 70% of South Africans do not have a household budget, 75% do not know credit cards are an expensive form of credit and 65% do not have long-term financial goals.
“These are just some of the challenges that some financial companies are addressing,” Neethling explains. “Our platform is designed to encourage smart spending habits and promote prudent financial choices. We’ve seen how, as our users reach higher tiers, they are making smarter financial decisions. The benefits of this baseline literacy are substantial, especially when measured over a lifetime. Investing in our financial understanding is the best investment many of us can make.”
As our society becomes increasingly complex, with a growing range of financial products and services, financial literacy is increasingly important. By being financially literate, individuals can take full advantage of opportunities that come their way, whether it's negotiating a better salary, investing in the stock market, or saving for retirement. Ultimately, financial literacy is not just about money management; it's about enhancing overall life quality by fostering independence, reducing financial insecurity, and laying the groundwork for a prosperous future for oneself and future generations.
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