Only one in four South African households are financially well – and their secret isn’t in earning high incomes or knowing some investment secret.

The key to their success is that they manage their money well, according to the eighth Momentum/Unisa Household Financial Wellness Index  released last week in Johannesburg. 

The index shows that only 25.5% of households are financially well, while  44.1% are financially exposed, 28.6% are financially unstable and 1.8% financially distressed. 

Financially exposed households can become unstable if something happens, such as an unexpected expense or they make poor decisions, and financially unstable households are in danger of becoming distressed if another incident occurs. Financially stressed households require outside assistance to make ends meet and are likely to miss payments. 

So, what are financially well households doing right? 

They are taking control of their finances, the researchers say, one of the crucial components of financial wellness, and one of the ways households can manage events in and out of their control.

The researchers call it personal empowerment capability. It is closely tied to financial literacy – what you know – and what you do with your resources to manage or improve your financial wellness.  

According to the survey, “a certain set of financial activities are the secret ingredient to turning a household’s inputs (education and personal empowerment capability) into better outputs”.

These financial activities include setting budgets, improving financial literacy, working towards short- and long-term financial goals and using expert advice where necessary.

Financially well households: 

• Have a written budget – 46.2% (financially well households) compared to 25.8% (financially unwell households).

• Are able to stick to the budget – 27.5% (financially well) compared to 15.7% (financially unwell) households. One factor that can derail financial wellness quite quickly is an emergency. Over half, 55.3%, of financially well households have access to savings in the case of an emergency compared to 27% of financially unwell households. 

• Have a plan – 38% have a financial plan compared to just 15.8% of financially unwell households.

• Save for retirement – while 60% of financially well households save for retirement, only 22.6% of financially unwell households save for this goal.

In some cases, financially unwell households don’t have the money for financial products such as investments and insurance to protect income. But earnings aren’t always a good indicator of financial wellness. 

The survey measures seven income groups, and as income increases the percentage of financially well households increases, but even among lower earners (R22,501 – R100,000 a year) 11.3% of households are financially well. This suggests it isn’t how much you have, but rather how you manage what you have that can lead to financial wellness.

Only 9.7% of financially well households surveyed say they have a professional adviser. The survey notes that in some cases, good financial literacy is all that is needed to make changes and improve financial wellness.

Professor Carel van Aardt, research director at the Bureau of Market Research Unisa, says they found low levels of financial literacy, evident in the survey score of 38.4 out of 100. 

“The lowest income group had higher levels of financially literacy because they have to cope with very little money. The low affluent and emerging affluent groups have incredibly low levels of financial literacy. Less than 50% of affluent people were unable to answer the most basic questions,” Van Aardt says.

Even the financially well households scored poorly with 52.4 out of 100 on the financial literacy measure, he says. 

Professor Bernadene de Clerq , M&D coordinator at the Department of Taxation in the College of Accounting Sciences at Unisa, says financial wellness and literacy starts with the basics – a budget. 

She says you have to analyse expenditure and warns against only using an automated system because you may not spend enough time analysing your actual spend. 

Momentum economist Johann van Tonder says you also need to be able to answer the ‘How much is enough?’ questions, such as how much do you need to save, how much are your belongings worth, and how much do you need to pay back debt. 

“Without these answers we can’t do proper budgeting or long-term financial planning,” Van Tonder says. “It’s crucial to know the answers.”

De Clerq says it is critical that you understand financial concepts like compound interest and how paying cash for an item such as a television costs, say R2,000 versus R4,000 if you are paying it off over several months. 

Van Tonder says it is important to act on facts, not fiction, opinion or rumours when making financial decisions. 

The researchers say another tip for reaching financial success is to diversify your income by earning from different sources, not using debt to pay for general expenses, and not being easily convinced to buy something if you haven’t planned for it.