The One Rand Man aims to get in touch with his money by dealing in cash only – R1 coins, to be exact – for the entire month of July. This social experiment is based on the theory that in a world of store, credit and debit cards, app and online banking, we’ve lost our connection with money and the real value of money.
So what happens when you’re detached from your dosh? Does the detachment erode wealth and prevent you from growing it?
Simon Dingle, a technology and trends writer, radio host and an adviser to 22seven, the personal financial management tool, says there is a switch in bias when people work with tangible cash, versus cards.
“Getting back in touch with your money is critical,” he says. Yet we’ve misdiagnosed our problem. “Senior executives and office clerks all complain about the same thing: not having enough money. But earning more money is not the key, he says. Assessing your behaviour and managing your money better is.”
Financial planner Theo Vorster agrees. “Income is not the be all and end all. I have seen more people with lower incomes in a better position to retire than people with big incomes. By that I mean I know teachers who will retire more comfortably than doctors and lawyers, because they are disciplined.”
Dingle says the problem is that we have a limited view of the world and overestimate our abilities in general, including our ability to manage our emotions and our money.
“The fact is we all need help,” he says. Consider dieting: we know we should be eating more vegetables and fewer donuts, but doing it is the difficult part, Dingle says.
When it comes to money, most people know what they should be doing – spending less and saving more – but the world is set up to entice you to make those choices that aren’t best for you – such as buying donuts.
Dingle says people try not to think about their finances. “So when it comes to preparing a budget or filling out a vehicle finance application, our numbers are often based on guesswork, because most of us don’t know what we are doing with our money.”
A typical example is what we spend on eating out, he says. “People will tell you that they eat out once or twice a month and ‘guesstimate’ what they spend on eating out, but when they see how much they actually spend, they’re always shocked.”
Costs that add up incrementally are more difficult to track than fixed costs that come off your account via debit order. But we tend to focus on the debit order expenses. When you face up to what you are spending day to day, that’s when the “aha moment” comes, Dingle says.
Dingle says psychologist Daniel Kahneman, who was awarded a Nobel prize in economics in 2002 for his work in prospect theory (a behavioural economic theory), explains in his book Thinking, Fast and Slow how the reflective part of the brain, which does the fast thinking (and is responsible for your fight or flight responses), is okay at estimating value, whereas the part of the brain that does slow thinking, which is more analytical, doesn’t work all of the time.
“You want to force yourself to do more slow thinking when making financial decisions. Consider how salespeople add urgency to your decision, because they need to keep you in that fast decision mode. But if you stop and think, you will realise that there will always be more houses, cars and TVs.”
Vorster says that if we can get two things right, we are more than halfway there. “The two things are: having a proper budget and a financial plan,” he says.
- A budget must include a surplus for saving, to ensure you achieve your goal of a financially secure retirement. No financial adviser can help you stick to your budget; that’s up to you.
- A financial plan is what you need to get to your destination. Vorster says an imperfect plan is 100 times better than no plan at all. “You can refine your plan as you go along. I have come across people who think a plan must have a trust and sophisticated tax structures, but the principle of a plan is about discipline. Being disciplined and sticking to a plan is more important than making the right investment decisions.”
Vorster, who is the chief executive of Galileo Capital and a member of the Institute of Behavioral Finance, says saving and the future value of money are also abstract concepts for most people. “For example, if I sacrifice one cappuccino now it means that I will be able to have two in future – in other words, there will be a greater benefit than having one now.”
This is partly why we find it difficult to save for retirement – it’s an abstract concept, he says.
“People have this idea that things will come right: a windfall will solve my problems, I’ll win the Lotto, inherit from a rich relative, or marry money. That’s an investment strategy based on hope. The trouble is that people only realise that it’s a bad strategy when it’s too late.
“You have to imagine yourself 20 or 30 years from now, and ask yourself what you want your life to look like, and then plan for it. The reality is that if you do nothing, hope is your strategy. Take responsibility and prepare now.”
Vangile Makwakwa, financial coach and author of Heart, Mind and Money, says more than getting in touch with our money, we need to move into a mindset of creating multiple income streams.
“I’m not sure that being able to touch and see our money versus having it in the bank will make a difference to the way that we manage it. In the ‘olden days’, when all we had was money in hand, it didn’t help people generate wealth from it. And in South Africa today, a large segment of the population still deals mostly in cash, but it hasn’t changed their thinking in a way that has enabled them to generate wealth. You have to go beyond saving to creating income streams.”
Most people are so busy making money they aren’t concentrating on making their money work for them. You make your money work for you by investing, Makwakwa says.
“For me, ‘connecting with money’ is about dealing with the emotions you have around money. For example, if money induces feelings of anxiety, you will be less likely to invest. You will always think you don’t have enough,” she says.
“People email me and say they are doing A, B and C and it’s not working. Clearly, they are frustrated or overwhelmed. My advice is to simplify things. Be clear about where you want to be. Do you have a concrete action plan?”
Managing money is about income, expenditure, saving, managing debt and saving for retirement, she says. “Each of these is like an area in your life – you might be excellent in one area but weak in another. So concentrate on improving in those areas where you are weak. Managing money takes emotional intelligence.”
Net tools and apps to help you
You don’t have to get all your money in R1 coins to keep track of your spending.
A number of financial services companies have online tools or smart phone applications that can do the job for you.
You can use these so-called personal financial management tools to set up a budget and then link your bank accounts to them.
The tools track your spending, allowing you to monitor it in real time, and some will even alert you when your spending reaches a certain level.
You can also classify your spending, teaching the tool to recognise shopping at a particular store, for example, as grocery shopping, and at a petrol station, as a transport cost.
These tools are:
- Momentum’s MyFinTrack (under the financial wellness tab at www.momentum.co.za)
- 22seven (www.22seven.com)
- Pastel’s MyMoney (www.pastelmymoney.co.za) .
The banks have issued warnings about disclosing your online banking credentials on these sites, despite the fact that they use aggregators that provide similar services in many other countries.
But some banks, such as First National Bank, allow you to create secure secondary read-only accounts with their own passwords that can be linked to these tools or apps.
If your bank doesn’t offer a secondary read-only account, you may have to download your account statement and import it into the tool or app.