Education is key to helping South Africans escape the debt trap

File Image: IOL

File Image: IOL

Published Oct 9, 2020

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It’s a well known fact that South Africans don’t save nearly as much as they should and are, instead, drowning in debt.

In fact, according to the DebtBusters debt index for the second quarter of 2020, unsecured debt increased by 18% when compared to 2016. This means that consumers are increasingly using unsecured debt such as credit cards to supplement dwindling incomes.

The onset of the coronavirus pandemic, and the lockdown implemented to curb its spread, has also had severe negative consequences for many South Africans.

The magnitude of the negative impact on the economy has yet to be fully understood or seen. What we do know is that the extent to which the economy has shrunk will be somewhere in the double digits.

What this means for the ordinary South African is that it will be increasingly hard to make ends meet, with job losses, hours and salaries being cut, and increases in food bills that don’t quite match up with what the official rate of inflation is purported to be.

Sadly, this means that many people will need to borrow cash to make ends meet. We all know how much of a slippery slope that can be, especially when consumers turn to loan sharks who charge usurious rates: often money is borrowed to cover loan repayments, leading to a perpetuating negative cycle.

One solution is to offer staff responsible early access to wages, tied into financial wellness education so that this enables them to become financially secure in the not too distant future. When companies offer staff early access to wages, they are saved from paying astronomical amounts in interest to service loans.

This then means that they don’t end up in an endless debt cycle, which is very difficult to get out of.

And, because there is no interest due to a loan shark, employee’s cash flow will be freed up and, after a while, they will get to the point at which they can save.

One step further

Employers should do more than just offer a helping hand ahead of payday, though. They should enable employees to learn how to better manage their finances, how to save, the perils of indebtedness and how to set and reach financial goals and objectives.

Tools at our disposal - and in the palm of everyone’s hands by way of smartphones - enable us to teach people better financial habits through gamification. Gamification, forgive the buzzword, refers to applying game-design elements and game principles in non-game contexts. The way that could work in the case of an app that enables responsible early access to wages is that users can earn points, which translate into lower fees each time they access wages before payday.

It’s a bit like scoring a bonus sweet bomb when you win a level in Candy Crush so that you can more easily win the next game.

If someone uses an app to access wages early, and pays less each time, they have more money to hand. This becomes a virtuous cycle, helping them get to a point where responsible early access to wages is no longer needed and, instead, they can save.

This has several benefits for employees, but also benefits their families and communities.

Higher savings reserves mean that consumers have a cushion for when a rainy day comes along. Not having to pay back unsecured debt also means being able to pay off other big ticket items, like a bond, faster. This then frees up their disposable income, which they can push back into the local economy purchasing other goods and services. And, like compound interest, the more people that can do this, the better the economic outlook for all of us.

PERSONAL FINANCE

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