You’re young, you’re flossing, you’re ballin’. You’re living your best life – got the car, got the clothes and the shoes, going out every night. And it’s all on Insta; Snapchat your good times. Everybody’s gotta know how good you have it.
But do you? The truth is probably closer to the bone. If you are like most South Africans, chances are you are living beyond your means and your best life is costing more than you earn. It’s easy when all it takes is swiping that plastic.
July is National Savings Month, a time to reflect on our practice of living on tick and to learn ways to lower our debt and change our spending behaviour.
“Our relationship with money is imprinted when we are young,” says Cora Fernandez, the chief executive of Sanlam Investments: Institutional Business. “First, it comes from how people you look up to treat surplus money. Second, it comes later in life, say in your 20s, when you find yourself in a financial disaster and you reflect on why and how you got into this situation. That event can fundamentally change your relationship with money going forward; if you learn the right messages from that experience.”
This could be when you leave varsity with a big student loan, and to be the “hip and hot” student, you’ve bent that credit card to the max. You have a load of debt even before you’ve even earned a cent.
“Some people embark on a path to correct this situation, and that determines their relationship with money going forward, but, unfortunately, others don’t,” Fernandez says.
You can actively and consciously change your relationship with money, but it is difficult. It is, however, the conversation we need to be having – and we should have been having it for a long time already.
“I love the idea of ConspicuousSaving,” says economist Annamaria Lusardi, the founder and academic director of the Global Financial Literacy Excellence Center.
She is referring to Sanlam’s #ConspicuousSaving campaign, which has Cassper Nyovest and Pearl Thusi as ambassadors. It is about putting the spotlight on people who are committed to working hard and saving hard.
“It is important to tell people there are lots of advantages to saving and that saving can bring you happiness and freedom,” Lusardi says. “It is important to counterbalance that temptation we have every day to spend … and important to see the advantages in saving. It makes us more financially secure, it allows us to do things we want to do.
“That freedom of choice is very important, but it requires effort to counteract all the messages we get every day to consume.
“We need to make opportunities available to save – retirement fund at work, bank accounts. We need to make saving as mindless and easy as we have made credit and consumption.”
Fernandez takes it back to “show-and-tell”. She says: “If you show anybody what the opportunity cost of not having a good relationship with money amounts to, they will change their behaviour. Currently, we don’t have a reward mechanism. If I ask whether you know that if you don’t buy that pair of shoes you don’t need for R800, by December next year that money could be worth R1 000, invested in X investment, would you buy those shoes?”
She believes a causal link should be shown between saving and reward, so people can see that saving is tangible. She talks of goal-driven savings, “because you are trying to get people to save, but they don’t know for what, how much or for how long. There is no goal, but I can have the shoes now.”
Drowning in debt
Before you can save, though, you need to clear your short-term debt.
And Fernandez is specifically concerned about people who have a big income but who live from pay cheque to pay cheque because they live beyond their means. They generally have a secure income and at least one asset, which means banks happily lend them money. They get credit, and they get into debt, contributing significantly to South Africa’s high level of indebtedness.
“You need to change your priorities and accelerate the reduction of your debt. Lower your indebtedness, especially the short-term debt – those assets that are not appreciating in value (cars fall into this category) or have no value anymore. Clear that debt.”
Steps to wealth
So you have cleared your debt and are ready to save. Where to begin?
Lusardi says: “To accumulate wealth you need to have that objective … and you need to change your behavior to reach your goal.”
With a goal set, you need to use the power of compound interest. “This is the most important principle in personal finance; it is critically important for building wealth,” Lusardi says.”It really matters to use time in your favour. There is a very simple way to become wealthy and that is to start saving early.
“We need to show that starting early will help people to accumulate wealth, and potentially a lot of wealth later in life.”
If you want to have R1-million by year X, Fernandez explains by way of example, ask your banker or financial adviser, or go onto the internet to work out how much you have to save per month over three, five and 10 years to have R1 million in spare cash. What sort of a return do you need? That’s a goal you can work towards.
“Once people get the hang of it, they can tweak it: if I only want half-a-million, how much must I save monthly? If I want it in four years, how much is it going to be?”
To make full use of compound interest, Lusardi says you must invest wisely to grow your wealth.
“You need to grow your wealth faster than inflation. This is why investing is really the important part of growing wealth. These are the basic principles of personal finance that every one of us can use to grow wealth over time: have a goal, start early and invest wisely, make use of compound interest, grow your money faster than inflation,” Lusardi says.
It’s as easy as one, two, three: set a goal, work out how much to put away and where, and then do it.
“It is the inverse calculation that you do when you buy a house or a car,” Fernandez says. “When you buy a car, they tell you the car is, say, R300 000 and the rate on the car is prime plus two percent. From that, they tell you the monthly instalment you have to pay the bank over the next five years is, say, R3 200. If you can do that on a car, why can’t you do that with savings? That is what the bank or the dealership is doing to you – they are forcing you to save for something they gave you up front.”
And if you start saving early enough – when you are still young, like Thusi and Nyovest – you can take full advantage of compounding returns.
Don’t despair, though, if you are older and haven’t saved yet, though. “You need to increase the amount you are investing monthly, and invest in assets that have higher returns to make up the time and the opportunity that you have lost. These higher returns come with slightly more risk.
“You have to understand what you are investing in. Google, friends and your financial adviser are all great sources of information and education. Ask around and compare notes. You will be amazed at how many savvy investors are lurking in your midst,” Fernandez says.