RANDS AND SENSE
By Claire Klassen
After a long, hard year, many of us look forward to charging full steam into the festive season, spending and spoiling ourselves and our loved ones with abandon. And when it comes time to deal with the consequences of our financial decisions … well, isn’t that what January is for?
Released earlier this year, the Financial Sector Conduct Authority (FSCA) 2020 Baseline Financial Survey determined that all indicators of financial literacy in consumers had decreased, with one of these being “financial control”. While this across-the-board decline is extremely concerning, the drop in financial control does not bode well as we enter the festive season – a time generally associated with unchecked expenditure.
Bear in mind that a lack of financial control is linked to debt, and that credit activity is on the rise. According to the TransUnion Industry Insights Report for the second quarter, credit card origination volumes (the measure of new accounts opened) increased by 37.9% year-on-year in the first quarter of 2022, in glaring contrast to the 42.7% year-on-year decrease seen over the same period in 2021. Furthermore, it revealed that almost three-quarters of all card originations came from Gen Zs and millennials, which points to a growing appetite for credit among younger consumers.
What is financial control?
According to the FSCA survey, financial control refers to how well households and individuals manage their finances over the month.
The survey revealed that individuals on the lower end of the living standards measurement (LSM) scale coped with income shortfalls by lending money from family members and friends, while those on the higher end opted to disinvest their savings.
Financial control is not necessarily influenced by or linked to income. People in the higher LSM brackets often fail to apply basic financial skills, such as budgeting and saving. However, the consequences of their not coping tend to be significantly less dire than those on the other end of the spectrum, which is why consumer financial education programmes tend to focus on these segments.
How much financial control is really within our control?
Yet with a turbulent economy, rising fuel and food prices, loadshedding, crime and job scarcity adding to our woes, are South Africans not just victims of our circumstances? Just how much financial control is really within our control?
The good news is more than we think.
There are extrinsic and intrinsic factors that determine our level of financial control. The former are generally macro-economic factors, such as output, growth, unemployment, inflation/deflation and investment. They could be considered as being outside of our control, such as being retrenched.
However, while we may have lower control over extrinsic factors, we can choose how we respond to an associated event. For example, we cannot control inflation, which results in our income having less purchasing power. However, what we can control is how we adjust and manage our budget in line with this reality.
On the other hand, intrinsic factors relate to the choices we make as individuals after evaluating resources, costs, and trade-offs. Over these we have far more control.
Understanding the difference between extrinsic and intrinsic factors and the role our own decisions play is key to our financial wellness.
How do we learn financial control?
Financial control is a lot like fitness in that you need to exercise these muscles constantly to stay ahead of the game. Rigorously applying the principles of financial control will lead to better money decisions, while practising forethought and restraint in where, when and how we spend our money will, in turn, help us to better develop our sense of financial control.
It all starts with a budget. As a financial education specialist, I teach consumers the basic principles of financial literacy. When asking whether they have a budget, I am frequently met with the response: “I do have a budget, but I don’t write it down – it’s in my head.”
In my experience, I have found that the best way to strengthen financial control is not only to visualise our budget but to write it down and bring it to life. Much like an eating plan, the more we practise restraint, the easier it will become, the more our confidence will grow, and the better we will feel about ourselves.
As we approach the end of the year, it’s now more important than ever to exercise financial control.
Most working people receive their annual bonus around this time of year, and December’s payday usually comes early. Savings are admittedly challenging to maintain with the current state of the economy in South Africa, but when we understand how to use money as a tool, financial control is that much easier to achieve.
As the late author and motivational speaker Wayne Dyer once said: “You cannot always control what goes on outside. But you can always control what goes on inside.”
Claire Klassen is Consumer Financial Education Specialist at Momentum Metropolitan.
PERSONAL FINANCE