How do we change a nation’s mindset from one that spends to one that saves? It is something that will not happen overnight, but it can be done through education and discipline. Do you really need that new car or a bigger house?
We come across more and more middle-aged people with close to zero savings or investments, yet they have a big house in the “right” area, a luxury vehicle and went skiing in Europe over the festive season. Their home and car are both partially owned by the bank and the holiday was paid for with their credit card. The vast majority of the SA population are driven by a desire to have the latest, biggest and most expensive toys. We live in a world where everyone is chasing consumables and lifestyles that few can afford. Before the vehicle is upgraded or the deposit on the Easter break to Mauritius is paid, we should be considering “is this really necessary? … perhaps I should not incur the credit or better yet, simply save the money, as I may well need it in the future”. Remember the power of compounding that Matthew Stroucken highlighted in his article entitled The most difficult thing in investing – The power of compounding in The Navigator – Anchor’s Strategy & Asset Allocation, 2nd quarter of 2019? Well compounding works both ways, which means it works against you when you are paying high interest rates to service the debt.
By having credit card or loan debt and accordingly being charged interest to service this debt, compounding is working in the wrong way for you. Most people are naive or simply ignore the interest rates being charged by banks. In fact, the information is not easily accessible, it is not your bank’s selling point! Typically banks charge around 20% interest on a credit card if you use the credit granted to you. This rate skyrockets up to around 45% when micro/unsecured loans are issued. While credit cards can be extremely useful when one has an emergency or in certain circumstances, a necessary evil, far too many people are relying on their credit card for not only the splurge items mentioned above, but also for their day to day living expenses. According to the National Credit Regulator (NCR), there are currently 25mn active credit cards in SA, of those credit cards 10.23mn (40%) are behind in their payments. A Woolworths Gold credit card charges 21% interest pa. and a monthly fee of R50.43. By way of an example if you have used R40,000 of credit on a credit card and are charged 20% interest p.a., you will be paying R8,000 in interest p.a. Most people see this as only R666/month, which is more than manageable. Compounding really works against you if your credit used starts to increase or there is an increase in interest rates as the interest payment will increase month to month and start to compound negatively.
So, how then do we become a nation that saves/invests instead of a nation that spends/consumes unnecessarily? Unfortunately, it is something that is not easily achieved and due to the tough economic climate in SA, more consumers are accessing personal loans and available credit card debt to support their day-to-day expenses. Far too many people in SA live beyond their means and are constantly trying to “keep up with the Joneses”. This mindset needs to change especially for people who can’t afford to “keep up with the Joneses”. Debt is often referred to as a trap, since once you are stuck in it, it is really hard to get out of it.
An excellent practical example, we can all relate to is the following: If you purchased R3,600 worth of Apple shares in 2001 instead of using the R3,600 to purchase the original iPod, your R3,600 of Apple shares would be worth a staggering R868,000 today and I guarantee you that your iPod would have been trashed over a decade ago. This goes a long way to show the power of compounding.
The decision is always there to buy or to save/invest.
What is the solution?
A member of the Anchor team could sit down with you to devise a strategic plan to reduce your debt, but this requires strict discipline and, while you may be compliant for a period without a complete change in mindset and approach to lifestyle, it is unlikely that the well thought out plan will result in a debt-free life. There is a desperate need for education at high school level or earlier about the advantages of living within your means, saving for the uncertain future that lies ahead and the wisdom of starting to build wealth early. Regrettably if we are no longer in high school, we have lost valuable time, as we get on in years, we have less time to accumulate wealth and less time for compounding to work for us, but it is not too late. I certainly wish someone had advised me to rather purchase Apple shares than the iPod which generated limited satisfaction.