How today’s debt impacts your tomorrow

And, one in 10 of us who are in poor financial health, are missing repayments for three or more consecutive months. It is a downward spiral which is difficult to climb out of. 

Reducing indebtedness, including the inappropriate use of short-term credit and creating a savings culture in South Africa, are major socio-economic challenges facing both individuals and society as a whole.

We know, these bad financial behaviours are a result of the current economic environment and rising living costs, but why is it that 64% of the people who are in poor financial health believe they are better off than they actually are?

Along with living in the present, low levels of awareness and a belief that we are better off than we actually are (optimism bias), entrenches debt.

In South Africa, 53% of the population borrows money.

This rate is higher than many other upper-middle-income countries in the world, according to the World Bank; Global Findex Report, 2017.

Worse still, credit use is outpacing employment growth – people are borrowing even when they have no means to pay it back.

Credit facilities such as credit cards, overdrafts and store cards make up 65% of South Africans’ credit account – and this is before we look at informal debt from friends and family, or moneylenders.

Debt means we are not saving

South Africa’s household savings rate is well below many other Organisation for Economic Co-operation and Development (OECD) countries.

In addition, only 40% of South African respondents to an OECD survey were classified as active savers, compared to an average of 64% across other countries.

What does this mean for our future?

Simply, we will not have emergency funds which could plummet us further into debt nor will we have enough money to retire comfortably.

Research also shows that 65% of people don’t know what they spent during the previous month¹. And that more than half of people who think they know what they spent either over or underestimate this amount².

Not knowing what you spend makes controlling your spending and debt management more difficult.

How we can fix this.

• Firstly, by being more aware. The link between financial knowledge and financial health is an important one. This has been proven effective, regardless of income level. This simply means, those who earn less could be financially healthier than some with a higher income.  Research shows that higher levels of financial knowledge are correlated with better financial outcomes and financial behaviours such as participation in the stock market, adequate retirement planning and debt management.
• Manage your debt by paying off the higher interest, short-term debt first. Continue to pay down until you have as little debt as possible, apart from your home loan and car payments.
• Use tools like Vitality Money Financial Analyser, which gives personalsed details into monthly income, savings and spending.

It enables Discovery Bank clients to place their expenses into more than 166 pre-set categories or to personalise and re-order categories for anything from holidays to home improvements, with a predictive search functionality.

With weekly insights on spending trends in each category over time, you can see what you’re saving by following and keeping to your budgets, and you can set limits in categories to prevent overspending and so earn more rewards for managing your money well.

NOTES

1. Intuit Mint Life Survey, 2020.
2. Exception Is the Rule: Underestimating and Overspending on Exceptional Expenses. Journal of Consumer Research, 2012