Tackling spending patterns key to financial freedom
Young people often mistake financial freedom for spending money on whatever they fancy. However, a lifestyle of saving, and not living in the hope of a big pay cheque, is the surest route to financial freedom, says financial consultant and author Nola Rae.
“People think financial freedom means you can buy anything you want instead of preserving money towards your future,” she adds.
Financial education is a booming business, with training courses, money coaching and self-help books providing the necessary education young people are not learning at school and from their parents.
Rae, author of Money Wit: Becoming Financially Savvy, says a major problem today is that many people believe that their monthly salaries are adequate and that they can control their earning power, but both are traps.
People also believe they can handle whatever financial problems might come their way. They think they’re too young to start saving, but that’s misguided, says Rae.
“Because people think they’re too young to save, they always believe there’s so much time ahead of them…. They think they’re going to live forever,” she says.
Another trap is that many people believe that when they are promoted at work and their salaries increase, their lives will improve. “What happens? Expenditure rises to meet income. So all that happens is the more you earn, the more you’re going to spend,” the author warns.
Currently, 39% of South Africans who are 16 years and older use credit products, and 26% of them do so to purchase food, according to Finscope.
Money coach Hayley Parry says people should focus on how much they spend rather than obsessing about what they earn. “I think that most people think that you have to earn a lot of money in order to be financially free,” she says.
“In reality, what you earn is far less important than what you spend on a monthly basis when it comes to becoming financially independent.”
Parry is the cofounder of financial education provider The Money School.
In partnership with insurance company 1Life and Boston City Campus, the school offers a free course entitled The Truth About Money, valued at R2,499. Parry says the aim of the course is to “teach people how to get out of debt, manage their money easily every month and ultimately grow their wealth in order to become financially independent”.
The Money School also offers bespoke solutions for companies, where they investigate opportunities to make a difference to an employee’s financial life and a company’s bottom line.
They help with induction programmes for new employees, pre-emptive festive season workshops and work with employees’ partners to realise personal finance transformations.
They also offer services related to garnishee orders, which frees up payroll staff from this legal requirement to deduct debt. Employees are offered protection from unscrupulous collection attorneys and creditors, garnishees are audited to ensure the balances, fees and interest charges are correct, and The Money School also provides access to a national call centre to help with “demanding creditors and stressed staff”.
Rae also visits schools, universities and workplaces to teach financial management, and she has been surprised, and very worried, about the high levels of financial illiteracy.
She says company managers she has spoken to confess that their staff lack financial skills. Many do not understand what their payslips mean and are not equipped to make sound financial decisions. They also do not understand basics such as registering for personal income tax, budgeting, saving and investing, she adds.
At the companies she assists, the management is usually concerned about the high levels of debt among their employees.
Rae says people often accumulate debt for the wrong reasons — a broken washing machine or an unexpected medical bill. She uses such examples to teach employees that it is precisely during such crises that they need to realise the only way out is to cultivate a habit of saving. “But people always learn this lesson when it’s too late,” she adds.
Another problem flagged during workplace education is that, to get out of debt, people often take on more debt.
Often they take loans without reading the fine print and have to pay hefty interest fees — and this is when people begin to see their salaries working against them.
Garnishee orders are a huge problem. “The more of your salary you need to keep aside to pay off debt, the harder it is to become financially independent,” Parry says.
During coaching sessions, people often mourn the fact that they did not start saving earlier. While the best time to start saving is with the first pay cheque, Rae says it is a habit that can be formed at any time, even if it’s only putting “a small portion away”.
Tiny increments will always surprise savers and motivate them to save even more, says Rae. “When you look at that savings account, you’ll be surprised by what you see. And that’s when people become encouraged.” Budgeting, saving and keeping records of earnings and expenditure takes effort, Rae admits, but all things in life, big or small, require planning.
“We plan what we’re going to wear in the morning, we plan a trip to a client. Planning your money is exactly the same concept,” she says.
“Look at your bank statements for a month or two and see what you can do without…. It’s not about how much money you have in the beginning. All that is required for financial freedom is a plan.”