Moderate behaviour and monitor expenditure
The secret to developing good financial habits is as much about moderating your spending behaviour as it is about monitoring how much you are spending by counting rands and cents. That’s the view of Standard Bank Savings and Investments guru, Takumi Daling who has some useful rules of thumb to help you develop good financial habits.
“A lot of people approach personal finance purely as an exercise in arithmetic and exert much effort in compiling detailed spread sheets that record every bit of income and expenditure,” says Daling.
“While there is merit in this approach, the truth is that successfully managing your finances is more about controlling your behaviour than it is about recording your transactions.”
South Africa has a pitifully low savings rate with the latest Reserve Bank Quarterly Bulletin dated March 2018 showing that gross saving as a percentage of gross domestic product (GDP) fell to 15.8% in the fourth quarter, meaning less than 16 cents of every rand earned goes to savings. The Quarterly Bulletin also shows that household debt to disposable income in South Africa reached 71.9% in 2017 as consumers take on more debt to finance expenditure.
To combat this government has introduced various measures such as tax-free savings accounts in an attempt to foster a culture of saving in South Africa. To further augment this, Daling says there are various behavioural rules of thumb that consumers can utilize to try and develop good financial habits.
One good rule of thumb is the so-called `50-30-20 rule’ coined by US Senator and Harvard Law Professor, Elizabeth Warren. The rule essentially states that 50% of your after-tax income should go towards covering basic needs such as housing, electricity, food and water. The next 30% of your after-tax income should be used to cover wants such as new clothing, haircuts or trips to restaurants. The remaining 20% should be allocated to paying off debts and saving towards retirement.
“The `50-30-20 rule’ is a great starting point for people who want to start building financial discipline as it provides an easy to understand budgeting tool that you can use to allocate expenditure responsibly,” says Daling.
“However, the trick to using the rule effectively is to accurately discern between needs and wants. Your needs should be all the things you can’t really afford to live without and would include things like your mortgage payments or rent as well as the cost of food or your child’s education. Wants are nice-to-haves but don’t necessarily include luxuries or extravagances like jewellery or overseas holidays.”
Another useful behavioural tool is that of delayed gratification, something that is not always easy in our current age of consumerism and instant satisfaction. The idea is essentially to learn to spread out your non-essential expenditure on luxury items or niceto-haves over a long period of time. For example, if you’ve already used your monthly allocation towards your wants, such as a new dress or the latest electronic gadget, rather delay your gratification until the following month before seeking instant gratification by purchasing a non-essential item on credit.
“You want to spread out your expenditure on big ticket, non-essential items throughout the course of the year,” says Daling.
“You don’t have to have everything at once - all you have to do is look around your house at all the things you’ve bought which you no longer use to see that the concept of buyer’s remorse is very real indeed.”
Confirmation bias refers to the tendency of human beings to selectively use information or facts to convince ourselves of beliefs we already harboured. In short, it is telling yourself what you want to hear. For example, people will often convince themselves that they really need something when in actual fact they don’t. This might involve telling yourself that buying the latest bicycle will make you cycle more often, even though the one you already own is gathering dust in the garage.
“We’ve all had the experience where a friend or family member asks our advice on whether to buy a new car or some other expensive item but during the course of the conversation we realise that they’ve already made up their mind and merely want our validation so they can feel better about the purchase,” says Daling.
“We also do this in our internal conversations with ourselves where we try to justify purchases by selectively using facts to back up our pre-determined assertions. From a financial point of view, this can be a very destructive habit.”