Are you Equipped to Manage your Finances Properly?

At some point in our lives, most of us will experience one form of financial difficulty or another that causes a significant impact on our lives. Whether it’s financial hardship experienced while studying, or debts caused by the overuse of credit cards, there are a huge number of potential stumbling blocks out there.

While some South Africans have the levels of financial literacy and education to make informed decisions throughout their lives, there are also many others who lack the basic skills they need. In the modern world, there are a huge number of credit options out there, from credit cards and overdrafts to unsecured personal loans, but many people are simply not equipped to manage these products properly.

The importance of financial literacy

Financial literacy is something people of every age and income bracket can benefit from immensely. Financial literacy has a considerable impact at every stage of our lives, from choosing whether to study at university and take a student loan, to building a nest egg for our retirement.

Financial decisions are becoming increasingly complex. Given the sheer number of spending, saving, investing and borrowing options available, it’s incredibly important we know how to make these vital decisions.

The debt problem in South Africa

Household debt levels are reaching epidemic proportions across much of the developed world. Research from the Organisation for Economic Cooperation and Development (OECD) shows that the US and the UK have a household-debt-to-income ratio of 113 percent and 156 percent respectively. In South Africa, the household-debt-to-income ratio is a comparatively modest 78 percent, but this is still more than double the banks’ allowed maximum of 36 percent.

While the situation in SA might not seem to be as bleak as the rest of the world, the relatively low median level of income in the country means many families are still struggling. Despite the enforcement of the National Credit Act, 60 percent of economically active people are still unable to pay one or more of their debt obligations each month.

Current levels of financial literacy

A recent survey of over 18,000 people took a closer look at the levels of financial literacy in South Africa. It found that 77 percent of the survey’s respondents did not look at the interest rates or fees on credit applications.

It also raised questions about people’s understanding of the importance of saving. Given the level of income, a strong culture of saving is needed in the country. Despite this, only 32 percent of respondents said they put any money aside on a monthly basis. The result is that if any unexpected expenses were to arise, only a precious few individuals would be able to call upon their savings. The rest would have to explore other credit options.

This is the reason while accumulating debt often goes hand in hand with the inability to save. The result is that nearly half of all credit-active consumers are burdened with debt. They have little or no room in their budget, so when emergencies do come along, they have to rely on further credit to pay their way.

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