The more consumers understand about how to manage their finances, their chances of getting into debt should reduce. Reducing household debt levels should also help the economy in general.
Financial education and the importance of saving
A study by the Financial Services Board showed that the financial literacy rate amongst the South African population is 51%. Whilst it is encouraging that this rate is on a par with many leading developed nations, more financial education is always welcome.
In surveys of this nature, people are considered to be ‘financially literate’ if they understand the basic concepts of numeracy, interest compounding, inflation, and risk diversification.
Ideally, consumers should be able to deal with financial emergencies by dipping into their own savings, rather than needing to borrow money every time something unexpected occurs. From their experiences in 2007-2008, many countries know only too well how unsustainable levels of consumer debt can affect the economy in general.
StarSaver™ is a flagship national programme where children are taught the importance of developing a savings habit.
The Wonga South Africa Money Academy
Many well-known financial institutions also have their own financial education programmes, and one of the most comprehensive of these is Wonga SA’s Money Academy.
The short-term lender’s Money Academy has four main ‘pillars’: Debt, Saving, Budgeting and Investing. For each of these pillars, the Academy website has two short videos, full of helpful tips designed to improve consumers’ money management skills.
The Debt pillar
The Debt videos explain not only what debt is, and how it works, but what debts might be considered ‘good’ or ‘bad’.
Examples of the former include mortgages, car loans and tuition fee debts; while examples of the latter might be loans taken out to pay for holidays, luxury goods, electronic gadgets and fashion items.
In summary, ‘good’ debt is borrowing that will leave you better off in the long run, while ‘bad’ debt is debt taken out for items you don’t need.
The videos acknowledge that almost everyone will be in debt at some stage of their lives. They also explain some of the adverse consequences of failing to repay your debts, and the importance of understanding how much you will need to repay before you agree to the loan.
The Saving pillar
The Saving videos highlight some reasons why you might want to save, such as:
- Funding your retirement
- Providing for education costs
- Accumulating funds that can be used as a deposit on a house
- Going on holiday
- Buying a special gift
- Addressing a household emergency
This section also includes some helpful money saving tips.
The Budgeting pillar
The Budgeting videos explain why you should do a budget, and what it should include. Budgeting starts with working out how much income you have coming in, and then moves on to working out how much you spend on rent/mortgage, utility bills, travel, food, clothing, insurance, debt repayments, education fees, entertainment, holidays etc. It allows you to work out how much you can afford to put aside as savings each month, and to identify some areas where you may be able to reduce spending on non-essential items.
The Investing pillar
Finally, the Investing videos explain the concept of ‘paying yourself first’. The idea is that, once you get your monthly salary, you pay a specified sum into a savings account straightaway, possibly via a direct debit. This way, you are saying to yourself that “your future is more important than non-essential spending on designer clothing and other luxuries.”
The Investing section also explains what things such as unit trusts, retirement funds and property investments involve.
In summary, good quality financial education benefits both individual consumers and society as a whole.