South Africans and their emotional relationship with money

Even before the coronavirus outbreak South Africans were neck-deep in debt and even though the strict lockdown curbed their ability to spend, they struggled to repay existing debt.

According to the TransUnion SA Consumer Credit Index (CCI) for the second quarter of 2020, accounts in early default (three months in arrears) increased by an alarming 21% year on year compared to 5% year on year in the first quarter.

On a seasonally adjusted basis, the rate of new defaults increased by 11% during the quarter, the highest rate on record since 2006.

However, distressed borrowing moderated rather than intensified during the second quarter.

Statistics SA reported a slump of 49.8%% in household spending in the second quarter in line with the closure of hotels, restaurants, transport services, recreational facilities and many retail stores.

Instant gratification

South Africans have an emotional connection with money from a very young age, says Ana Scott, financial planner at Momentum.

“In the age we are living in, success is measured in terms of the car you drive, the house you own and the school your kids go to. However, if you are trapped in a debt spiral because of the material things you have acquired, you are far from successful.”

She says people avoid facing their current financial situation, mostly because they are overwhelmed by it. But breaking bad habits requires brutal honesty.

“It is almost like trying to lose weight. The first step is to face any form of denial head-on … It requires discipline, commitment and dedication. It takes time. It takes effort,” she says.

Of course you can have that luxury vehicle, she adds.

But not right now because your financial situation does not allow it. If you have a financial plan in place, you may be able to afford it in five years’ time. “People generally do not like that timeframe. They want instant gratification.”

Plan for success, don’t just expect it

She advises people to do a financial needs analysis to determine their current situation. Once there is a financial plan that covers their financial needs, they have to stick to it.

This analysis must then consider ways to protect the wealth and income that have been accumulated; ways to invest correctly in order to create future wealth must consider ways to retire successfully.

The first step is to get out of debt.

Remain present and mindful of your current financial position, know where you are going, and stay the path.

“Take the emotions out. Being financially successful on a personal level is to be free from any debt bondage.”

Scott quotes American author and personal finance specialist Rachel Cruze who said: “Having nice stuff is okay (as long as you budget for it), just don’t let your nice stuff have you.”

A theme running through the TransUnion CCI report is that the second quarter could have been a lot worse for credit providers and credit users.

However, repayment holidays, higher household saving rates due to a lack of spending opportunities in lockdown, low inflation (and in some cases deflation), and large and rapid rate cuts offered relief.

While interest rates are expected to fall further during the third quarter and remain low for some time, many other favourable conditions for consumers could disappear, the credit bureau warned.