It’s just good old common sense

2012-05-05 09:55

While visiting the US last week, I read an interesting article about financial literacy in one of the local newspapers.

The article was bemoaning the fact that so many Americans cannot manage a budget and that they have little financial literacy despite living in one of the most developed economies in the world.

A shocking statistic was that the average credit card balance in the US was about $15 000 (R116 000). A 20-something-year-old has an average debt of $45 000!

The article interviewed a 29-year-old woman who said she struggled to make ends meet despite having a relatively good job.

She was burdened, she said, by her study loan and basically lived permanently in debt through her credit card and store cards and really had no idea how to cut back.

The article blamed the school system, her parents and the banks.

But the irony was that in the photograph the woman was standing in a high-end gourmet food market looking up a recipe on her iPad!

If she really needed any explanation of her financial troubles, she should have just looked at herself for that moment.

If you have outstanding student loans and credit card debt, where do you find the $600 to buy an iPad? If you are trying to live on a budget, why are you shopping at an expensive food store?

Being financially healthy is not rocket science, it is about common sense. But I wonder sometimes if people don’t hide behind the technicalities of money in order to have an excuse not to take action.

This woman does not need to understand compounding interest or how to trade on the New York Stock Exchange to get out of debt. She just needs to spend less than she earns.

The reality is that she doesn’t want to make that choice.

I am often concerned that there is an obsession with “getting rich quick” – people want to learn how to trade currencies or want to buy the latest hot share on the JSE – but people spend little time on the basics of finances like having a budget, saving 10% of what they earn and paying off debts.

For many people, these basics seem irrelevant when they could be making big money through clever investments.

The truth is that you could win the lottery tomorrow but if you haven’t got the discipline to look after the basics, you will be poor again in a very short space of time.

As I mentioned in my column last week, I attended the Financial Literacy and Education Summit in Chicago hosted by the Federal Reserve Bank of Chicago and Visa, where William Walstead, a professor of economics at the University of Nebraska-Lincoln, presented a study which established that the confidence in a person’s financial knowledge has a greater influence over financial behaviour than actual financial knowledge.

In other words, people who rated their financial knowledge at a higher level than their actual test results exhibited better financial behaviour than people with higher actual knowledge but who rated themselves poorly.

This study ties in with our attitude towards money.

The fact is that the 29-year-old woman believes that she is not capable of managing her money; her thought process is that she is in financial difficulty because she doesn’t have the required financial skills.

In the article she says: “I freeze. I have no idea where to even start with this.”

Another person with more confidence in their ability to manage their money but perhaps with less knowledge would be in a far better financial situation because that confidence would result in them taking action.

What Walstead found was that in order to be financially fit, we do not always need to know the complicated stuff.

How exactly a unit trust works or how to calculate the earnings price ratio of a share had far less to do with our financial wellbeing than sticking to basic common sense like – spend less than you earn, have an emergency savings, keep a budget and don’t take on unnecessary debt.

If you feel like the woman in the article, start by simply writing down a budget. Go over all your statements of the last three months and start writing down what you spend on.

This will give you a clear indication of where your problem areas lie. See where you can cut down and set goals.

Select your smallest debt and set a time frame to pay it off. Just that small starting point will give you the confidence to tackle the rest.

Only once your household finances are under control andyou have gained confidence in your ability to manage money should you start getting into the technicalities of finance.

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