We live in times and society where the pressures to buy and to show off the things we have bought (materialism) is enormous. Our inability to afford these things or put money aside for them has pushed us to the direction of buying on credit (getting things now and paying for them over time thereafter). Credit can, if approached with caution and discipline, greatly improve the quality of our lives. It can afford us things that we need now that we do not have cash to buy, for example, we may not afford to buy houses cash but may take a mortgage bond and pay affordable instalments over time, or take out a hire purchase for a car personal or business use. Credit can however become addictive resulting in impulsive buying habits (buying things that you do not need because you can afford them through credit limit). The fact that you can afford something does not necessarily mean that you can have it. If credit is not applied responsibly, it can have tremendous destructive consequences.
We live in a consumer society where people are judged by what they have, rather than who they are. This has developed a culture in which community members compete against each other regarding material possessions. This consumerism behaviour drives people to wear expensive label materials, expensive cars, and expensive houses with top of the notch furniture and equipment leaving them with very little or nothing to save. There is absolutely nothing wrong with acquiring these things if you can afford them. There is definitely everything wrong in acquiring these things at the expense of the provision for your children’s education and your retirement savings. While we may need credit and debt at some point in our lives, it should not be a way of life.
We need to plan now for the things we’ll need in the future. The starting point will be to understand the difference between needs and wants. Needs may be things that you may not live without or things that you must have or do, for example, provision for your children’s education, owning a house, life insurance, food, clothing, provision for your retirement, and transport for your business. Wants may be things that you desire to have and can live without, for example, label clothes, expensive furniture, expensive cell phones, luxury houses, etc. You need to take care of your needs first before looking at wants. Depending on credit is living on borrowed money which is a very expensive option. Try to save money for the things you may need that are not needed urgently or buy them on laybye. When you buy something on credit, you are actually borrowing someone else’s money. Borrowing money costs money. Do not overspend your income and do not over commit yourself with credit purchases. Whenever you are thinking about borrowing money, or buying something on credit, ask them to tell you how much you will be paying in total – including all the interest, administration charges, fees and any assurance premiums. Find ways of reducing your hire purchase debt by for example, paying a bigger deposit than required by the credit lender. The most effective helpful way is to look for ways of making extra money. This should be something that will not require much of your time and should not cost you an arm and a leg.
Financial institutions and credit providers make most of their profits from the interest they charge on the money they lend, for example, if the repo rate (the interest rate at which the Reserve/Federal Bank lends money to the financial institutions) is 5.5% and the prime rate (the interest rate at which banks lend money to customers) is 9% and the bank or furniture store charges you 17% interest, that institution is making 11.5% (3.5% + 8%) profit from you. This excludes the mark-up that the furniture/clothing store has already factored in the selling price of the merchandise. So, you are paying even more. This is not about paying less or more, it is about whether you can afford to repay without sacrificing your immediate needs.
Finding a balance between savings for the future and committing to debt has a lot to do with our need for security and harmony. No one likes to feel exposed and at risk, so we must make sure that we have some money saved for emergencies and irregular expenses. Committing to debt is spending our future income (money we have not earned as yet) now and this puts us in a disadvantaged position. Some people have committed themselves to so much debt that all their monthly income is spent as soon as they receive it. The only way to prevent this from happening is by using a budget and strictly following it.
There is a simple rule in life that many of us choose to ignore regarding future financial wellbeing. We have to sacrifice some things today so that we may live better tomorrow. The truth is that if we spend all our income today, we’ll have nothing left for tomorrow and this will force us to work extra hard just to survive. If we force ourselves to save some of our income today, we’ll have something tomorrow to enable us to relax and enjoy life. Putting money aside on a monthly basis for future benefits requires commitment and discipline. Try to save at least 10% of your income every month and see what difference it will make to your financial situation. However you cannot save what you do not have. Once money has been accumulated then strategies for saving and investing it can be sought. Getting your saved money to grow and work for you requires financial literacy and skills to navigate the maize field of investment options.