WHAT IS FINANCIAL LITERACY?

According to Wikipedia, Financial literacy is the ability to understand how money works in the world. How someone manages to earn or make it, how that person manages it, how he/she invests it (turn it into more) and how that person donates it to help others. More specifically, it refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.

WHY FINANCIAL LITERACY?

The absence of financial literacy can lead to poor financial decisions and poor planning. To avoid the poor decisions, financial education is used to assist consumers to encourage planning and informing consumers of all the information they do not know, out of ignorance or just laziness.

Financial literacy is usually entails the knowledge of making good decision to personal finance like insurance, retirement, investment and real estate. That is where NBFIRA (Non-Bank Financial Institutions Regulatory Authority) comes in as a regulator for Retirement Institutions, Insurance institutions, Investment Institutions and Micro lenders.

Financial literacy also involves intimate knowledge of financial concepts like compound interest, financial planning, the mechanics of a credit card, advantageous savings methods, consumer rights, time value of money.

As a way of our consumer education, we came up with the following money management rules:

Rule 1:  First pay for the things you need and then but the things you want, if you can afford them

Under rule 1, it is essential to understand the difference between needs and want. In simple terms, Needs would be defined as goods or services that are required. This would include the needs for food, clothing and shelter. Wants are goods or services that are not necessary but that we desire or wish for. For example, one needs clothes, but one may not need designer clothes. One does not need toys and entertainment. One needs food, but does not have to have steak or dessert. One does not need glamorous trips, or drive an expensive car.

Avoid the following

• Your needs should not increase as payday approaches (I am guilty of doing this )
• Manicure and pedicure is not a need.
• Designer clothes are not a need.

Rule 2: Write down a monthly budget and stick to it

To be able to do a budget, you need to know how to add and subtract. You do not have to be educated. All you do is a put the money you receive, that is the salary then deducts the rent, school fee, grocery and bills.

Tithing (tsa bo some) should be included in the budget because it is a need for other people.

Rule 3: Use credit to buy things that last

Only use credit to buy thing that last longer than it takes to pay them off. Make sure the budget in rule 2 shows that you can afford it. There are some things that are too expensive to pay cash for, for example a house and a car. However, if you are well informed and disciplined, debt should not be seen as a monster waiting to trap or punish you.

Debt can be an extremely useful financial tool, which can help you achieve your goals, e.g. borrowing money to buy a house. If you manage debt carefully, it can be your friend. There are types of debt, which are a good debt and a bad debt. Mortgage is an example of a good debt because at the end of it all the house appreciates and it is a need. A bad debt is paying for a car that gives you problems or its already on top of stones under a tree at home.

Rule 4: Try to save a little money every month

Do you remember the feeling you get when you pick up money! It’s an amazing feeling or when you pay for clothes and at the till they tell you it is not P400 it’s P250. It’s a great feeling, so image you have been saving and they you needed money and remembered that you have small something you have been saving.

Rule 5: Borrow money but keep the amount small

There is nothing wrong with borrowing as long as you can afford it and you not borrowing to pay another creditor. Let’s think about the following scenario: You take home is P2000 and you go borrow a month loan of P3000 to pay in a month at say 25%. Total repayment is P3750 and you take home P2000. Honestly it does not make sense for you to borrow for one month but for a longer period. It’s expensive to borrow for a longer period because the interest is more.

Rule 6: Take out an insurance to suit your needs

We are from different families and our needs are totally different. Insurance companies want to make money so they will tell you what you want to hear. I am not saying insurance is bad, all I am saying is that make sure you need a policy not because Malebogo have the policy. Malebogo is an only child and her mother is working and has a policy for herself and Lebogang takes care of an extended family.

It will make more sense for Lebogang to take a funeral policy to cover her extended family because death does not make an appointment and she looks after many people unlike Malebogo whose mother is independent.

REASONS WHY CONSUMERS GET INTO DEBT

• Mismanagement of funds
  This will include spending money without thinking. If Malebogo says she is going to Johannesburg on a Thursday you tag along when you did not plan for the trip.
• Undisciplined buying habits
  When you just buy every time, like all the time! I always say that avoid that word of ‘SALE’, that is why they write it in red. DANGER! Buy because you can afford. Before I purchase something I ask myself if I do not have the same or similar clothing in my wardrobe and do I really need it.
• Excessive lifestyle
  This is simply leaving beyond your needs. Having more wants than needs. Usually this is caused by impressing the community and a behavioral problem.
• Retrenchment
  This is something that you one does not plan for but it do happen and usually you will be aware couple of months before it happens. I always say that we have talents. If you get retrenched and you cannot find employment, start something that can bring income.
• Unexpected events e.g funeral or medical expenses.
   

ALL READY IN DEBTS (5 steps to pay down debt)

Running or avoiding your creditors will not make them go away or borrowing from another creditor to clear another one will not solve the problem. The first thing to do is to face the problem. If you get letters from people you owe money (called creditors), open them. Read them. You must know where you stand with each creditor.

If you have family members who depend on your income, discuss the situation with them. If your family wants to get out of debt, everyone in the family must cooperate. You must all agree on the way forward and stick to the plan because it will involve a bit of sacrifices of lifestyle.

If you have a credit card or clothes account card, cut them and through them away,like now.

Budget a set amount each month

I have stressed the importance of budgeting and I still say budgeting is the first step to see how much surplus you can have. Look for ways to cut your spending  so you can free up money to pay off debt. Even a small amount each month will start to reduce the amount of interest you pay. Revise your budget. Tick off all your needs. These are the things you need to pay off and cut down on. Sit down and make a list of all your creditors and how much you owe them, each one. Make it your goal to pay off your creditors. Work out how much you can afford to pay each one, leaving you just enough to live on. Avoid all unnecessary spending.

Phone or visit the accounts departments of all the places you owe money to. Ask if you can pay a smaller monthly amount. But remember that the less you pay each month, the longer it will take to pay off the debt. If the creditors agree, ask them to give you the agreement in writing.

Until your debts are paid off, don’t buy anything else on credit. Get your family to cut down on all unnecessary expenses. It may be difficult, but buy only what you need.

Pay off high-interest debt first

Your biggest loan may not cost the most. Your mortgage may be the biggest debt you have, but it’s probably the cheapest. To figure out which debt is costing you the most, look at the interest rate you’re paying, not how much you owe. For most people, credit cards are a good place to start.

Store credit cards often charge 20% or more in interest. If you owe P1,000, you could pay as much as P200 in interest in the first year. Credit cards from a financial institution also charge high interest rates.

Consolidate your debts

If you have a number of different debts, consider a consolidation loan. This means you take out a loan or increase your mortgage to get enough money to pay off all of your other loans. The advantage is you lower the overall interest rate so it costs you less to pay off. This only works if you don’t rack up more debt.

Set up stop orders

When you have extra money in your account, you might be tempted to spend it rather than use it to pay down debt. If the money is withdrawn from your account automatically, you won’t have a chance to spend it. See if your bank can make an automatic withdrawal from your account every month. The amount withdrawn could go into a separate account that you use for debt repayments. Or it could be automatically applied to the debts you’re repaying. If you use online banking, you can likely set up these automatic withdrawals on your own.

Make extra mortgage payments

Many mortgage lenders will allow you to make extra payments against the principal. Paying down your mortgage by even a small amount can dramatically reduce the overall cost of this loan over the years.

Avoid people or organizations that claim they can help you clear a debt for you and they ask to pay more money. Honestly think about it! The reason why you have not paid your debt is that maybe you do not have money then you pay someone to pay your debt on your behave?

Ask for credentials of the financial planner or debt counsellor to confirm if they qualify to be to be in the other side of the table and also ask background just for clarity. If he/she starts beating around the bush then something is not right. Make sure you check if they registered and they are known. Ask what their benefit is from all the assistance them giving you.

Once you have taken the first steps towards managing your money, you will feel a lot better. Money problems make us feel unhappy, worried and hopeless. But if you face the problem, and you work out a plan that you can realistically stick to, and then stick to it, you can get out of debt and take control of your money and your life.

After the above is successful done, be patient and see how it turns out. You will be thanking me. When you clear one creditor, demand a letter to prove that you have cleared the loan and channel the amount to another creditor to finish the debt quicker.

Debt management strategies

There is no pleasure in sleeping and knowing your debt will be in your dreams. It’s nice to sleep and be awakening by the alarm not the thoughts in your head about what you are going to say to Lebogang regarding the debt.

The following are strategies used to reduce debt:

• Consolidate many small loans into one big one
  Instead of paying 3 different interest rates, you turn the loan into one with one interest rate. Consolidating assist by, that it will be cheaper.
• If possible, transfer the  most expensive debt to a debt with a lower interest
• In certain situation, it may be necessary to liquidate the investment to pay off debts. This is where a financial planner can play an important role
• Sell non-essential assets and use the proceeds to pay off debts.
• If possible, pay any additional amounts of money received into mortage bond.