WILLIAM GUMEDE: Get personal about finance

A lack of knowledge about the critical importance of personal finance is not only tripping up many South Africans; it is also one of the reasons for the country’s dire public finances.

SA is facing a crisis of personal finance illiteracy. Many South Africans — educated and uneducated — lack basic personal finance management skills, making them unable to manage their money, be it applying for credit or getting out of debt. 

The anxiety over debt can lead to ill health, impair decision-making and ruin personal relationships. Many elected and public officials often also suffer from poor personal finance skills, undermining their ability to effectively manage public finances.

In my years of teaching elected and public representatives how to manage public finances it has become clear that many of them have little understanding of how to manage their personal finances — making it almost impossible for them to manage public finances too.

Poor personal finance skills also often encourage corruption. Elected and public representatives are often tempted to take part in corruption to make ends meet because their poor personal financial management has led them into debt.

Many witnesses at the Zondo commission of inquiry into state capture testified how cash-strapped elected and public officials were bribed by corrupt businesspeople who paid their children’s school fees, their utility bills and outstanding car payments.

But elected and public representatives who have limited personal finance knowledge often also treat public money they are entrusted with poorly, causing poor public service outcomes, financial decisions and waste.

When previously disadvantaged South Africans joined the market economy at the end of formal apartheid in 1994, most did so without any assets such as homes or businesses, as apartheid laws prohibited black land, property and business ownership. They were often less financially literate than their white counterparts.

Furthermore, given the exclusion of previously marginalised South Africans from being active players in the market economy, many lacked the basic personal financial education that many of their white counterparts would have routinely picked up in homes from their parents.

This means many previously marginalised South Africans do not acquire personal finance management capability from an early age to prepare them to better manage their finances in adulthood, or appreciate the risks involved in borrowing and how to take advantage of saving.

Countless black South Africans who are part of the post-apartheid new middle class, but also the working classes, often start adult and family life by having to borrow disproportionally more to finance homes, vehicles and household items. As the economy, society and suburbs opened up to blacks, many left the townships for the suburbs to access schools, public services and be closer to workplaces.

Except for the difficult financial period during the 2007 and 2008 global financial crises, many financial institutions were also generously offering credit to new black entrants into the market economy. New professional graduates were often given what looked like liberal credit to start their post-higher education careers.

The failure by the democratic government to deliver public services such as education, health and policing have forced far too many people to look to the private sector. And previously disadvantaged South Africans often secure credit to pay for these, increasing their indebtedness.

The cultural phenomenon of the so-called black tax — the social expectation of those with secure sources of income to help needy relatives — has also increased indebtedness.

When young black South Africans from previously disadvantaged communities start their employment and professional journeys they often do not set financial boundaries when giving to family members. Instead of contributing only what they can afford, they give beyond their means — often borrowing to give to relatives — wreaking havoc with their own personal finances.

The post-apartheid culture has also become strongly materialistic. New belief systems appear to have taken hold that place value, status and social belonging on material assets. For example, social expectations demand that professionals drive expensive cars, wear expensive clothes and live in expensive homes to be seen as being successful.

Sadly, the materialistic trend was in part started by newly elected public representatives and civil servants who, after living modestly in townships, suddenly started to receive large remuneration packages. Instead of setting a tone of humility, modesty and prudence, many have splashed out on “bling”. Others with more modest incomes then try to keep up. 

As cases in point: weddings, funerals and birthdays are expected to be lavish. Such expensive events have often left many highly indebted. And, unlike many of SA’s emerging market peers, our financial institutions provide credit far more willingly for depreciating assets such as vehicles, rather than to buy a home or to start a business.

Given the appalling levels of personal finance in this country, improving the understanding of this skill should take place in all life phases, by multiple institutions. The place to start embedding a basic understanding of personal finance is for parents to teach their children how to manage money. However, given that many parents themselves lack personal finance skills, it is crucial that the topic be taught in schools.

Personal finance education should be a compulsory for basic education, starting in nursery school. Higher education institutions should also make basic personal finance modules compulsory. Corporates should provide personal finance training to their employees. Political, religious, sports and professional organisations should provide personal finance training to their members.

Financial institutions should provide personal finance education to their customers. The SA government should provide basic personal finance education to recipients of state grants.

It should be compulsory for elected and public representatives to undergo personal finance training as part of their induction programmes. There has to be greater mass public awareness that money is not just for spending, and that living within a budget, saving and investing is crucial. Saving is a critical life skill that encourages self-discipline, goal-setting and delayed gratification. It is the pillar of financial security.

Importantly, SA needs to foster a culture of savings. The importance of saving should be inculcated at all levels of education level too. The government, at all levels, should also save and invest public money prudently and in that way boost a new national culture of saving.

• Gumede is an associate professor at the University of the Witwatersrand School of Governance. He teaches MPs in SA and the British Commonwealth how to perform oversight of their countries’ national budgets. This article first appeared in The Professional, the magazine for members and advisers of PPS.