After a long, hard year, many of us look forward to charging full steam into the festive season; spending and spoiling ourselves and our loved ones with abandon. And when it comes time to deal with the consequences of our financial decisions…well, isn’t that what January is for?
A decline in financial control and a rise in credit activity
Released earlier this year, the Financial Sector Conduct Authority (FSCA) 2020 Baseline Financial Survey determined that all indicators of financial literacy in consumers had decreased, with one of these domains being ‘financial control’. While this across-the-board decline is extremely concerning, the drop in financial control does not bode well as we enter the festive season – a time generally associated with unchecked expenditure.
Bear in mind that a lack of financial control is linked to debt, and that – adjacent to this decline in financial literacy – credit activity is on the rise. According to the TransUnion Industry Insights Report Q2: 2022, credit card origination volumes (the measure of new accounts opened) increased by 37.9% YoY in Q1: 2022; in glaring contrast to the 42.7% YoY decrease seen over the same period in 2021. Furthermore, it revealed that almost three-quarters of all card originations came from Gen Zers and millennials, which points to a growing appetite for credit among younger consumers.
What is financial control?
According to the FSCA survey, financial control refers to how well people manage their finances. Several factors are assessed in determining these levels.
In measuring financial control, whether a household has a budget to structure its income less expenditure is considered, while financial management – which covers how well an individual manages his or her finances throughout the month – is another key factor.
The survey revealed that individuals on the lower end of the living standards measurement (LSM) scale coped with income shortfalls by lending money from family members and friends, while those on the higher end of the scale opted to rather disinvest their savings or other investment instruments.
Financial control is also not necessarily influenced by or linked to the income someone earns. Often members of the higher LSM brackets are not able to cope when they fail to apply basic financial literacy skills, such as budgeting and saving. However, the consequences of their not coping tend to be significantly less dire than those on the other end of the spectrum, which is why consumer financial education programmes tend to focus on these segments.
How much financial control is really within our control?
Yet with a turbulent economy, rising fuel and food prices, skyrocketing inflation, loadshedding, crime and job scarcity adding to our woes, are South Africans not just victims of our circumstances? Just how much financial control is really within our control?
The good news is more than we think.
There are extrinsic and intrinsic factors that determine our level of financial control. The former generally covers macro-economic factors, such as output, growth, unemployment, inflation/deflation and investment. Should we apply these five principles to how an individual manages their finances, extrinsic factors could be considered as that outside of our control, such as being retrenched.
However, an important caveat is that – while we may have lower control over an extrinsic factor – we can choose how we respond to an associated event. For example, we cannot control inflation, which results in our income having less purchasing power. However, what we can control is how we adjust and manage our budget in line with this reality.
On the other hand, intrinsic or micro-economic factors relate to the choices individuals make after evaluating resources, costs, and trade-offs, thus allowing us to exercise far more financial control.
Understanding the difference between these factors and the role that our own financial decisions play is key to our financial wellness.
How do we learn financial control?
Financial control is a lot like fitness in that you need to exercise these muscles constantly to stay ahead of the game. Rigorously applying the principles of financial control will lead to better monetary decisions while practising forethought and restraint in where, when and how we spend our money will, in turn, help us to better develop our sense of financial control.
It all starts with a budget. Yes, you’ve heard this time and time again and there’s a reason for that. As Consumer Financial Education Specialist at Momentum Metropolitan, I teach consumers the basic principles of financial literacy to help them make better financial decisions. When asking whether they have a budget, I am frequently met with the response, “I do have a budget, but I don’t write it down – it’s in my head.”
In my experience, I have found that the best way to strengthen financial control is not only to visualise our budget but to write it down and bring it to life. Much like an eating plan, the more we practise restraint, the easier it will become, the more our confidence will grow, and the better we will feel about ourselves.
As we approach the end of the year, it’s now more important than ever to exercise financial control.
Most of the working population receive their annual bonus around this time of year, and December’s payday usually comes early. Savings are admittedly challenging to maintain with the current state of the economy in South Africa, but when we understand how to use money as a tool, financial control is that much easier to achieve.
As the late author and motivational speaker Wayne Dyer once said, “You cannot always control what goes on outside. But you can always control what goes on inside.”
Claire Klassen, Consumer Financial Education Specialist at Momentum Metropolitan.