Ins and outs of smart finances
Are you earning money for yourself, your children, your home and your retirement—or are you working hard just to make other people rich?
Daryl Collins, a former Wall Street economist in the United States who directed the groundbreaking Financial Diaries project (www.financialdiaries.com) at the University of Cape Town, knows about this issue after closely tracking the finances of more than 150 households in rural Eastern Cape, Johannesburg and Cape Town for more than a year.
‘One thing that is striking about the results is that teachers are really quite engaged in the financial system already,” she says. ‘They have loads of funeral policies, life policies, loans and all sorts of things.
They are targeted because they have relatively secure jobs, and teachers in the rural areas are particularly better off than their neighbours.
Also, the insurance companies can easily do a one-stop marketing visit to the school to sell their policies.”
But there’s a catch, Collins warns. The teachers weren’t managing their own money. They were money-management victims. She noticed that many of the teachers in the sample, especially those in the countryside, ‘had so many policies that they didn’t really know what each one was for”.
‘When you have a teacher who has more than four funeral policies, you start to wonder whether they are really necessary or whether a salesperson has just done a good job convincing her.
‘This is probably a place where financial literacy education is most needed,” Collins says. ‘Teachers need to know what policies they have signed up for and what they cover.”
So do your homework: dig out your paperwork, phone the offices and demand to know what is happening with your money: Find out how much the salesperson makes out of the total investment, and whether it only starts paying out after the salesperson has been paid his or her commission in full.
Kenneth Mathabane is the Johannesburg-based head of the life-management division of the South African branch of the Independent Counselling and Advisory Services, which has been appointed by the Western Cape and the Gauteng departments of education to run a multilingual 24-hours-a-day hotline for stressed teachers.
Finances come up regularly, he says, and teachers often don’t know what they’ve signed up for. He blames ‘unscrupulous dealers” and micro-lenders who approach teachers with tempting but ultimately dangerous credit offers.
Says Mathabane, the teachers ‘present the problem like this: ‘I cannot manage financially, there’s a garnishee order on my salary, I’m left with nothing.’”
When Mathabane does an assessment, he finds that a lot of teachers have so many long-term savings and insurances that they are plunged into unnecessary debt. ‘One teacher had two funeral policies while he also had something he didn’t know about at his workplace, which covered the same area. He had an endowment policy, which he called a savings plan, and an education plan for his children—which is one and the same thing.”
Nearly half this teacher’s after-tax income was going to cover funeral policies, savings plans and insurance plans. As a result, far too much of the rest of his salary was going to borrowing money from microlenders at a hugely inflated rate to cover daily living costs. ‘We try to go through the budget and restructure their finances and explain what the consequences are, what the penalties are if you end a savings plan early, for example, and empower the teachers to take it up with the insurance companies because we need to share the responsibility,” says Mathabane.
Avoiding debt—especially informal microlenders—also rated highly in the Financial Diaries. ‘I noticed that of the formally employed who were highly in debt, the teachers were the most likely to use short-term micro-loans,” warns Collins.
It seems that schools should be banning financial consultants from the teachers’ room. But if it’s too late, pay it off as fast as you can and never get into debt again. Cut up all but one of your credit cards. And save your own money.
Many of the people in the project used informal banking systems—stokvels or imgalelos -— to put aside money. It’s easy for a group of teachers to do this for themselves, meeting once a month to put aside cash—whether it’s kept at a home or put in the bank to grow interest—and having every last little detail recorded in a little book where all their colleagues can see. ‘Saving for Christmas is extremely common,” reports Collins.
Many teachers belonged to both formal funeral plans as well as one or two informal burial societies, says Collins, ‘Either to take advantage of the social network or to ensure money for a particular item not covered by their funeral plan”.
But funeral cover only pays for the teacher and the teacher’s immediate family, not other relatives. ‘Yet because teachers are relatively better off than others, especially in the rural areas, they would get asked quite frequently for contributions to relatives’ funerals, so they need to put money aside for things like this,” says Collins. ‘They need to put money aside for unexpected crises.”
It’s important not to take short-cuts. Oprah Winfrey interviewed an American school teacher who carefully saved her money, bringing her own packed lunches to school and avoiding spending small amounts on soft drinks, candy, takeaway coffee and food. The lady was a dollar millionaire by the time she retired. She managed her money. She didn’t let her money manage her.
Examples close to home include Marcia, a poorly paid librarian, who saved hundreds of thousands of rands after listing everything in an expense book and cutting back on items she didn’t really need. One of her main recommendations is not to rely on using an ATM card.
Then there is Jackie, who became a millionaire by paying herself first. At least 20% of her salary went into long-term savings, and she never left the house with more than a few rands because it was simply too tempting. As her salary increased, she kept the same lifestyle. She simply put more aside for her retirement. Now she’s sitting pretty.
Many teachers reduce the stress and effort of saving by making investments automatic. Get the bank to deduct as much as possible—whether it goes into a 30-day savings account, a unit trust or whatever makes most sense—so you’re not tempted to spend the cash you meant to save for a rainy day.