Rands and Sense

5 SIGNS YOU MIGHT BE FINANCIALLY ILLITERATE

Ever wondered why your career’s going well but your investments are in a mess? Here are a few possible reasons:

1. You save all your money in the bank

Cash is not ideal for investments of longer than a year. There’s no denying that cash is the safest asset class around – but it doesn’t beat inflation. There are many other asset classes that provide inflation-beating returns, such as shares, property and commodities. Unit trusts are a great way of combining and diversifying these asset classes to suit your investment goals, term and risk appetite. Not only is your love of cash making you miss out on good returns, but the fact that you can easily access your savings in seconds may lead to impulsive spending. Fixed-term savings products may help – but they can be costly. I’m not saying there’s no place for cash. But please, only use your bank savings account for emergencies and short-term goals.

2. You’re attracted to investment scams

The thought of doubling your money in a day excites you. The “invest R1 000 and receive R50 000 in two weeks” ads are definitely a scam, as there’s no investment that returns over 100% in such a short space of time. Yes, high risks equal high returns, but this isn’t one of those instances. You’re simply donating your money to a fraudster. Growing your money and net worth requires patience and consistency. Remember: if it sounds too good to be true, it probably is.

3. You don’t know how to manage debt

You’re comfortable taking out loans to fund lavish holidays and to splurge on designer clothes, but you baulk at putting money in your retirement annuity or unit trusts. Using credit to buy consumables is far from ideal. Take note of debt traps like balloon payments on cars. Your creditor may lure you into believing you can afford it. But can you really? Would you rather “look” rich or be actually rich?

You’ve probably also heard the classic Rich Dad, Poor Dad tactic of using debt to purchase assets. This needs a strategy and proper planning. Credit needs to be used wisely, since it is mostly a long-term commitment.

4. All you know about money is what you learned in school

Scholar, it’s time to read actual books on finance, watch webinars, and subscribe to finance newsletters. This will assist you in making the right money decisions and receiving insights on things like the latest tax laws that can save you money through tax deductions. Medical and retirement fund deductions, coupled with tax-free savings accounts can help to significantly reduce your tax burden.

5. You don’t have a financial plan

You earn, spend, try to save and that’s really it. You save because you were taught “it’s the right thing to do” but you don’t put much thought into it. Your savings don’t have goals and that’s why you’re easily tempted to spend. Your money needs to have a plan if you want it to grow beyond your current level. The tricky thing is that if you don't plan, plans will still be made for you – they just won’t be the plans you wanted.

The bottom line

Did you recognise bits of yourself in the article? Don’t stress! It’s never too late to become financially literate, and there’s a plethora of resources to help you. Take your pick from DIY investing books through to blogs, podcasts and social media influencers. Or ask a financial adviser to help you to brush up on your financial ABCs.

Mpumie Makhanya is a financial adviser at BDO in Cape Town.

Mpumie Makhanya