Debt and the management of personal finances

English: High personal debt levels, as well as low savings ratios, seems to be the norm rather than the exception in most developed countries and South Africa is definitely not excluded from this growing phenomenon. After the deregulation of financial institutions in the 1980s, personal debt levels have grown substantially and savings levels have diminished to a fraction of what is necessary for healthy personal finances, for the reason that these two variables are in inverse ratio to each other. Excessive debt and low savings do not only affect the individual, but also employers, as well as the country’s overall economy. Due to excessive debt individuals can experience destructive financial failure such as broken homes or divorce, stress, underperformance at work, deterioration of financial health and bankruptcy. All of these consequences of excessive debt and low savings have damaging effects on the quality of life of the individual. The personal aspects of an individual’s life will also influence his work, and therefore his employer, negatively. Low productivity, absenteeism, organisational commitment and work-time used, all have a negative impact on the employer and therefore also the economy. Firstly, it affects the economy indirectly because of low productivity of employees. Secondly, it affects the economy directly by influencing economic variables such as investments, inflation, interest rates, the value of the rand and overall economic growth. A lack of basic financial management knowledge is one of the main reasons why individuals tend to make bad financial choices. Gender, age, income and education level could all impact on financial literacy and the effect that this could have on the personal finances of the particular individual. This study aimed to acquire information regarding the debt management practices of all enrolled students attending management programmes at the University of the Free State’s School of Management during 2005. The secondary objectives also included were to evaluate the importance of financial literacy and effective personal financial management, to determine the different sources of debt used, to ascertain the extent of household debt accumulated and the percentage of disposable income spent on each form of debt, to determine the extent of savings by individuals and to assess the impact of excessive debt on stress and productivity in the workplace. In all of these objectives the four demographic variables, namely gender, age, income and qualifications, were taken into consideration. The target population consisted of 425 enrolled students for 2005. It was decided to make use of the whole population and that decision eliminated a representative sample. Two hundred and eighty six students completed the questionnaires. The results showed that the total average percentage paid each month on debt equals 62,1%. In general terms that means that 62,1% of all available disposable income goes to the repayment of debt, leaving only 37,9% of the disposable income for general monthly expenditures and savings. According to the 2006- figures the household debt to disposable income ratio is 73%, with 28% of the salary not spent on debt repayment. High levels of dissatisfaction were detected among the respondents concerning their knowledge of personal finances, perceived control of personal finances, confidence in managing money and making investment decisions; they were concerned about their debts, savings and whether they had adequate retirement funds; they were also pessimistic about their financial future and experienced high levels of financial stress that interfered with their daily responsibilities. There were also high levels of poor financial management in not setting money aside for savings or retirement, not budgeting and not repaying credit cards in full to avoid financial charges. The respondents will be able to live an average of 5-6 months on their savings only if they should not be able to work. The main reason these individuals are not saving is that they feel that they do not have enough money to save (74,3%), while a staggering 13,2% indicated that they have not thought about saving. Individuals who do not feel in control of their personal finances were found to think that they would not have enough money on which to live throughout retirement; they feel pessimistic about the future and experience extreme financial stress; and they do not follow a weekly or monthly budget.