ARTICLE How people end up in financial distress and don't see it coming! Part 1 Written by: Gary Wilde © Copyright Gary Wilde 2010 - All rights reserved 20 October 2010 Right now in South Africa, 20% of economically active people are in financial distress, which is a marginal improvement on the 25% of working individuals that struggled to make ends meet in 2008. To put the enormity of this socio-economic pandemic into perspective; ignoring the disturbing 38% of people in SA who are unemployed, one in every five cars you pass on the way to work every day, is driven by someone who is worried sick about the financial disaster that is busy collapsing in on them! It may come as a surprise to discover that this high ratio of people in financial distress is not limited to those in the lower income brackets, but is prevalent throughout every income level. For the other 80% that are not at risk of immediate foreclosure or liquidation, it's concerning to note that 98% are dependent on receiving this month's salary or active earnings to keep their creditors at bay... i.e. just one glitch in their income stream, or the advent of another global financial crisis, can have the wheels coming off for them in 30 days! So why is it that the overwhelming majority of people find themselves in or very close to financial distress? Why is this true for people at every income level... and how is it that when the wheels do fall off, it invariably catches people completely off guard? The short answer is; access to credit and the predictable nature of human behaviour! One of the reasons people aspire to earn more than they currently do, is because of the prevailing perception that more money means greater financial security and reduced exposure to risk. The bad news is that this is a fatal assumption that couldn't be further from the truth... which is one of the main reasons why so many people are unable to anticipate financial disaster far enough in advance to prevent it and only recognise it for the first time, when it’s already hit them... so let's set the record straight! It's not how much you earn that determines your financial security or risk exposure, it's what you do with your money that does! If this is true, then what exactly is it that the vast majority of people are doing with their money that continues to place them in such an arduous position of financial risk? The first answer to this question is, “They spend it!” However, there is a darker more ominous and disturbing answer, which is, “They spend money that they don't have.” Yes, I'm referring to the use of credit! It's fairly safe to assume that no one wants to place themselves or their family in a precarious financial position, let alone do something that brings about the stress and discomfort accompanied by financial ruin. Why then does the bulk of the population insist on not only spending every cent that they earn each month, but also money that they haven't yet earned? The simple answer to this question is, "They haven't really thought about what they're doing, nor have they considered the potential consequences of their actions.” So let's think about it... 1. Anyone that spends all the money that they earn each month is not saving money. 2. Anyone that is not saving money is entirely dependent on their next month's salary or earnings to survive and maintain their current lifestyle... for one month! 3. Anyone that is dependent on their next months earnings to survive, keep their house and car and pay their children's school fees, is at the mercy of the company they work for and the state of the economy in determining their financial security... every month. 4. Anyone that is dependent on the company they work for or the state of the economy for their financial security each month, is bound to face financial difficulty at some point in their future... because companies don't always do well, everyone gets to the point where they can no longer work and economies always have a downturn! It gets worse... 5. Anyone that spends all the money that they earn each month AND spends money that they haven't yet earned (i.e. credit), not only accumulates no savings, but gets themselves into debt. 6. Anyone that uses debt to finance their lifestyle is getting themselves deeper into debt... every month. 7. Anyone that gets deeper into debt every month will eventually be unable to afford the repayments on those debts. 8. Anyone that can't afford the repayments on their debts, has their house, car and any other assets they own repossessed and will have no choice but to abandon the lifestyle they and their family have become accustomed to. The message I wish to drive home is this: Spending all the money you earn each month is a risky thing to do that leads to financial difficulty or distress at some point in your and your family’s future. However, spending money that you haven't yet earned to finance your lifestyle, is a recipe for inevitable financial disaster! Unfortunately, the vast majority of people engage in the prolific and unrestrained use of short term credit to finance their lifestyles, which is why one in five of the economically active population are in financial distress in South Africa, at any given time. In Part 2 of this article, I will explain the fascinating reasons as to why the vast majority of people perpetuate these financially disempowering and seemingly bizarre patterns of behaviour, regardless of their level of intelligence, education, job title or earnings. Until then, please put some quiet time aside to think carefully about your own spending patterns and consider ALL the potential consequences of your financial decisions... because one hour of thought could save you years of heartache. To your Wilde success! Gary Wilde 
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