Grahamstown’s genteel poverty is legendary.
In Johannesburg, if someone is said to have money, people ask, “How much?” In Cape Town, they ask, “Ah, but is it new money or old money?” In Durban, they ask, “How much of it is offshore?”
Grahamstown’s genteel poverty is legendary.
In Johannesburg, if someone is said to have money, people ask, “How much?” In Cape Town, they ask, “Ah, but is it new money or old money?” In Durban, they ask, “How much of it is offshore?”
In Grahamstown, they ask, “What’s money?”
Yet I am surprised when looking around Grahamstown at what seems to be reasonably high levels of conspicuous consumption. Granted, the number of SUVs and Mercs is outstripped by the number of daddy-bought entry-level cars and lecturer-owned skedonks. The SUVs and Mercs, and the fashionably fitted households do exist, however, and the people who inhabit them do not skimp on material goods.
The difference between those who appear to have money and those who don’t is, I am reliably informed by someone involved in finance in Grahamstown, often debt.
To be sure there are some debt-free people here who are wealthy by Grahamstown standards. But many of the luxury vehicle drivers who eat out all the time and wear expensive clothes simply have access to more credit than the rest of us. They are floating on a sea of debt.
Now at this stage you might expect some kind of jeremiad against the evils of debt, recalling the words of Polonius in Hamlet: “Neither a borrower nor a lender be.”
To be sure, the terrible events at Marikana have, among other things, raised the issue of the levels of debt in our society. It transpires that the earnings of some of the miners, low as they are, were further depleted by garnishee orders as a result of unpaid debt.
Some of my fellow journalists earnestly warn people against borrowing, or raise the spectre of the consequences for South Africa of high levels of household debt, or the perils to the economy of “unsecured lending”. The technical term for this is moral panic.
Debt is, indeed, a double-edged sword. Without it, however, societies find it hard to function. The role of banks is not, as some suppose, to keep our deposits safe but to lend the money out many times over to businesses and individuals so that they can function in this capitalist economy.
Individuals do not need as much debt as firms, but they also find it hard to build capital without it, in the simple area of residential property. When banks stop lending, property markets tend to collapse. A slump in residential property markets soon feeds into the broader economy through the “wealth effect”.
What this means is that homeowners who thought they possessed a goldmine find instead they have a house with all the costs that entails. This is especially so when houses have “negative equity”, which means that the house can be sold for less than the bond taken out to buy it.
Individuals also often need debt to buy the means of transport to and from work.
I have known a few people who have lived without any debt at all. Inherited wealth or some kind of windfall sometimes plays a role, enabling the purchase of a car or a house or both. Some, among the middle class and the poor, have incredible self-discipline.
Moreover, there is a good psychological reason to avoid debt. While some people happily ignore the credit fuelling their lifestyles, sometimes until it is too late, for many it is a constant mental weight.
Conversely, I seem to remember that having cash in the bank can be enormously mood-lightening.
We need to differentiate between careless or uninformed spending based on debt and the distress debt that also characterises our society.
Distress debt is that debt caused by, for example, the cost of a funeral, paying for hospital or other medical emergencies, and a host of other ills that befall ordinary people unexpectedly and for which money has to be urgently sought. For some middle-class families, the cost of rehab falls into this category, since medical aid schemes rarely pay this cost in full.
Many of the truly poor in South Africa, to summarise academic research, are not poor because they are in debt: they are in debt because they are poor.
In any case, if you have to use debt, here are few tips.
First, mortgage debt is the cheapest debt around. Using your mortgage to buy a car is the cheapest way of raising finance, though it delays that wonderful moment when your house is paid off.
Having a paid-off house and a debt-free car is financial freedom. While mortgage debt is relatively low-cost, paying off mortgage debt is the best way of saving, because it is tax-free.
There is a lot more to using credit wisely, and Grocott’s reporters may well have more tips on this and other personal finance matters in future.
