In January 2012 I bought a cup of coffee for R889.60 (about $105). A few days later I did it again. Now I bet you’re thinking 2 things. Firstly, “ARE YOU INSANE?!?!?!” and secondly “that must have been a magnificent cup of coffee.”
Where did I purchase this cup of coffee? Was it some incredibly rare-blend of coffee? Did it involve plane tickets, a camel ride, an audience with a Sheik and a marriage proposal? Or was it a moment of insanity? Brace yourself. The truth is it was a VERY below average house blend mug of filter coffee from our nearest Mugg & Bean. OK, I’ll admit that Mugg & Bean obviously doesn’t charge that much for a cup of coffee but everyday many of us spend that much purchasing a morning fix without realizing it.
OK, I realize I’ve lost you all but please bear with me as I build some context that I promise will make sense towards the end. Once upon a time… Within the first half of 2011 our finances were what would probably be considered pretty good and stable. 2010 had been really expensive because of 2 tenants in a flat that couldn’t make rent payments, but could afford flat screen TV’s and new furniture. These tenants also thought we’d appreciate the gift of exorbitant heating bills. In 2011 however we had a new paying tenant. We were keeping up with payments (which included large credit card payments due to the shortfall from our non-paying tenants) and it looked like there was some light at the end of the tunnel. We were even getting quotes to decide on how to beef up my life policy and our will to include a few nominal benefits so that there would be a comprehensive trust to provide for our kids in the case of our untimely death.
Around the same time Murphy (as in Murphy’s Law) decided to visit. In fact Murphy enjoyed his visit so much that he decided to move into our guest bedroom. Month after month he extended his stay without any regard to us. Murphy just wasn’t taking the hint. Courtesy of ‘ol Murph we had a roof fire, burst water pipes in the roof (within weeks of the fire damage being repaired), multiple car breakdowns, multiple hospitalizations, a murder and a suicide, the death of my dear old dog and more burst pipes in the ceiling (just to mention a few things… there really was a lot more). The thing about life’s little Murphy’s, in-case you haven’t noticed, is that they tend to cost money. A lot of it. And it’s usually when you’re completely out of it that ‘ol Murph then decides that your two precious bundles of joy need to play a game of flu virus ping-pong. After-all, endless bills for doctors visits and medication are just the perfect gift when you’re trying to scrape together money for fuel to get to work.
We barely clawed our way through the last 2 months of 2011 with no birthday present for Katherine and no Christmas presents. Truth be told it was a lot worse than that. I borrowed money from a work colleague for fuel and Jude (my firstborn) was running around barefoot not because of the Hot African December summertime, but because there was no money for shoes. The credit cards were maxed-out. The new year (2012) started with a lot of anxiety as we had to process the reality that our monthly expenses now consistently exceeded our monthly income. If you’ve been (or maybe you are) in that spot, then you’ll know that it doesn’t leave you feeling like a ray of sunshine. You don’t wake up in the morning with a desire to visit a pet shop just to play with a box full of kittens. You wake up anxious… depressed… fearful… Sapped of motivation you crawl out of bed. By the time you’ve made it out the back-door you’re already grumpy, short-tempered. My precious family was no longer getting the attentive, supportive, encouraging, playful and strong Husband/Father that they were supposed to have.
Hindsight is 20/20
In hindsight when the disasters were happening we should never have relied on those evil plastic credit cards to make up the difference. We told ourselves, “don’t worry, it will all be OK next month. Next months pay will cover this and in a couple of months we’ll be back on track.” There are a few problems with that attitude.
- Life happens. We’re not in heaven. You don’t know that nothing will go wrong next month. No need to be fearful about next month, but we should be realistic. Next month is not the month where suddenly there will be world peace, 100% employment, 0% crime, 0% road accidents, the end of poverty and the discovery of the cures for cancer, AIDS and childhood obesity. Oh yes… and the end of stupidity.
- You should never put off solving a problem that can be easily solved now. Before you know it you’re facing 73 problems and a overwhelming situation where it’s much tougher to think clearly and cope.
- It ignores compound interest – an incredibly destructive yet fiercely misunderstood force.
By keeping a fatalistic attitude month after month we started 2012 with the nasty surprise that even if next month is OK it no longer matters. Our minimum required debt repayments had tipped the budget over. When our first disaster in 2011 hit we should have clamped down on monthly expenses immediately. We should have cut the fluff from our budget immediately. We should have delayed instant gratification. Don’t get me wrong, we weren’t living it up or anything, we just didn’t see the problem for what it was.
So we scrutinized our monthly budget looking for some fat to cut off but it was too late; the combined minimum payments due on each account had become so bloated that even after cutting out large chunks of spending our budget did not balance. It was time to get creative and think out the box. Time to find a new perspective on how we spend our money.
What about that cup of coffee from the beginning?
Back to that R889.60 cup of coffee. Being someone that likes numbers, I decided to start by quantifying the potential real cost of our debt. I wanted to know in the long run how much was this debt (especially the credit cards) were really going to cost me. Prior to all these disasters we had once already worked hard at cutting back to pay off credit cards and clothing accounts, and faced with this situation once again, except now with 2 children I was beginning to think that our only solution would be to get a few more credit cards, open a few more clothing accounts and then essentially juggle the debt around. After-all that’s how governments do it. It would be so easy. After-all I get offered a credit almost once a week by some telemarketer;
“Hello Mr Henry … Fine thank you for asking … I’m excited to let you know that YOU’ve been SPECIALLY pre-approved for a GOLD/PLATINUM credit card…. blah blah… loyalty program… blah blah … Frequent Flier Miles …. blah blah… essentially free banking… blah blah… FREE blah with BLAH BLAH and up to 15% discounts at BLAH BLAH. When would you like to take delivery of your new GOLD/PLATINUM/PREMIUM card?”
Almost every week. Standard Bank, Nedbank, Diners Club, American Express, Woolworths, Builders Warehouse, Edgars, Bradlows etc. However I was fortunately about to discover something truly horrific when I started playing around with the numbers.
Assuming that I just shrug my shoulders and made no changes to the budget and chose instead to continually accrue more credit card debt I decided to calculate what R1 of debt on my credit card at 18% interest per annum would turn into over the next 35 years. I chose 35 years because at the time 35 years would have put me at 65 years of age; the current expected retirement age in South Africa.
It turns out that R1 at 18% interest per annum compounded monthly over 35 years turns into R519.68. So it would mean that my R13.90 cup of coffee from Mugg & Bean would be setting me back R7223.55 (R13.90 x 519.68). Of course for it to be a useful number we need to factor in inflation. Ok so let’s assume an annual inflation of 6%. One rand 35 years in the future is the equivalent of R8.12 today. So then if you take that naughty R1 on a credit card over 35 years and adjust for inflation it becomes the equivalent of spending R64 right now. This meant that unless our budget had a radical change then the real value (i.e. adjusted for inflation) of a cup of coffee bought on my credit card is R889.60 (R13.90 x 64). Would you pay R889.60 ($105) for a cup of coffee?
Looking back the idea of buying any small item on a credit card seems ridiculous. How did this happen? A few years ago we were hi-jacked while I had a large amount of cash on me. Subsequent to that I decided to no longer carry cash. Since debit cards were virtually non-existent and expensive to swipe I opted for the credit card. At first I was really disciplined and deposited money into the card in advance so there was always a positive balance. And of course there was the loyalty program associated with the credit card. Over time however the balances slowly moved into the negative and eventually through compounded monthly interest, ill-discipline and life’s little Murphy’s, it (actually it was 3 credit cards) all got maxed out.
We’re not alone
Our attitude was a reflection of our culture. Pay later for something you want/need now because tomorrow you’ll magically become a millionaire who can afford it. After-all you really deserve whatever it is that you’re buying. Personal debt is pandemic. One study in the States found the city of Sloux Falls was the American city with the least amount of credit card debt; that being R27568 per person. That is alarming. I couldn’t find any similar stats for South Africa but in 2011 it was estimated that 46.4% of the 18.6 million people who have recorded debt in South Africa were more than 3 months arrear in their payments. This figure of course doesn’t reflect loans between friends and family or illegal loan sharks. This is very worrying in a country where half the population is unemployed. It means that almost every working South African has credit (half of which are not honoring their agreements).
This of course means the reason everyone else seems to have nicer cars/houses/gadgets/holidays/furniture is that they haven’t actually bought any of it. It seems that most people have become victims of great marketing campaigns and envy. Will Rogers once said “Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.”
The revelation that every R1 that makes it onto a credit card and doesn’t get paid off will be R64 when I am 65 changed our perspective on how we
- Decide what makes it onto our budget
- Actually spend our money
Everything on our budget I started multiplying by 64. It turned out that I was ultimately paying the lady who did our ironing twice a week more than my salary. The same with our date nights out eating a starter, meal and dessert with drinks + baby sitting. There were suddenly many line items on our budget that didn’t seem that important anymore. There was another benefit to multiplying everything by 64 (well actually another 2 benefits if you count the additional mental exercise required to actually multiple things by 64 in your head); Impulse spending almost completely dried up. That quick “harmless” and “cheap” can of coke you desperately need to quench your thirst is no longer R8, OH NO it is now suddenly R512. Suddenly I wasn’t so thirsty, I no longer craved chocolate and tap WATER became my new favorite drink. Bye-bye Nescafe Gold, Jacobs and Douwe Eg *something or another* and hello Ricoffee.
You might think this is a little radical and over-the-top. I started saying “No” to all kinds of things. In fact some made fun of me. I even got the nick-name Kenny (apparently the poor kid from South Park who always dies). Many said to me things like “You can’t live like that. You have to have some fun. I’d rather be in debt than not be able to XYZ”. Other’s said “but Gareth, in 10 years time you will be earning much more than you earn now. You will have more experience and be at the top of your game in your career”. Those people are right. But in 10 years time I don’t want all of my increase to be spent servicing compound interest while barely paying off debt. I want to be enjoying that increased income. I want to be giving a non-sensical amount of it away and enjoying my surplus with my family all while sleeping really well at night with no concerns about bills.
Did we like that it meant taking a knock in our lifestyle? No. Do we like that it has meant we’re no longer having a regular date night that includes baby sitting, a nice steak, a starter and a dessert followed by a movie. No. It is not nice. Do I like that it means that many months after it’s release I still do not own a copy of the much anticipated Diablo III?
But I have a greater dislike. I shudder to imagine reaching 65 years of age and having millions upon millions of rands in debt with a pension that is primarily used to cover repayments. I shudder at the thought of not been able to leave an inheritance not only for my children, but for my children’s children as well. So 64 is a number I’ve gotten intimate with.
My new friend, the 64 times table.
So, if you find your debt increasing every month then meditate on the following:
|Item||Current Cost||Real Cost (x64)|
|Plastic shopping bag||R0.39||R24.96|
|Small slab of chocolate||R8.99||R575.36|
|Cup of Coffee||R13.90||R889.60|
|McDonalds Sausage Egg McMuffin breakfast with free coffee||R14.90||R953.60|
|3 Boerie Rolls for family after doing monthly shopping||R60.00||R3840.00|
|Jar of Jacobs Coffee||R84.00||R5376.00|
|Monthly cost of a maid ironing clothes once a week||R500.00||R32000.00|
Assumptions:Current Age 30, Retirement 65, Credit Card Interest 18%, Inflation 6%
*If you’re 25 years old then your current multiplier is +-115
**If you’re 40 years old then your current multiplier is +-20
I am super grateful that I don’t smoke.
There were some big item amounts that I couldn’t remove altogether. Such as travel expenses (about R4000 before multiplying), and groceries. So we got creative. I spent the year car-pooling whenever possible (cutting about R2000 a month), we started buying our meat in bulk every second month, purchased almost all our fresh produce through a farmers market co-op. We started manually processing medical claims instead of letting doctors or pharmacists process claims (in most cases this saves you a lot). Voila and hey Presto!!! Our budget is now not only balancing, but we’ve been paying off our debt with a Vengeance. As of last month we have no consumer debt what-so-ever. 3 cards paid off, clothing accounts closed, medical bills paid and a list of various people who were owed a couple hundred all sorted. This took less than 10 months. Best of all, during this time we bought a 2nd-hand freezer with cash (to store the bulk meat), and cash-flowed a few small Murphy incidents.
I sit here now on the last day of 2012 filled with wonder and excitement. We’ve just had the most lavish Christmas and as of about 2 weeks after paying off the last credit card I’m now working as an independent contractor earning significantly more than I was. The above paragraphs will never adequately bring across the pain and the joy of reaching this point. The pain of saying no to everything, and the JOY of realizing that I didn’t actually pay R889.60 for a cup of bad coffee because in the end that January cup was only financed over 10 months and not 35 years. (So I paid R15.29 instead of R13,90 in case you’re wondering.)
How much is your coffee costing you? Perhaps I’ll share some tips, secrets, convictions and strategies employed to persevere through this journey to financial peace.