By: Steven Amey
As the hype around Black Friday creates a frenzy of excitement, most of us wait in anticipation of the annual extravaganza and all its tempting specials. The marketing machine kicks into gear, and as this happens, advertising creates the desire in many of us to splurge on products we can’t resist.
The pull is so strong that, according to Forbes, Black Friday global sales in 2022 reached a staggering $65.3 billion. But what if we could zoom out and look at our Black Friday spending over time compared to what would have happened if that same money was invested instead? “Once you start looking at that picture, a few epiphanies might come to you,” says Steven Amey, Head of Intermediated Distribution at Ashburton Investments.
Let’s look in the mirror for a second
Most of us are emotional beings, so we convince ourselves that we deserve to be spoilt. We crave fulfilment and we use our logic to justify these cravings. There is a certain thrill to splashing out. However, if we can pull ourselves out of that temptation for a second and look at what we truly owe ourselves, what we can really afford to spend, and what we can truly achieve with our hard-earned money, then saving and investing becomes appealing.
We need to ask ourselves the question: “Are we truly saving money by spending on Black Friday specials, or would we be better off saving that same money and placing it in an investment that can grow over time?”
Before deciding, you need to consider the following:
Are items truly cheaper on Black Friday? A report by consumer group “Which?” found that 98% of products on sale in the UK during Black Friday 2021 were cheaper or the same price at other times during the year.
There will always be specials, so we need to resist the need for instant gratification, especially when there is the added peer pressure of Black Friday.
Would it not be wiser to save until you can afford to purchase products in cash and not incur additional debt? You don’t want to regret your purchase due to the additional debt burden a couple of weeks later, only to experience the dreaded buyer’s remorse. You want to enjoy your product well after you have purchased it, without the pressure of feeling guilty.
Think about your future self, and what you would thank yourself for in 15- or 30-years’ time. Will you still be enjoying the new TV bought in 2024 or would the money you invested put you in a far better place, financially?
Understanding the true impact of debt
In South Africa, according to Eighty20, the middle-class group pays approximately 80% of their net salary to service debt. This debt is ladened with interest rates that far exceed the average salary increase. Therefore, servicing debt with 80% of your salary, at an interest rate that far exceeds your annual salary increase, can only end in disaster.
The impact of this debt-seeking behaviour profoundly affects people in retirement, as only 6% of South Africans can afford to retire comfortably. Let’s look at this by way of example, introducing you to three special characters:
· Mr Freddy Friday – the illustrious feel-good shopper
· Mr Debt Interest – the capital destroyer
· Miss Compound Interest – the joyous wealth creator
Mr Freddy Friday loves to shop, especially on Black Friday. Freddy earns a salary of R600,000.00 per year, and his average annual increase is 5%. Freddy has been on shopping sprees for years and has accumulated debt amounting to R480,000, and this debt comes with the well-known capital destroyer, Mr Debt Interest, who charges a hefty interest rate of 22% per annum, for his services - lending money to Mr Freddy Friday.
Freddy’s consumption behaviour has caught up with him. To get out of this hole, he has agreed to pay back his debt over 15 years, the repayments of which are R9,148 per month. The debt that started at less than half a million rand will amount to a total of R1,6 million over 15 years. Think of that for a moment. Freddy Friday’s debt has cost him more than three times the actual purchase price of his goods, due to the interest charged by capital destroyer, Mr Debt Interest. Mr Freddy Friday would have spent 70% of the R1,6 million, a shocking total of R1,1 million, on interest alone over the 15-year repayment period.”
Grasping the magic of compound interest
Now to offer an alternative outcome, like a choose-your-own-adventure, let’s introduce you to Miss Compound Interest who talks to Freddy about his exorbitant buying habits. She convinces Freddy to purchase what he really needs, a little of what he likes, and to save and invest the rest. Freddy decides to give this a try and instead of spending on Black Friday, he puts the money aside for investment. Where previously he saved R500 per month towards his retirement, he can now save R1500 towards his retirement and saves five years earlier. If we assume Freddy’s investment was placed in a unit trust, which generates a return of *8% per annum, Freddy will undoubtedly look back in 15 years on how fortuitous it was that he could make R522,000. This was only possible because he acted on the guidance of Miss Compound Interest, and benefited from saving more, saving earlier, and enjoying the benefits of compound growth over the period.
Let’s all take a moment to think before the debt train runs away with us. Realise that debt interest is a capital destroyer, and you could live very well without accumulating a lot of stuff that won’t be worth much to you later in your life. Think for yourself and don’t get swept up in the hype of Black Friday. Rather make friends with Miss Compound Interest earlier in your life and end up with accumulated wealth when you are older that will enable you to enjoy life, having less financial stress in retirement.
*Excluding tax
**8% growth has been used for illustrative purposes and is not a guaranteed return. Please speak to your financial advisor for additional information.
*** Amey is the head of intermediated distribution at Ashburton.
PERSONAL FINANCE