I was recently asked by a young woman if it would make sense for her to cash in her pension, settle her debts and start all over again.

It sounds like a good idea: on the one hand you have debt with interest as high as 25% per annum and on the other hand you have an investment which will grow at 10% per annum – the expected return from a retirement fund.

People, however, underestimate how powerful compound growth can be over the period of one’s career, while at the same time they tend to overestimate their willpower or ability to change.

Say for example she was 30 years old with a pension fund of R100 000. She changes jobs, cashes it in and settles her debt. What she has failed to deal with is the reason she is in debt in the first place, namely her lifestyle.

In this scenario she has not learnt to write up a budget and stick to it; she has not learnt how to develop a repayment plan. What she has learnt is that in the short term, there really is no negative consequence for living beyond one’s means as you can always borrow from the future.

Settling your consumption debt with investment money is nothing more than stealing from your own future.

Based on my experience of how most people handle money, I would say that there would be a 95% chance that within five years she would be back at the same level of debt again. That new job with the higher salary would just allow her to take on more debt. In the meantime she has lost out on the potential growth of that R100 000. She is now, at 35, worse off than she was when she was 30, with fewer years ahead of her to rectify her financial situation.

If she focused on paying off her debt by budgeting and cutting back on her lifestyle, she could probably pay off her debts within five years with a payment of R2 900 per month, or by using her bonuses and tax rebates to pay it off even faster. Over five years, at an interest rate of 25%, she would spend R174 000 to settle the R100 000 of debt. She would also have become used to living on less each month and hopefully have developed the discipline to start saving R2 900 per month once those debts were paid off.

In the meantime, if her R100 000 is growing at 10% a year, it doubles in value every seven years. So after seven years it is worth R200 000, after 14 years it is worth R400 000 and after 21 years, at the age of 51, it is worth R800 000. If she cashes in the money and pays off her debts, those debts would have effectively cost her R800 000.

Settling your consumption debt with investment money is simply stealing from your own future.