Article and Photo: Fin24
Cape Town - The ripple effects from South Africa's weak economic position will reduce your disposable income in 2016, says an actuarial expert.
Public Policy Actuary at the Actuarial Society of South Africa (ASSA) Niel Fourie says several sectors are facing retrenchments as part of cost cutting initiatives "which will result in job losses".
South Africa ended 2015 on a low, with the rand weakening to historic levels against the dollar and other major currencies, a drought that crippled much of the agricultural sector and the downgrade of SA’s credit rating to just one level above junk, says the ASSA.
As a result food prices are expected to increase by double-digit figures in 2016. In addition, a dramatically weakened rand has pushed up the cost of imported goods by significant margins.
Experts also forecast substantially higher electricity and water prices in the year ahead, the consumer price index (CPI) is expected to rise considerably and many medical aid scheme contribution increases are also in the double digits.
"Times are tough for South Africa and the road ahead is rocky. With pockets already stretched it is vital that you take immediate control of your financial situation to avoid falling into hardship," says Fourie.
To help you navigate through the difficult economic terrain of the months to come, Fourie provides the following financial survival tips:
According to the National Credit Regulator (NCR), of the more than 23 million credit active consumers in South Africa as at June 2015, close to 11 million had impaired credit records or had failed to make debt repayments. This is a worrying sign that many South Africans continue to spend beyond their means.
Fourie notes that in many cases, a simple lack of financial awareness owing to the absence of a budget is to blame.
"Having a budget is therefore always the first and most important step you take in managing your finances," he says. "In difficult times, putting off making a budget is like trying to find a safe path through the wilderness blindfolded. You need to rip off the blindfold, take in your surroundings and then choose your next steps."
"Likewise, making a list of your income and expenses will provide you with an honest picture of your financial situation so that you can begin making realistic decisions regarding the financial survival of your household."
Fourie warns that you will not achieve financial independence as long as you or your family members continue to spend recklessly and create debt, which a budget will reveal.
"Finance Minister Pravin Gordhan has reassured the nation that he will improve South Africa’s economic situation by helping government stick to a firm budget and not spend money the country does not have. As consumers, we must learn from this and do the same."
He states that the first step to taking control of your budget and spending may be to cut up unnecessary credit cards and close clothing or other store accounts, or look at other luxuries you can cut back spending on. You may also need to reconsider the affordability of items such as a new car.
Fourie points out that in 2016 your New Year’s resolutions should definitely be focused on cutting unnecessary expenses such as cigarettes, subscriptions that you do not really need and extravagant spending such as eating out.
"If ever there was a good time to strictly question every expenditure it is now. Before spending money in 2016, ask yourself whether you really need something or whether it is a want?"
Towards the end of 2015, the South African Reserve Bank (Sarb) raised the interest rate by 0.25%. As a result the banks' prime lending rate increased to 9.75% and debt has become more expensive. Economists anticipate a further increase this year.
As budgets are already stretched, it is vital that you make paying off debts your next priority with the goal of one day becoming debt-free and therefore financially independent, states Fourie.
He recommends compiling a list of your debts from most expensive (high interest rates) to least expensive. You can then put any extra money you can muster into paying off high-interest debts while making minimum repayments on debts with lower interest rates and gradually work your way down your list.
"This is known as the debt avalanche. Short-term debt such as credit cards, clothing accounts and vehicles will likely top this list, while long-term debt such as bonds will come later," notes Fourie.
He explains that it does not make financial sense to increase your investments while you have substantial debts, as the interest you will be paying on your debts may outweigh the interest you can earn on your investment.
"You should therefore prioritise increasing your debt repayments first, especially as debt will become even more expensive this year if interest rates increase as expected," he states. "And any amounts you can spare in your budget can make a huge difference to your debt repayments."
To demonstrate, Fourie points to the example of an individual purchasing a house who takes out a R1m bond over 20 years with an interest rate of 9.75%. Including service fees, this individual must make monthly bond repayments of a minimum of R9 542.
Assuming no interest rate increases, by making only the minimum repayments over 20 years this individual would pay close to R2.3m. By increasing the bond repayments by just R500 a month, this individual would repay the bond in just over 17 years and pay a total of only R2.1m, saving around R200 000.
If this same individual increased their bond repayments by R1 500 a month, the bond would be settled within 14 years. The total amount repaid would be R1.8m, nearly R500 000 less than if only the minimum repayments had been made.
Fourie says this example highlights why it makes little sense to save and invest until you have settled your debts.
"The reality is that you are unlikely to earn returns on bank deposits and investments that exceed the interest rates charged by your debt accounts."
Fourie states that in order to avoid falling off the path of financial discipline, you should set out clear long-term goals to keep in your mind's eye as you make decisions throughout the year.
"Putting goals in place such as saving towards a child's education, a home or retirement will help you stay focussed and prevent you from being tempted off your path by unnecessary spending," he says.
"You will also then be able to look into specific investment products that are best suited to you and what you need for your individual financial journey."
Fourie notes that qualified financial adviser will be able to help you set out your priorities and steer you towards the best savings and investment product for your unique situation.
He explains that psychologically, you will also be more likely to remain disciplined if you automate your savings and investments to occur as soon as you receive your salary rather than if you attempt to save any amounts left in your bank account at the end of the month.
"You will be more tempted to indulge with money you can easily access in your bank account rather than if you put the money immediately out of sight and out of mind," he states.
"Falling into a debt trap is often the result of a series of poor decisions over time, and in tricky economic times you will be the most vulnerable to making financial mistakes. Consulting a financial adviser will help you stay on track," he says.
"The year ahead may be difficult, but if you keep tight control of your budget, communicate openly with your family and stay focussed, you can all look forward to a brighter financial future together."