The environment in which South Africans must manage their finances continues to become more complicated, with interest rates and the general cost of living rising sharply.
There are several well-disaggregated reasons for this. In addition to the cyclical nature of the markets, various exogenous shocks, triggered by the war in Ukraine, exerted significant inflationary pressure on fuels, foodstuffs and other raw materials.
The knock-on effect for consumers has been significant, with households facing rapid inflation of the basic necessities they depend on and rely on. South African inflation hit a 13-year high in June of 7.4%, down from 6.5% in May 2022.
This has resulted in some of the largest annual price increases for goods and services like fuel, oil and electricity.
It is important to note however that South Africa’s official inflation rate has a different impact on each household. As such, consumers should understand where the increases are in their own inflation baskets to try to mitigate the impact of inflation on their standard of living.
An individual inflation basket represents the basic goods and services one usually spends one’s money on. For example, if the cost of telecommunications is a big inflation factor in your shopping cart, the best thing to do is to review your plans and contracts, shop around and find the best price for this service.
Many countries around the world have seen rising inflation in recent months, prompting monetary authorities to raise interest rates as they seek to contain and eradicate potential runaway inflation.
At the last monetary policy meeting, the SA Reserve Bank raised the country’s repo rate sharply, by 75 basis points, the biggest increase since September 2002. This will put even more financial pressure on consumers, especially those who borrow money because it becomes even more expensive to service debt payments.
Times are certainly tough and many consumers have no choice but to go into debt to survive. While debt may be the first lever you can think of to pull to keep your head above water, instead take a moment to stop and reflect, given that we are in a cycle of interest rates at the up, to some of the other levers you might pull first like finding other sources of income or ways to reduce your expenses.
Of course, you don’t necessarily have control over your income, but there are ways to potentially supplement your salary with a side hustle. The new digital environment has made it easier to start a business and access customers, and a secondary hustle could be turned into a primary hustle that pays your bills, employs people, and helps the economy grow.
At the same time, take a close look at your expenses to see where you could potentially cut back and save. While this daily takeaway coffee might not seem to hit your wallet too hard, think again. Small purchases, made regularly, eventually add up. Think about it: the average cost of a cappuccino is around R25, and if you’re used to buying one daily during the week, it could cost you around R700 per month and R6,000 per year. . Limiting transportation costs here as possible, maximizing rewards and loyalty points, and being energy efficient at home can also help create wiggle room in your budget.
It is often said that every financial challenge presents an opportunity. Now is the perfect opportunity to get your finances under control; establish a budget, understand well what you spend to identify what is potentially luxury and unnecessary expenses. One of the big mistakes people make in this exercise is making the decision to terminate health, vehicle, home, or life insurance. While this may create some short-term cash flow relief, it could hurt you and your family financially if something unexpected happens.
Once you have exhausted these options and still need additional funds, consider borrowing options. The first thing to do is to think about the use of debt.
If you take on debt to cover your day-to-day expenses, you may run into trouble, as interest rates are only expected to rise. For this reason, it becomes essential to avoid getting stuck in a cycle where you rely on credit to make ends meet.
Never fund a short-term need with long-term loans, as it will cost you much more later, eroding your ability to save and invest. In this case, credit cards that offer interest-free periods may be a good vehicle to use, if you pay off that debt during the interest-free period.
If used correctly and managed with discipline, debt can be a useful wealth-building tool. The cycle of rising interest rates should not deter those looking to take out long-term loans to finance the purchase of their first home or start a business.
If for example you are considering buying a property in the current climate, understand your ability to drive up costs. Although you can afford it at the current interest rate, ask yourself if you could still afford it if interest rates were to rise again.
Remember that these purchases come with additional expenses such as car or home insurance, the cost of which will also start to increase as inflation tends to rise and should be factored into your budget. Consumers don’t want to be in a position where they forfeit their insurance payments, or any commitments for that matter, because skipping payments can negatively impact your credit score and your ability to get a financing at a good rate in the future.
If you are in financial difficulty, have exhausted all your options and are still not getting out of it, it is very important to recognize your situation first. Then contact your financial institution for assistance. The sooner you do this, the sooner arrangements can be made by both parties. The longer it is ignored, the harder it becomes to relax from the position you have placed yourself in.
Finally, don’t despair. Almost everyone, in South Africa and around the world, is feeling similar pressures. In these times, find a way to reward yourself and your family.
Most people work incredibly hard trying to provide the best for themselves, their loved ones, and their communities. It is therefore important to do something good, which does not necessarily have a price.
Maybe it’s spending quality time with family or enjoying a little luxury, especially after meeting your goals and financial obligations. The discipline that is rewarded only serves as motivation and healing yourself from time to time will go a long way to keeping your spirits up and up in difficult times.