John Manyike, Head of Financial Education at Old Mutual
It’s time for South Africans to add another belt to their already tightened belts as interest rates reach their highest point in 14 years. When interest rates rise, it could mean that your debt payments get bigger, and your discretionary spend becomes smaller.
When you stretched your budget to get that dream car or house in 2021, you couldn’t have predicted that there would be nine interest rate hikes within two years and that you would be paying more than you bargained for. The same applies to all other debt, good or bad, including your bond, personal loans or credit cards, says John Manyike, Head of Financial Education at Old Mutual.
“For example, a person who bought a house for R1 000 000 over 20 years and paid a R100 000 deposit would have been paying R9 137 a month. With the latest rate increase, this would increase to R9 598 (or an extra R461) a month. This is enough to upset an income already balanced on a knife edge.”
” It’s time to take strict personal measures, amid signs of more interest rate hikes. The best you can do -especially if you already spend most of your salary repaying debts, is to formulate a budget and keep and try to stop any wastage so you can focus on reducing debt and diversifying your income stream.”
” Most importantly, get help. Realise that thousands of others are facing the same problems and that being open and talking to your financial service providers could lead to solutions.”
One of the most underrated solutions to a volley of interest rates squeezing your disposable income is a side hustle.
The nett salary increases are not matching the inflation rate which means people are becoming poorer and highly indebted. No matter how hard you try to stick to your monthly budget there might be no room to manoeuvre. Therefore, any advice encouraging people to stick to their budgets might not be the ultimate solution.
It is high time that people research alternatives streams of income to save for rainy days, to reduce debts and to create wealth.
There is no harm in consolidating debts if push comes to shave but understand the financial implications.
Payment holidays in this interest rate cycle are not ideal because no one knows how long is the piece of string.
” The high-interest rates we are all facing should also be teaching us that we need to think differently about why we borrow money or spend on items we don’t need with money we don’t have,” says Manyike.
There are many reasons that interest rates rise. Increases are always possible, so balancing your budget and future proofing your finances should be a priority.”
To be ready for the unexpected:
- In simple terms, have a budget and always have some money ready to cope with the unexpected, like rate increases.
- Look at the total cost of a loan and the interest rate rather than the monthly payment. For example, a major retailer is currently offering a 55-inch TV for a cash price of R 7 999. On credit, this means R370 a month for 36 months or R13 301 because the interest rate is 21.75%. Is paying an extra R5 302 for a TV worth it?
- Buy down instead of up. Even if you buy in instalments, buying at a price below the maximum you can afford means you will not be stressed if rates rise. Also, it means you can pay more each month for the item, pay for it earlier and save on interest.
“The search should now be on for ways of reducing costs and getting ready for tough times that lie ahead…)”
What should be driving action for turning personal finances around and becoming a saver rather than a spender during times of high rates?
” Having money in the bank or in an investment instrument rather than paying debts means that your savings will earn more than they have. Where savings and investments accounts were opened some time ago, account holders will be getting better returns than before, with compounded rates adding even more value,” says Manyike.