Lizl Budhram, Head of Advice at Old Mutual Personal Finance

 

South African consumers will have to take tight control of their household budgets to have any hope of weathering the perfect storm of high inflation and rising interest rates. Local consumers have been stunned by no fewer than nine interest rate hikes over the last 18-months, taking the prime lending rate from 7% in November 2021 to 11.25% presently, and pushing the monthly repayment on a R1 million home around R2700,00 higher.

 

“Sharp increases in loan repayments are just part of the ‘cost of living’ nightmare as consumers also face electricity, food, schooling, and transportation price hikes as a result of the consumer price inflation (CPI) rate, which reached 7.1% in March 2023,” says Lizl Budhram, Head of Advice at Old Mutual Personal Finance.

 

Revisiting your budget regularly 

 

The question ‘top of mind’ among most consumers is how to deal with the unchecked ‘cost of living’ increases when household income barely keeps pace. “One of our concerns is that households get through the tough times by reducing their life- or short-term insurance covers, or halting contributions to their discretionary savings,” says Budhram. “Households must carefully assess areas where they can safely cut expenses before cancelling or reducing insurance or savings policies – such decisions can have serious long-term financial consequences”. Old Mutual Personal Finance suggests that households revisit their income and expense ‘spread sheet’ often, especially during periods of rising inflation / interest rates.

 

“After 9 rate hikes, South Africans are effectively in round 9 of a ‘cost of living’ boxing match, without much certainty about how many rounds they may still need to face. At this stage of the fight, no household should be without such a budget spreadsheet, as it is the only way of ensuring that one makes informed, sensible, and intentional decisions of where to continue spending and where to reduce or stop spending,” adds Budhram.

 

Money-saving hacks to boost your financial well-being 

 

When deciding which expenses to eliminate, take care to consider which products or services can be repurchased or resumed in the future without significant detrimental financial impact. For example: cancelling a streaming, or app subscription can often be resumed in the future at similar subscription rates. Whereas life cover cancellations may result in significant premium increases based on new age or health conditions if new life cover is contracted in the future. Also be sure to check product terms and conditions: some policies may allow ‘premium holidays’ or have a ‘skip a month’ feature. Many people are also taking advantage of rewards and loyalty benefits to provide budgetary relief. Have you checked that you are getting the most out of available rewards or loyalty benefits?

 

Consult a professional   

 

An interest rate hike should trigger a two-stage household budget review. The first stage involves a reassessment and reprioritisation of each of your expenses, which could entail making tough decisions about entertainment, gym contracts, subscriptions etc. The second stage centers on rebalancing between your current and future needs… “You cannot spend all your money on the present and risk having no money for your retirement; but you cannot save so strictly that you are unable to make ends meet today either,” says Budhram. Some tips to conduct a successful budget review include having accurate, up-to-date figures; stripping out emotion; and, if possible, seeking input from a trusted, objective third party such as your financial adviser.

 

“If you find yourself unable to balance the household books, we suggest approaching your financial adviser for help before turning to credit cards or short-term loans to get by,” Budhram says, before warning that taking on short-term debt during periods of financial turmoil seldom ends well.

 

Avoiding short-term debt 

 

Short-term debt should be avoided at all costs! One of the traps to avoid is using your credit card budget facility to purchase food and other essentials; this strategy not only delays the ‘cost of living’ problem but makes the problem much bigger when you try and recover from it six months down the line.

 

“Yes, we are at a difficult point in the interest rate cycle; but this situation will play out and we will gradually revert to the mean,” says Budhram. “We encourage households not to turn to short-term solutions to assist with their budget shortfalls but instead to find more creative ways to navigate this part of the cycle”.

 

The budget relief for consumers ahead 

 

“While it is still tough out there, there is some relief ahead for the remainder of the year. CPI inflation should ease sharply over the next few months – mainly thanks to expected lower food inflation and even some petrol price declines – and interest rates are very close to peaking. The Reserve Bank might hike rates one more time later in May and then halt the hiking cycle as inflation declines,” says Johann Els, Chief Economist Old Mutual Investment Group.

 

Factoring in inflation risk 

 

Turning to holistic financial planning, Budhram says consumers need to show a greater awareness of inflation risk on their plans. Inflation chips away at your savings by reducing the amount of goods and services you can buy with each rand over time. For example, assuming a loaf of bread costs R20,00 and inflation is at 10% per annum: next year, your R20,00 buys nine tenths of a loaf; less than two thirds of a loaf in 5-years; and about two fifths of a loaf in 10-years. “You must work with your financial adviser to ensure that your investments are outpacing inflation by an adequate margin and that your asset allocation is suitable for both inflation and volatility risk,” she says.

 

Can’t afford a financial advisor? 

 

But what about the thousands of low- and mid-income South African households who do not have the luxury of a financial adviser on speed dial? These households need not despair. “The common-sense solution to budget hiccups is to look at your budget carefully; figure out where you can cut expenses; and avoid additional debt at all costs – these are fundamental principles that will serve any household well,” continues Budhram.

 

“If taking on additional debt proves unavoidable, please reduce the amount you have to take on by first carefully reviewing your budget and aim to settle this debt as soon as possible,” concludes Budhram.

 

ENDS