Surviving challenging economic times

With interest rates, inflation, fuel and electricity costs and food prices all rising rapidly, consumers need to take steps to safeguard themselves from financial harm.

Many consumers have not budgeted and planned for increases in prices and interest rates, and, as matters stand, they are already struggling to make ends meet. The results of the weakening rand also do not bode well for the man in the street. Household finances remain finely balanced, with debt levels high and the percentage of credit-active consumers with impaired credit records remaining on a gradual rising trend.

The first step in making sure you do not fall foul of the tougher financial conditions ahead is to make sure you have a financial plan, and to stick to it. The foundation of a financial plan is a household budget.

Prepare a monthly budget

The easiest way to prepare your budget is by printing your monthly bank statements and carefully going through all the income and expense items. Compile a spreadsheet with headings such as Home Loan Repayment, Car Instalment, Short-term Insurance, School Fees, Groceries, Entertainment, etc. and make sure that all the expenses on your bank statements, including credit cards, are included in the list. Take care that any annual or quarterly payments, such as membership fees, vehicle licence fees, service costs, etc. are accounted for in your monthly budget. If you are making cash withdrawals and payments, keep the slips and document the expenses.

Allow for rising interest rates

In the current rising interest rate cycle, it is vital to ensure that your monthly budgeted credit repayments reflect the higher instalments applicable. If you are currently planning to buy a house or a car, it is important to consider the affordability of the finance while bearing in mind the interest rate hikes predicted for the foreseeable future.

Deducting all the expenses that you have recorded from your monthly income will give you a clear indication of how much money should be left at the end of the month or by how much you are currently overspending.

Analyse your expenditure

Following the above you need to categorise your expenses into those that are essential, such as your bond repayments, and those that are luxuries or “nice-to-haves,” such as eating out or magazine subscriptions. In tough economic times, it is important to sacrifice unnecessary spending in favour of paying off debt or increasing your savings. For example, if you are buying lunch at work, you will be surprised at how much you can save by bringing lunch from home.

Pay off expensive debt

The money you are saving by eliminating luxury spending can be used to pay off debt. Start with the smallest account you have, such as a retail store card, and work your way up the list. The instalment you are no longer paying on debt you have cleared can be added to settling the next debt item.

Consolidate your debt

Consolidating your debt by, for example, using the equity in your home loan to pay off the smaller debts that attract higher interest rates, such as personal loans, store or credit cards, is another way to free up some cash to pay other debts or to increase your savings. The risk with debt consolidation is that, if you do not change your spending habits, you will end up with increased debt that needs to be serviced, with no additional avenues to settling the debt.

Fixing your interest rate

You should also consider the possible benefits of changing from fixed to variable interest rates on agreements such as your mortgage bond and vehicle financing, in anticipation of possible interest rate hikes.

Seek advice

An important aspect of finalising your financial plan is to seek the advice of a registered financial planner to ensure that your monthly budget makes sufficient provision for unforeseen events as well your financial well-being once you retire. Ensure that your financial plan is updated on a regular basis to accommodate your and your family’s changing financial needs.

The information contained on this website (or in this article) is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/advisor to take into account your particular investment objectives, financial situation and individual needs.