July 2008

How to get through tough economic times

Times are great if you're out of debt and in with savings. But when the interest rate is rising and you have a home loan, a car loan, and any other debt, you're bound to feel the pinch on your monthly budget. Not only do we have increased interest rates to deal with, but this year South Africans find themselves battered by soaring petrol prices and food prices – a heavy combination for the average household. How can you get through this tight economic period with both your sense of humour and your bank balance intact?

First of all, it may help to know that South Africans are not alone in the financial crunch. It's pretty much a worldwide phenomenon. If the oil price goes up, it goes up everywhere – every single person around the world who uses petrol, diesel or any oil-based product will feel the impact on their pocket.

Next, in terms of the global economy, the United States is in the midst of a significant economic slump – and that generally has a knock-on effect to the rest of the world. American consumers are hard-hit, and their economy could be heading for a recession.

In Japan, inflation reached a ten-year high in May, driven by food and fuel prices. The French are in the same position, with high inflation, and spare a thought for Australians who not only have to fork out more for a tank of petrol, but whose food prices, especially fruit and vegetables, have risen sharply due to the severe drought in the country.

So South Africans are not the only ones tightening their belts. But unfortunately we are usually ill-prepared for tough times. Unlike Japan, where a savings culture dominates (the Japanese are known to save up to 20% of their monthly income), and France, where the government is creating fiscal interventions to help ease the load for consumers, South Africans have neither a strong savings history nor a whole lot of government interventions to make things easier for us.

Here's what we are dealing with:

• Since 2006, interest rates have gone up nine times by a cumulative 4,5 percentage points (and it's possible there will be another increase in August).
• Our inflation rate currently sits at 11,7%. This figure is from May 2008 and is based on what is known as "Headline Consumer Prices", a fairly comprehensive measure of the cost of living. A year ago, in May 2007, our inflation rate was 6,3%.
• House prices are decreasing – research shows that property values have dropped 11,3% in a year.

Here's what to do

How do you hold your head above water? The best way through is to have a plan of action, in which you:

• Create your own debt management programme (essential in the face of rising interest rates).
• Get the family involved. This is a great time to teach children that money does not grow on trees.
• Reassess your budget, actively looking for ways to cut costs (we'll give you some tips).
• Play a part as a member of the community. No man is an island. The philosophy of "Each man for himself" doesn't really work when lift clubs are such an obvious solution to cutting your transport costs, and when we can club together to buy groceries in bulk for cheaper.
• Keep focused on your overall financial plan. It is possible to stick to your goals, even at a time like this, if you are prepared to be disciplined.

First, a debt management programme. We'll look at this in the next issue, starting with the mortgage on your most valuable asset: your house.

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