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Steven Barker | Managing financial obligations, goals amid rising inflation, interest rates

Steven Barker |  Managing financial obligations, goals amid rising inflation, interest rates
22-08-22 / Tau kaVodloza

Steven Barker | Managing financial obligations, goals amid rising inflation, interest rates

The environment in which South Africans are having to manage their finances continues to get harder, with interest rate and general cost of living increasing sharply. There are several well-ventilated reasons for this. Other than the cyclical nature of markets, various exogenous shocks, ignited by the war in Ukraine, have placed significant inflationary pressure of fuel, food, and other commodities.

The knock-on effect for consumers has been significant, with households having to deal with rapid inflation creep on the necessities they rely and depend on. South African inflation surged to a 13-year high in June of 7.4%, up 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's important to note however that South Africa's official inflation rate impacts every household differently. As such, consumers should understand where the increases are in their own inflation baskets to try and soften the impact inflation has on their standard of living.  An individual inflation basket represents the core goods and services that one usually spends their money on. For example, if the cost of telecommunication is a big inflation driver in your basket, the best course of action is to review your plans and contracts, shop around and find the best price for this service.

Many countries around the globe have experienced rising inflation in recent months, prompting monetary authorities to hike interest rates as they look to get a handle on and stamp out potential rampant inflation. At the last monetary policy meeting the SA Reserve Bank pushed the country's repo rate sharply up, by 75 basis points, the steepest hike since September 2002. This will place even more financial pressure on consumers, specifically those who are borrowing money, as it becomes even more expensive to service debt payments.

Times are certainly tough, and many consumers may have little choice other than to take on debt to survive. While debt may be the first lever that you can think to pull to keep your head above water, rather take a moment to stop and think, considering we are in a rising interest rate cycle, about some of the other levers you could pull first like finding other sources of income or ways to cut back on your expenses. 

Of course, you may not necessarily have control over your income, but there are ways of potentially supplementing your salary with a side hustle. The new digital environment has made it easier to start up a business and to reach customers, and a side hustle could be turned into a main hustle that pays your bills, employs people and contributes to growing the economy.  

At the same time, take a good look at your expenses to see where you could potentially cut back and save. While that daily takeaway coffee may not seem like it's hitting your wallet too hard, think again. Small purchases, made consistently, end up adding up. Think about it: The average cost of a cappuccino sits at around R25, and if you're in the habit of buying one daily during the week, it can end up costing you about R700 monthly and R6 000 annually. Limiting transport costs here possible, maximising rewards and loyalty points and being energy conscious at home can also help to create some breathing room in your budget. 

It is often said that every financial challenge presents an opportunity. Now is the perfect opportunity to get on top of your finances; draw up a budget, get a clear understanding of what you are spending on to identify what is potentially luxury and unnecessary spending. One of the big mistakes that people make when conducting this exercise is making the decision to cancel health, vehicle, home, or life insurance cover. While this may create some cash flow relief in the short term, it could leave you and your family significantly worse off financially should something unexpected happen. 

Once you've exhausted those options, and still require additional funds, then consider debt options. The first course of action is to think about what the debt will be used for. If you take out debt to cover daily expenses, you may find yourself running into some trouble as interest rates are only expected to climb higher. For that reason, it becomes critical to avoid becoming stuck in a cycle where you are relying on credit to make ends meet. Never fund a short-term need with long-term lending, as it is going to cost you much more later down the line, eroding your ability to save and invest. In this instance, credit cards that offer interest free periods can be a good vehicle to utilise, if you settle that debt within the interest-free period.

If utilised correctly, and manage with discipline, debt can be a useful wealth creation tool. The rising interest rate cycle shouldn't deter those who are looking to take out long-term lending to fund the purchase of their first home or to start a business. If for example you are thinking about buying property in the current climate, understand your capacity for increasing costs. While you may be able to afford at the current interest rate, think about whether you could still afford it if interest rates were to go up again

Don't forget that with these purchases comes additional expenses like vehicle or home insurance, the cost of which will also start going up as inflation trends upwards and should be built into your budget. Consumers don't want to find themselves in a position where they forego payments on their insurance, or any commitments for that matter, as skipping payments can negatively impact your credit score and ability to secure financing at a good rate in the future.   

If you are in financial distress, you've exhausted all options available to you and you're still not coping, it's very important to first acknowledge your position. Thereafter, approach your financial institution for assistance. The earlier you do this, the sooner arrangements can be made by both parties. The longer it is ignored, the harder it becomes to unwind from the position that you've placed yourself in.

Lastly, don't despair. Almost everyone, in South Africa and across the globe, is feeling similar pressures. In these times, find a way to reward yourself and your family. Most people are working incredibly hard to try and provide the best for themselves, their loved ones and communities. This makes it important to do something nice, which doesn't necessarily come at a cost. Maybe it's spending quality time together as a family, or enjoying a small luxury, especially after meeting your goals and financial obligations. Discipline that is rewarded only serves as motivation and treating yourself every now and then will go a long way to keeping good spirits and morale in times of difficulty.

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