Don’t get caught short

Staff Reporter

This article is a printout from iafrica.com
Copyright © 2000 iafrica.com*, a division of Metropolis*

Wed, 07 Dec 2005

With the rapid drop in interest rates over the past couple of years, many South Africans have felt this is a good time to improve their standard of living, taking advantage of the lower interest rates to buy better houses, cars and other consumer goods. In fact, consumer spending has been at consistently high levels over this period, with a large slice of it taking place on credit.

However, the Reserve Bank reviews interest rates every quarter and rates can change at very short notice. As a result, it is possible that South African consumers will need to become more realistic about their spending to ensure that they are not caught short with expenses that exceed their income.

Have room to manouevre

Gys Woest, Chief Financial Officer of FNB Card says: “If you are financing a home with a mortgage of R800 000, a car of R120 000, a credit card of R20 000 and store credit worth R10 000, then a one percent increase in interest rates would take an extra R603.13 out of your monthly budget.

“If interest rates were to increase by a further one percent this would suddenly jump to R1221.47 out of your monthly budget and, of course, the picture gets worse with each increase after that. As a result, it is advisable to have as much flexibility as possible built into your financial plan.”

‘Stress test’ your finances

First National Bank (FNB) advises consumers to use this opportunity ahead of the holiday period to re-assess their debt position.

“This is a good time to ‘stress test’ your financial position and ensure you’ll be able to withstand any potential rate hikes in the New Year. Before you decide how to spend your annual bonus, work out a realistic budget that takes into consideration some small rate hikes and check that you’ll still be able to manage your bills comfortably. If not, now is the time to start some serious planning,” says Woest.

“The sooner you realise that you are over-indebted, the more options you will have available to you to remedy the situation,” explains Woest.

Some tips:

• Stop spending on anything that is not essential
• Re-assess your assets and investments. Try to reduce your overall debt by selling off those that aren’t performing well, for example, a rental property where the cost of servicing your mortgage is more than the profit that you receive after tax.
• Consider consolidating your debt into one product that will offer you a better interest rate. You could try to increase the repayment period to lessen the immediate burden.
• Rather than spending your 13th cheque, consider using it to pay off debts or put it aside to use in an emergency if needed.
• Also remember that, just because this is the ‘season of giving’, you don’t need to get yourself into debt to show your family and friends that you care. By applying some financial savvy and common sense to your choices you’ll make your money go a lot further and ensure that you don’t overburden yourself with heavy repayments in the coming months.

“If you feel that you are drowning in debt, speak to your bank as soon as possible to structure a payment plan to repay your debts. Your bank will be more willing to assist when you’ve acknowledged there’s a problem than if you keep trying to run away from the debt. The quicker you take control of this situation, the sooner you’ll be able to fix your debt worries,” concludes Woest.