Belinda Beresford gives a few handy tips on how to survive in a wild financial world
You might have been getting by with a little help from your friendly bank manager, but now the world economy seems to be going for a walk on the wild side and the most immediate effect for many South Africans are the rising interest rates.
Good news if you’re one of that rare species of South African who has savings in a well-planned portfolio and no debts – in which case you shouldn’t be looking too smug, at least not in public.
Even if you are normally quite careful with a monthly budget, the events of the past few months are likely to have strained your planning. After all, a several hundred rand increase in your monthly housing loan payments is not something many people would have budgeted for. And it’s highly unlikely you’d have managed to wangle yourself a proportionate pay increase.
The first thing is Don’t Panic. Don’t sell your shares and unit trusts unless you have to or you’re convinced they’re only headed one way and it isn’t towards the skies. And even if you think company shares are on offer at once-in-a- lifetime prices, don’t borrow money to buy them.
Buying stocks has been called an educated gamble, but there’s no need to load the odds against yourself. After all, your investments would need to provide returns greater than the cost of borrowing the money – more than 20% – just to break even on the deal.
The obvious thing to do is to clear up debt, fast. Even if you don’t have the money to liquidate your debts immediately – and if you did it’s unlikely you’d have them in the first place – there are things you can do.
Faced with the formidable ogre of debt, you can dance like a butterfly and sting like a bee. But to survive, like Muhammad Ali, you also need an honest understanding of your own strengths and weaknesses.
If you have a tendency to be a victim of the “I wants” – as in “I want that antique tea set even though I’ve spent my salary already and it’s only the second of the month” -take steps to ensure you don’t give in.
Just as the prospect of summer sees a surge of people heading for gymnasiums, spurred on by the horrible image of themselves in a swimming costume, use the image of yourself on the bankruptcy lists as a spur to sort out your finances. After all, you’d like to be the one buying the Mercedes at the forced sale, not the one selling it.
If you’re lacking in self-control when it comes to money, use the bank to do it for you. Consider switching from an overdraft to a revolving credit facility which involves some financial discipline – you have to pay off a quarter of the amount owing to access the rest of the facility.
Or go the whole hog and switch to a personal loan – possibly more expensive in interest terms but at least the repayments are made as soon as your salary hits the bank.
If you’re confident of your self- control, there are a number of ways you can ease a financial straitjacket. Effective credit-card use can save you money. Using the interest-free period, as long as you pay it off, allows you to put extra money into paying off debts. This kind of financial juggling, however, requires an iron will – use the credit to pay off debts, not to incur more.
One obvious thing is to consolidate all your debt into your housing loan. This clinical-sounding operation involves using money from your access bond or adding to your mortgage and using the money to pay off all other short-term debt such as credit cards, store cards, overdrafts and personal loans.
The idea is that your housing loan has a lower interest rate than other forms of personal debt and so, at least in the short-term, you’ll pay less.
Banks are not always keen on that idea, however. Once the strain has eased and the demanding letters stop coming, it’s very easy for people to slip back into their old ways. And then you end up in even more trouble, because if you add to your housing loan and don’t pay it off, it’s going to be very expensive in the long run.
Banks are more likely to agree to this kind of consolidation if you’re ahead on your housing loan repayments, and if they think you are a fairly reliable spender. NBS, for example, has the NBS Actionbond, which allows clients to consolidate short-term debt into their home loan.
The bank says this is “a preferable option as the borrower will be repaying the debt at an interest rate lower than hire-purchase rates or the prime lending rate”. However, it warns that this facility “requires responsible financial management”.
Another thing to do is to talk to your bank about rescheduling your housing loan. The banks have a number of different ways of doing this. Generally they allow you to defer the increase in monthly payments for a certain period of time, after which you have to repay it over a predetermined length of time.
Then there are all the odd things that can save a little money here and there: checking that your car insurance has been adjusted for depreciation of the vehicle, shopping around for lower household premiums – and even for cheaper methods of banking.
If you’re a high net worth individual, you can benefit from the competition among banks to get the high-earning – and usually high-spending and high- borrowing – individuals. Private banks may offer you cheaper interest rates.
Another strategy is to increase your income: go for a better paying job. But bear in mind that in rocky financial circumstances many companies look to “headcount reduction” to save money. There is often a tendency for the last one in to be the first one out – so if you do change jobs, check what your situation would be if you’re made redundant.