/ 17 January 2023

HOW TO: Manage your finances in 2023

The cost of living is not showing signs of moderating in the first quarter of this year and consumers need to be money savvy to stay afloat.

With the latest inflation numbers due out on Wednesday, economists have warned South Africans to brace themselves for another difficult year, which is likely to see the price of  food and fuel increasing, in addition to electricity costs.

Interest rates are set to rise further, while incomes remain stagnant, and therefore managing finances well this year has become imperative.  

According to the Household Affordability Index, in December the cost of the average household food basket increased by R17.21 to R4 853.18 compared with November. The index looks at a family of seven members — the average low-income household size. On a year-on-year basis, the cost of the average household food basket increased by R577.24 or 13.5% in December.

Budget and budget reconciliation will therefore make your life easier and give you a clear outline of what you are spending your money on. 

Budget and budget reconciliation 

It is important to audit your expenses; this way you can make changes easily once you have reconciled your budget and resolved any discrepancies. The cost of living is rising and it is important to factor that into your budget. 

Just last week the National Energy Regulator of South Africa agreed to an 18.65% increase in electricity tariffs, effective from 1 April this year. Power utility Eskom had asked for a 32% increase for the 2023/24 year, citing rising diesel costs. 

When budgeting your expenses for the month, the amount you put aside for electricity needs to increase by 18.65% from April. You may need to reduce other expenses, such as buying takeaways or cancelling a subscription for a streaming service to accommodate this.

By following a set budget, you will be able to gauge your spending behaviour and eliminate unnecessary expenses. Most banking apps show you what you spend your money on each month and this will help you determine where to limit spending. 

After your budget is set, you need to be covered, should a financial emergency arise. This is where emergency funds come in. 

Set up or replenish your emergency fund 

Unexpected expenses affected many people’s budgets in 2022 and some may have had to take money from their emergency funds. But now you have to replenish it — or set up one, if you don’t already have one.

An emergency fund, according to Investopedia, helps you minimise debt should you encounter a financial crisis. With the repo rate — which affects the cost of borrowing — currently at 7%, loans and credit cards will not be needed if you have this financial safety net

It is for future mishaps and unexpected expenses and it comes in handy should you lose your job. However, an emergency fund can also be used to replace your car tyre after you drive into one of South Africa’s notorious potholes. Roads agency Sanral said last year that the country had an estimated 25 million potholes. The emergency money could also be used for a medical procedure that is not covered by your medical aid (you probably need gap cover for this) or to fix your broken gas stove. 

An emergency fund should ideally cover three to six months’ worth of expenses. According to Expatistan, a platform that compares the cost of living between cities around the world, a South African family of four has estimated monthly costs of R42 514. This then means, for that family, an ideal emergency fund for six months would be R255 084. 

Setting up your emergency fund is not as daunting as it sounds. A starting point would be to find out how much you can actually save with some wiggle room afterwards. This is done first by taking stock of all your living expenses and seeing what amount can be set aside for a monthly contribution to your emergency fund.

The next step is to stow your monthly contributions in a savings account separate from your other bank accounts. This type of account is best as it allows you to get your money at relatively short notice, so you can cover those emergencies. 

The trick with this savings account is that you must be able to access it quickly but it must not be so convenient that you dip into it for spinach at the grocery store during Janu-worry. 

This large sum of money cannot be in a normal savings account because you want the highest possible interest rate so that the money will grow. You’ll need a high-yield savings account, according to African Bank. A high-interest savings account can earn interest that is higher than the inflation rate, according to rateweb.co.za, a personal finance platform. 

Finally, you need to automate your contributions or create a debit order so it is easier to commit to your monthly contributions. 

By creating your emergency fund, you ensure that your financial goals are not derailed by unexpected, urgent expenses. 

Limit major expenses

Economists have said the South African Reserve Bank will probably hike interest rates again at its first meeting for 2023 later this month. This means that big purchases, such as houses and cars, will be costly and so will the loan repayments. 

A car has become a necessity in South Africa but the cost of running one is high. Carpooling or taking public transport might be one way to reduce this expense, although the latter is often not reliable. 

Downsizing your accommodation, for example, moving from a two-bedroom apartment to a one-bed, might also help you stay afloat until the situation normalises. 

For those with a bond, it may be beneficial to rent out a spare bedroom for additional income which could go towards paying off your bond.