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The economy and your bank balance: Where to from here?
Date: 01 Feb 2009
The repo rate came down one percentage point last month, the petrol price is holding steady for now, and some major food retailers have been or are negotiating with suppliers to bring food prices down on at least a few key items.
We should be smiling and spending. This, after all, should be a rosier economic picture than six months ago. But many households have adopted what is called "recessionary spending" - we are tightening our belts.
Although the economic picture might seem to have grown a couple of pretty petals, it'’s not enough - fundamentally we're still in for a rough ride.
The number of South African mortgage bondholders in "severe stress" (bondholders who are more than four months in arrears on their repayments) increased to more than 35 000 in the fourth quarter of last year from 8000 in the second quarter. Even though the interest rate has come down, it is still comparatively high and this puts pressure on bondholders.
As announced in the recent Budget speech, there will be a fuel price levy increase on the 1st of April, so filling our tanks will squeeze our purses yet again. Add to this the weakness of the rand, a flat housing and vehicle sales market (two fair indicators of an economy's strength or weakness), and political uncertainty as the 2009 elections loom, it's fairly clear that South Africa's economy is slow and sticky and we are feeling the effects.
Do you feel like you have your back to the wall? Then our advice at Money Matters is that while you can't control outside market forces, you can control the way you spend your money. Now is the time proactively to focus on your own finances. And it starts with generating more money from your budget.
To do so, our basic suggestions from previous Money Matters remain the same: use lift clubs, take your own lunch to work, cut down on entertainment, to name but a few.
If after the tax cuts announced in the new Budget, the savings you instituted in your own household and the relief of a lower interest rate, you find yourself with extra cash in your budget, please - save it, don't spend!
One of the best forms of saving is paying off your debt as quickly as you can. Settle your store charge cards, tackle your car loan and pay extra into your bond every month. And then, don't ever get into debt again. Tough economic times (which come and go repeatedly over the years) are not quite as scary if you are debt-free.
If you are currently debt-free, what should you do with the extra money you squeeze out of your budget every month? Is it worth putting it into a savings account?
Two factors are very important in selecting a savings account: bank charges, and the interest that will be paid on your money. Balancing these two factors is critical! Here's an example:
Say you deposit R1000 in a savings account. You are told that the interest rate applicable to this account is 8%, paid once a year. So, at the end of the year your savings are worth R1080. But the bank charge on this account is 0,6% of your balance. So, R64,80 comes off your account. You are left with the grand total of R1015.20 - which means your precious savings have attracted interest of approximately 1.5% - way below the rate of inflation!
If you are going to make money from money, the net return (i.e. after costs and income tax) on your savings and investments must beat the rate of inflation. So do your homework very carefully if you want to use a savings vehicle.
Compare banks' costs and the interest rates they are offering - check out their websites AND phone them to double-check the information.
Here are some questions to ask:
If you have other tips to save money on your monthly budget, please send them to us at jacques.skinner@sanlam.co.za, and we'll include them in a future issue of Money Matters.
Next issue: other savings and investment vehicles to consider
Click here for previous issues of Money Matters.
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