A formula to help you stretch your rands

The cost of inflation – are we working to live, or living to work? The price of oil has been rising daily and is currently above R915 a barrel.

Who could have predicted that it would rise like this? The effect on the cost of living through a rise in oil prices that feeds through to food is a nightmare.

The cost of debt is up by 43 percent in only 20 months. People who are servicing debt are finding it difficult to keep up with payments. One need only peruse the auction pages showing repossessions of cars and homes in the daily papers to understand the depth of the crisis.

But it is not all doom and gloom.

Sentiment in the South African marketplace is still buoyant as a result of a number of positive influences and factors throughout 2007.

Prospects going forward to 2010 and beyond are good and this adds to the optimistic outlook for the future as long as you can hold your own.

I would like to propose a method to help you understand the effects of inflation and how to budget appropriately.

It’s called the rule of 72. This illustrates what goods you will be able to buy if inflation continues at this rate in the years ahead.

Divide the rate of inflation into 72. Assuming inflation is 9 percent, therefore 72/9 > 8. This means that in 8 years time if you are spending R1000 on food today – you will either only be able to buy R500 worth of goods or you will have to pay R2000 for the same basket.

With high inflation, fuel, and food prices out of control and interest rates still rising, it is critical to evaluate your current situation.

You can never have too much savings. Bear in mind when doing this exercise that there are a few gloomy clouds on the horizon:

• Another interest rate increase is predicted.
• Education inflation is on the increase, and parents are finding it more difficult to give their children a private education .
• Medical costs have increased by about 9 percent and 13 percent. People need private cover because of poor state healthcare.
• The assessment rates have also been increased, albeit according to a new system. However, many people now find that their increased rates and taxes are considerably more than they used to pay previously.
• Eskom and the cost of electricity. Quite a shock. The proposed 53 percent increase in electricity tariffs and its knock-on effects could be crippling, with talk of strike action if the proposal goes forward.
• Food inflation. We are nearing a point where the cost of staples like bread and milk are teetering on the brink of being classified as luxury items!

My advice is to do a careful budget to ensure that the money coming in is more than the amount you are paying out.