Cape Town, January 13, 2010: There is no doubt that the global credit crunch and recession has impacted our lives. From widespread retrenchments to lower year-end bonuses (or none at all) and the ballooning cost of living, the 2009 financial crisis hit consumers and businesses hard. Yet, despite South Africa's R1,14 trillion debt bill and the 150 000 people expected to be applying for debt counselling by year-end, the recession has done something right because it made us rethink our financial priorities and encouraged us to clean up our spending habits.
In fact, its effect was so pronounced that 79% of South Africans surveyed in a recent global money and finance study (Synovate, August 2009) said they will do their best not to go back to spending as much as they used to before the economic downturn.
Carl Fischer, Capitec Bank Executive: Marketing and Corporate Affairs, says, "The grim reality of the recession hit home for many of us. To avoid making the same mistakes again, it is important that consumers become prudent spenders, that they learn to really stick to a budget and they take a long, hard look at the importance of living within their means".
Here Fischer rounds up some of the key learnings that the recession has taught us:
It's no secret: saving is a must
"If the recession has taught you only thing, it's to start saving. Even if it's just 10% of your monthly salary or overtime payment, this will help guard you against uncertain financial times," says Fischer. To make sure you receive the best interest rate on your savings, first identify what you want to save for, e.g. a holiday, study fees, a wedding or your retirement. Next, decide whether you want to open a flexible or fixed-term savings account. The former allows you immediate access to your funds, which is not ideal if you have a tendency to dip into your savings, while the latter allows you to set a specific time frame, e.g. 36 months.
You should not wait until your thirties or forties to start saving either. "In the recent Youth Prosperity Survey (Capitec Bank, August 2009) conducted among South African youth, 81% said they'd like to start saving when they earn a salary. However, it seems once that salary appears the plan to save goes out of the window."
The recession highlighted the necessity to work out a budget and stick to it. However, if you earn R5 000 a month and continue to spend R10 000 on credit, then you are living way beyond your means. "To work out your budget, you need to take an honest look at your monthly spending and calculate what your overheads are. This includes your rent or bond, electricity, transport costs, food, cell phone and insurance costs. Once you know the total of your must-pays, deduct it from your salary after tax. The figure may not be to your liking, but it is the reality. Learn to live within that budget or investigate new ways to earn extra money," suggests Fischer.
Involve the whole family
Money shouldn't be the responsibility of only one person in the family. Mom, dad and the kids all have a role to play in well-managed family finances. "Interestingly, in the Capitec Bank 2009 Youth Prosperity Survey, mothers were found to be the key source of financial education for SA's young people, regardless of demographics," says Fischer. As such, women should empower themselves with knowledge about saving, budgeting and responsible spending in order to teach their kids - not to mention themselves - about money. Young children too will benefit from positive money messages in the home.
Know your credit
South Africa has over R1 trillion worth of debt. While bonds make up the largest slice of the credit pie, store cards, credit cards and overdrafts account for 12%. "While the recession has raised our awareness about debt, it won't put an immediate stop to credit applications," says Fischer. He adds that before you sign on the dotted line in 2010, you need to know what credit is, how it is calculated and what the risks and pitfalls are. "Because credit cannot be compared like-with-like due to variances in interest rates, initiation fees, insurance costs and monthly admin costs, there is little transparency in the credit market. As such, you often have no idea what your monthly repayments consist of. This could lead to financial trouble."
Prioritise your debt
Despite the full implementation of the NCA since 2007 and the global credit crunch, the average person has four creditors. For people in debt counselling this number is as high as 13. To pay off all that debt, focus on the high-interest accounts first. "Credit cards, store cards and overdrafts often come with the highest repayment terms and are often the unnecessary expenditure in households," says Fischer. Start by setting aside R200 a month and use it to pay off your credit card, for example. This way, you will lower your debt and reduce the amount of interest you will accumulate over the long-term. "Paying off debt may seem arduous, but it is rewarding. Start out with a plan. Then follow through. After you have paid off the first few accounts, you'll quickly realise how much more money you have freed up to pay off other debt."
Be a deal hunter
Cash-strapped businesses mean that bargains and discounts are on the rise. So, instead of paying the first price you see, shop around and negotiate better deals before making a purchase. Fischer adds that when it comes to banking, you should compare costs for card, online and transfer transactions to ensure the best possible deal based on your needs. For insurance and investment options, talk to a financial advisor.
Knowledge is power
The recession has shown that finance is not just for people who "get numbers" or the man in the household. It is relevant for everyone - from the 80-year-old granny who fixes interest rates on her retirement plan and the 22-year-old student who wants to save for a gap year overseas to the mother of four looking to invest some inheritance. "Money is often perceived as intimidating and difficult to understand. As such, people tend to turn a blind eye to their finances and think it is someone else's job," says Fischer.
Distinguish between a want and a need
Everyone likes expensive things. But deciding which are wants and which are needs is vital if you are going to stay out of debt. "At the end of the day, it's up to you to decide what you can and can't afford. Giving in to peer pressure to have a flashy car or wear designer suits is not going to help you financially in the long run if it's all been ‘paid for' on credit. By all means, treat yourself once in a while, but learn to save for expensive things."
Be creative with your revenue streams
If you're not earning as much money as you'd like to, get real about it. Either upskill yourself by enrolling for extra training at work or by taking night classes so that you can apply for a better position or find a new way of making extra money, for example by working on weekends. "Like many things in life, you have to put in what you want to get out. Take action, make a plan and stick to it," concludes Fischer.
For more information on Capitec Bank visit www.capitecbank.co.za.