Today the South African Reserve Bank Monetary Policy Committee (MPC) again increased interest rates with another 50 basis points impacting interest rates, debt, budget, finance
Lets unpack the real cost of debt, and some tips to help you.
The interest rate hike was expected by most economists and banks alike. This means that Interest rate hikes have gone up since the hike cycle started in November 2021 to a total of 475 basis points. Interest rates are the highest its been in 13 years, with the last time being from the global financial crisis.
Reading an article published today by Businesstech, the rate hike comes from high CPI as well as sluggish economic growth due to severe loadshedding.
Mortgages:
When looking at some mortgages and rough calculations, for homeowners, it means that your 20 year mortgage increase based on March interest of 11.25% and now May at 11.75% the below summaries would be as follows:
R850k Bond your premium would go up with R293 per month
R1'5 million Bond your premium would go up with R517 per month
R3 million Bond your premium would go up with R517 per month
Vehicles:
When looking at vehicle finance arrangements, the interest rate increase adds further pressure on the consumer. Lets look at it, based on various vehicle values, but using the interest rate a few months ago of 10.5% against the current 11.75% financed over a regular term of 5 years without any balloon payment or deposit.
R200k Vehicle installment will go up with R125.97 per month
R500k Vehicle installment will go up with R312.97 per month
R1 mil Vehicle installment will go up with R625.18 per month
When one starts adding up the increases on your finance arrangements, you can quickly see the snowball affect it has on ones financial position.
Here are some tips to help you
Tip #1 - Budget, Budget and Budget
The key to unlocking value is to have an accurate budget of what your income and expenses are. This allows you to stay in the drivers seat with regards to your finances and controlling where your hard earned income is going.
Tip #2 - Credit cards, overdrafts and clothing accounts
These debts usually charge a very high interest rates. In our digital society, its hard to not have a form of credit card as to do online bookings to purchases, but we have seen it where some consumers have credit card facilities totaling over R400'000 but earning R100'000 per month. This is absurd to say the least!
Credit Card:
Your credit card should total about 50% of your gross income (be conservative here). Yes you will be able to better manage a lower facility than one more than your income.
If you have a credit card that has a very high limit, then you need to systematically start reducing it if you haven't done so already. This means that every month, you need to call the financial institution and ask them to reduce your overall limit with a set amount (say 50% of the available balance). This will give you some flexibility and also reduce the overall limit.
Overdraft:
Why rob Peter to pay Paul? If you're living in overdraft each month, that's exactly what you are doing. No need for this at all.
If you are in overdraft, then I suggest that once you have reduced the credit card like explained above, then only do you start with the overdraft, perhaps doing the same as explained therein.
Store Accounts:
There's a saying that goes which my parents always taught me, "If you cant buy it 2 times over with cash, then you cant afford it." And those words ring so true, because why purchase an item which is financed over a 24 month term, and the institution charges between 27 to 37% interest. This means that that R10'000 item ends up costing over R16'000.
If you have these, then this should be the first thing you try and close due to their interest charged. If you have multiple accounts, then its advised to start paying the one with the lowest outstanding balance, then once closed cut up the card and close it off. Then focus on the next one, and so forth.
Tip #3 - Take Responsibility and ownership
If you are in a difficult position at the moment with the high cost of living and rising debt levels, you need to sit down, start with your budget, look at your debts and be real with yourself. Understand how you got to this position and take action.
This means that you might have to stop going out every weekend and trying to keep up with the social media trends which is ending up costing you a bit.
Buckle up for the next few months, and focus on debt reduction. Remember that this can be done, but you are the only one that can make that decision.
Tip #4 - Rewards Cards
With so many rewards cards out there from various premium outlets, when you purchase food and other items, you are rewarded. Today I actually took a walk into Woollies and got my very first Cash Rewards card.
You can also look at what your Current Wellness Program like Vitality or Momentum Insure offers you, because I know both have certain outlets and discounts to members. Engage in the program that you are paying for!
Tip #5 - Don't Cancel your Insurance
Your insurance is there to look after you and your loved ones should something unforeseen happen to you. I see it where people terminate their insurance, then Murphy comes knocking on their door with a potential claim, only to realize they do not have the relevant insurance. Part of being a responsible adult is to have insurance for you and your dependents.
Tip #6 - If you're saving - you're going to love this
High interest rates mean that the active savers are earning more in interest than the last 13 years, and that's reason for celebration. If you look at a Money Market Account all the way to a more specialist investment, any investment that has an interest component on Cash on it means that every interest rate increase has led to an increase in your return.
In Closing
Take an honest look at your financial picture. How healthy is it at the moment?
Need Help with where you are? Click here and reach out to me.
Stay safe South Africa, and make the right financial decisions.
Regards
Wallstreet Financial Services