Make 2014 your best year so far by committing to improve your financial security: paying off your debt and saving.
With 2013 in hindsight, individuals have already begun to plan their New Year resolutions, and something that should be a priority is ensuring financial security for your future. “A New Year brings various challenges, often involving unexpected costs, so putting a financial plan in place will increase financial confidence by ensuring that individuals are aware of how much is needed to meet their future financial goals, as well as whether they are actually on track to reaching these goals,” says Dave Mohr, Chief Investment Strategist for Old Mutual Wealth, an advice-led, wealth management business.
It’s a common fact that during the festive period, savings and paying off debt is often neglected. The festive season is synonymous with frivolous spending and increased debt. While it is easy to be swept up in the hype of holiday spending, a reckless approach to expenditure will also have a disastrous effect on an individual’s savings. Unfortunately, during this holiday period, many South Africans are likely to increase credit limits, pushing debt levels further into the red.
Mohr points to previous Consumer Credit Market Reports by the National Credit Regulator (NCR), which reveal a worrying spike in new credit grants leading up to and during the holiday period. The total value of new credit granted during the fourth quarter of 2012 increased by 9.21% (quarter-on-quarter). “This highlights how consumers ramp up borrowing ahead of the festive season. It also means that consumers are starting the year on the back foot. We witnessed the same thing in previous years.”
The latest Credit Bureau Monitor, also from the NCR, shows the same problem from a different angle. “The percentage of consumers with impaired credit records, meaning that they were more than three months in arrears on their repayments, has been rising steadily. At the end of September 2013, 48% of consumers had impaired records.”
Furthermore, the FNB / Bureau for Economic Research’s consumer confidence index for the fourth quarter of 2013, which revealed that household finances are under significant pressure and that a slowdown in unsecured lending has eroded consumers’ ability to spend. “Households in the lower income brackets have a particularly dim view of their own financial position and if one considers that many of these households participated in the massive boom in unsecured lending, this reading makes sense. These households are now paying off these loans and, in most instances, are unable to borrow further,” adds Mohr.
While it may be tempting to utilise credit to maximise the holiday experience, serious consideration needs to be given to a time when there is no longer a regular income to fund both lifestyle and debt, such as during retirement.
“It is a known fact that many South African companies have shifted from defined benefit to defined contribution pension schemes, meaning that the onus rests on the individual to ensure that they have saved enough and that they are making sufficient retirement provision. The current Government pension funding available to people over the age of 60 is only R1 270 per month, which is not remotely enough to sustain a comfortable retirement for most retirees.
“Each individual has become accustomed to a specific lifestyle throughout their working life and without sufficient savings and wise investment decisions, the likelihood of having to downgrade your life significantly after retirement is extremely high.”
South Africa’s current ratio of household debt to disposable income remains at an elevated level and reflects a poor savings environment for individuals.
“The cost of servicing debt is currently 7.7% of income – i.e. almost 8 cents for every rand of after-tax income – which is low due to multi-decade low interest rates. However, should interest rates rise, the cost of servicing this debt will increase significantly. This is something that consumers need to bear in mind, especially younger individuals who have not yet experienced a full interest rate cycle.
“Personal saving, expressed as a percentage of household disposable income, is -0.1% according to the latest South African Reserve Bank data. This has declined steadily over the past two decades.”
“Another key contributor to poor savings is ignorance around how much needs to be saved to secure that pictured retirement, or having unrealistic expectations of how much an investment will grow before retirement.”
Unfortunately many individuals are simply unwilling to save more simply due to the fact that the desire for instant gratification is too strong. “A lot of people receive bonuses or 13th cheques this time of year, but spend it instead of investing at least a portion. Often they argue that there is no point in making small investments.
In conclusion, having a financial plan in place in the new year(s) is the first step towards financial security and confidence. The power of compounding means that even a small investment now can have a big impact later.
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