Managing household expenses in tough economic times
By Wouter Fourie (CFP®)
Director of Ascor® Independent Wealth Managers and the Financial Planning Institute of SA (FPI). Award-winning certified financial planner of the year 2015/16
During economic hardship, try to limit your expenses and exposure to debt as much as possible.
These days it is not strange to pay a couple of hundred rand for a simple bag of groceries. The rand has weakened against the major currencies and there is a general expectation that this will continue for the next two to three years.
One of the expectations is that the prime interest rate is expected to increase by 2%-3% over the course of the next two years. We may also see an increase in personal and business tax, which will further strain our disposable income and drive up living costs.
During tough economic times, you should try to limit your exposure to debt as much as possible. Because debt rises with higher interest rates and it grows with interest every month, it magnifies the effect of negative economic news on your pocket.
Set yourself a target of when you want to be debt free and put any disposable income towards that goal. Rank your debts based on their interest rate and try to pay off the most expensive debt first. Don’t fall behind on any debt payments, but put any extra income towards the most expensive debt.
While you are paying off your debt, start saving for your retirement. Consider what the current economic climate would do to you if you were living on a small pension every month. So start saving a minimum payment every month towards your retirement.
Once you have done these two steps, you can build up an emergency fund of 2-3 months of your monthly expenses. Use the money that you have been spending on your debt before you became debt free towards building up this emergency fund.
An emergency fund gives you a welcome cushion if living expenses rise beyond your salary or you have sudden large and unexpected expenses, such as car repairs or medical bills.
Keep in mind that you have two types of costs: Fixed costs are costs that you have to pay, because you made an agreement with someone else or an external party. It includes those costs that are deducted by monthly debit order, such as your car or house payment.
Variable costs are the costs that you have control over. This could include movies, food and other costs. You can shop around for the best price for these expenses or you can decide, such as in the case of the movie, to postpone or cancel it to save money.
If you have large household expenses and very little room for luxuries in your monthly budget, then you should seriously consider holding off on unnecessary expenses. A new car or other luxury items might not be the best investment now, especially when interest rates are set to go up.
After paying your debt, try to eliminate non-essential expenses. To clearly identify non-essential expenses, track your monthly expenses closely and compare it against your budget. Use this as a guideline for identifying expenses that are not necessary and that you can stop making.
You should also consider enlisting the help of a CERTIFIED FINANCIAL PLANNER ® that is accredited by the Financial Planning Institute (FPI). There are many people in the market who are salespeople and they will give you advice that suits their pocket or that are really a sales pitch framed as financial advice.