How to re­ces­sion-proof your fi­nances

With the econ­omy’s growth prospects in the dol­drums, there are still strate­gies South Africans can use to shield their fi­nances

CityPress - - TENDERS - ANGELIQUE RUZICKA busi­ness@city­press.co.za

With ratings agencies Fitch and Stan­dard & Poor’s down­grad­ing South Africa’s credit to “junk” sta­tus, the sack­ing of Pravin Gord­han as fi­nance min­is­ter and the econ­omy producing neg­a­tive growth for two con­sec­u­tive quar­ters, it’s hardly sur­pris­ing that we are now go­ing through a tech­ni­cal re­ces­sion.

A tech­ni­cal re­ces­sion is a tough spot to get out of and, as such, ex­perts aren’t will­ing to pre­dict how long it will last. John Loos, house­hold and property sec­tor strate­gist at FNB, points out that we’ve been through this super cy­cle of stag­na­tion be­fore – in the 1990s and in 2007/2008 – and that these lows can last as long as a decade. What’s more, South Africa has run out of “stimulus am­mu­ni­tion”. “We’ve had a con­sumer and hous­ing boom which re­sulted in the house­hold sec­tor be­com­ing more in­debted. The other stimulus be­fore that was the end of boy­cotts and sanc­tions and nor­mal­is­ing of trade with the world, which sup­ported eco­nomic growth for a while. The third stimulus came from gov­ern­ment crank­ing up its debt to GDP ra­tio and that kept eco­nomic growth go­ing for a while,” said Loos.

We’re fac­ing struc­tural im­ped­i­ments to our growth and a large part of that is down to the lack of jobs. “We don’t com­pete well on labour re­la­tions glob­ally, a huge part of the pop­u­la­tion is not em­ploy­able and the ba­sic ed­u­ca­tion sys­tem is not chang­ing that in a hurry. We have var­i­ous struc­tural con­straints and the so­lu­tions to those prob­lems are long term, not short term. So it’s dif­fi­cult to say that next year will be an up­swing. We do have up­swings from time to time but noth­ing ob­vi­ous that will take us out of this stag­na­tion,” adds Loos.

With South Africa’s growth prospects in the dol­drums and the po­ten­tial for interest rates in­creas­ing, what should we, as con­sumers, be do­ing to shield our­selves and our fi­nances as we head down this gloomy road?

In­vest in your­self through up­skilling While jobs are few and far be­tween, the key is to stay ahead of the pack and keep your­self in­formed and up to date with the lat­est tech­no­log­i­cal ad­vances. This will help to en­sure your job se­cu­rity. “A small group of high-in­come peo­ple are tak­ing a big­ger per­cent­age of the in­come pie as more jobs get au­to­mated and the mid­dle class can’t pro­vide as much value as they used to. So, for all of us, up­skilling is cru­cial in the work­place, oth­er­wise you’ll get left behind,” says Loos.

In­vest in the right kind of property for your budget Buy­ing a property is ex­pen­sive, but so is main­tain­ing it. While it might be ap­peal­ing to buy that lux­ury pad with the ex­pan­sive gar­den and pool, you may be head­ing into the red with all the up­keep and main­te­nance that you have to do. “Big­ger houses mean more run­ning costs. The other big item is your mo­tor ve­hi­cle. Those two items drive your per­sonal fi­nan­cial well-being to a great ex­tent,” says Loos. If you are able to down­size your car and your house, you’ll go a long way to­wards sav­ing money and rid­ing out this down­turn.”

Get rid of your debt “In 2008 when South Africa was in a re­ces­sion the peo­ple who lis­tened to the ad­vice on get­ting out of debt as quickly as pos­si­ble were able to ride the storm. Food, trans­port, all goes up and you’ll be able to field the in­crease in these costs and it will be a lot eas­ier. We must be mind­ful of how we use money. Start cut­ting out lux­ury ex­penses and start entertaining at home which is cheaper,” says Win­nie Kunene, money coach and trus­tee of the board of Truth About Money – a 1Life ini­tia­tive.

If you can’t get rid of your debt, at least con­trib­ute more to pay­ing it off sooner. “If you have a R1 mil­lion bond, you’ll pay around R10 552 a month. If you pay an ad­di­tional R500 per month into your bond, you will pay it off in 17 years in­stead of 20 years. The interest and pay­ments saved will amount to R233 500! This is in­vest­ing in your­self,” points out Floris Slab­bert, coun­try man­ager at Ec­spo­nent Fi­nan­cial Ser­vices.

Pro­tect your money – but not too much You could run for the rel­a­tive safety that cash, American dol­lars and gold could bring. Gold is a tra­di­tional hedge in times of cri­sis and if you in­vest your money in a high interest bank sav­ings ac­count it would be one of the least volatile ways of earn­ing re­turns. But Si­mon Shear, co-founder of fi­nance site My Trea­sury, warns that you may miss out: “The JSE has av­er­aged 15% an­nual re­turns over the last 20 years, but if you’d missed just 75 of the high­est trad­ing days over that pe­riod you would end up mak­ing noth­ing,” he says. So shield your money if you need to but don’t stick it all away in safe in­vest­ments.

Pi­eter Koeke­moer, head of Corona­tion’s per­sonal in­vest­ments busi­ness, says dur­ing eco­nomic tur­moil ac­tive man­agers may be prefer­able to pas­sive funds as man­aged funds ben­e­fit from stock pick­ing and hedg­ing strate­gies to out­per­form the market. While not ev­ery man­ager can achieve this, it makes sense to stick to a man­ager that has. “Out­per­for­mance of 2% to 3% on a base of 9% is a must-have: The dif­fer­ence be­tween 9% and 12%, com­pounded over years, can trans­form your re­tire­ment. Skill in de­liv­er­ing strong out­per­for­mance be­comes more valu­able (not less) in chal­leng­ing times. In­vest­ing with man­agers that have a demon­stra­ble track-record of suc­cess­ful as­set al­lo­ca­tion will be­come even more im­por­tant.”

Com­par­ing prices If you do have to spend money, the con­sen­sus is that you should be care­ful what you spend it on. Gone are the days when you could af­ford to be loyal to one brand or service. “To use a travel ex­am­ple, you might be in the habit of al­ways go­ing to one air­line, or one hotel, that you know well. But have you shopped around to see if there are equally good or better op­tions out there that cost less? The same is true for things such as insurance. It def­i­nitely pays to com­pare,” says Pi­eter Richards, chief fi­nan­cial of­fi­cer of low-cost air­line FlySafair.

Don’t for­get that you could be in­sured When you bor­row money you’re of­ten charged for “credit life insurance”, which cov­ers you in the event that you are un­able to meet re­pay­ment com­mit­ments. This cover can cost as much as R57 per month for ev­ery R1 000 spent, so don’t for­get that you have this insurance as it can pro­vide a vi­tal life­line. Sasha Knott, CEO of credit life insurance com­pany Switch2, says: “The­o­ret­i­cally, credit life insurance poli­cies pay out in the event of death, dis­abil­ity, ter­mi­nal ill­ness, un­em­ploy­ment or other in­sur­able risks that pre­vent cus­tomers from earn­ing money or pay­ing their com­mit­ted monthly in­stal­ments in terms of the credit agree­ment.

“How­ever, be­cause many con­sumers do not un­der­stand what credit life insurance is, there are too many in­stances where they can­not pay their monthly ac­counts, but do not claim from their poli­cies. This leads to goods being re­pos­sessed and con­sumers re­ceiv­ing a black mark against them on their credit records in sit­u­a­tions where it should never have hap­pened,” she says.

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