Fi­nance – Sur­viv­ing the VAT in­crease

With the cost of con­sumer goods hav­ing gone up in re­cent months, South Africans are feel­ing the fi­nan­cial pinch. Here’s how you can re­duce the im­pact the VAT in­crease will have on your purse

True Love - - CONTENTS - By THANDOKAZI SEPAMLA

It’s been five months since the gov­ern­ment’s con­tro­ver­sial de­ci­sion to raise the Value Added Tax (VAT) rate to 15% was im­ple­mented to plug a R48 bil­lion short­fall in tax rev­enue col­lected in the pre­vi­ous fi­nan­cial year. While a hugely un­pop­u­lar de­ci­sion, the VAT in­crease was a nec­es­sary one, econ­o­mists say, in or­der to show in­ter­na­tional in­vestors that South Africa is com­mit­ted to re­duc­ing its dan­ger­ously high bud­get deficit in a bid to at­tract more in­vest­ment. This will help to boost SA’s frag­ile econ­omy.

It comes, how­ever, at a time when con­sumers are shoul­der­ing the bur­den of ris­ing global oil prices and a weaker rand that has led to four petrol price hikes in as many months! Faced with a bar­rage of ris­ing costs, con­sumers are be­ing forced to change their spend­ing habits and this is wit­nessed from the re­sults of Old Mu­tual’s lat­est Sav­ings and In­vest­ment Mon­i­tor. It re­veals that nine out of 10 con­sumers are ac­tively seek­ing out dis­counts when they shop, just un­der two thirds of con­sumers are switch­ing to cheaper su­per­mar­kets and more than half of the sur­vey re­spon­dents are opt­ing to buy in bulk as a means to save money.

Bulk buy­ing is one of two strate­gies San­lam se­nior fi­nan­cial plan­ner Madri Ja­cobs ad­vises you to adopt. The other is en­sur­ing that you make a list be­fore you go shop­ping to avoid the temp­ta­tion of un­bud­geted pur­chases. Stick­ing to a well-con­sid­ered bud­get is cen­tral to sur­viv­ing the VAT in­crease, she says.

Ja­cobs is, how­ever, quick to point out that bulk buy­ing doesn’t al­ways trans­late into the cheap­est buy, so spe­cial con­sid­er­a­tion needs to be taken to the unit cost of an item to make sure you’re get­ting the best deal. “When you’re buy­ing in bulk, it’s im­por­tant to pay close at­ten­tion to the unit costs of the bulk prod­uct ver­sus the unit cost of a sin­gle item. So as an ex­am­ple, if some­thing costs R100 for 5kg, but R17 for 1kg, you’ll pay less when you buy mul­ti­ple 1kg packs,” she says.

Con­trary to pop­u­lar be­lief, bulk buy­ing isn’t just for big fam­i­lies. If you live alone and you’re wor­ried about ex­cess per­ish­able foods po­ten­tially go­ing to waste, con­sider club­bing to­gether with other peo­ple around you who also live by them­selves. This way, you’ll still reap the sav­ings of bulk buy­ing with­out the guilt and agony of see­ing good food go to waste.

DAN­GERS OF BANK CARDS

By now most of us are aware that ev­ery ser­vice we pro­cure or any item we pur­chase – barr the 19 tax-ex­empted food items – has got­ten more expensive thanks to the VAT in­crease. But how much do you know about the im­pact it’s hav­ing on trans­ac­tional bank­ing fees?

Over and above the in­crease in your monthly ser­vice fee, Neil Thomp­son, Head of Prod­uct at African Bank, says the im­pact of the VAT in­crease doesn’t end there. In fact, he says re­plac­ing a lost or stolen card will cost you more, and so will trans­fer and pay­ment fees. With­draw­ing money from an ATM and swip­ing your card at a point of sale ma­chine has also in­creased, so you need to be smarter about your ap­proach to bank­ing. “The charge for swip­ing your bank card is usu­ally sig­nif­i­cantly lower than the fee banks charge for with­draw­ing cash so I’d ad­vise con­sumers to swipe where pos­si­ble and try stick within your monthly free ATM with­drawals limit to save,” he ad­vises. If you have mul­ti­ple bank ac­counts you might want to con­sider clos­ing some or iden­tify no more than two cards you will use to trans­act with be­cause the more cards you use, the more you’ll be pay­ing in VAT in­crease re­lated bank­ing fees.

SET­TLING YOUR DEBT

While the VAT in­crease won’t im­pact the amount of prin­ci­ple debt you owe or the in­ter­est rate at­tached to the loan, you will be charged in­creased VAT on the as­so­ci­ated loan fees. “So of course the more loans a per­son has, the big­ger the im­pact on monthly fees could be,” Thomp­son warns. If you’re heav­ily in­debted you need to tackle your debt as soon as pos­si­ble. Start with smaller debt as well as credit and store card debt be­cause these tend to carry in­ter­est rates much higher than long-term debt, like a bond.

Re­search out of Texas A&M Univer­sity sug­gests this is ac­tu­ally an ef­fec­tive way of deal­ing with debt be­cause psy­cho­log­i­cally it’s a vic­tory ev­ery time you set­tle an ac­count. The sat­is­fac­tion mo­ti­vates you. “Win­ning ‘small vic­to­ries’ by pay­ing off small debts first can give con­sumers a real boost in even­tu­ally pay­ing off all their debts,” say lead study au­thors Alexan­der Brown and Joanna La­hey.

If your debt bur­den is too high, you could also con­sider con­sol­i­dat­ing your debt into a sin­gle monthly fee, which will save you on mul­ti­ple loan ser­vice fee charges. Also, if you’re a home­owner you can col­lapse your ex­ist­ing debt into your home loan to pay a lower in­ter­est rate, says Tran­sUnion CEO Lee Naik. “You’ll need to have pos­i­tive eq­uity on your bond – the value of the prop­erty must ex­ceed the cur­rent out­stand­ing loan amount,” Naik ex­plains. He adds:

“Us­ing this ex­cess, you can then pay off credit and store cards and ve­hi­cle fi­nance ar­range­ments with higher re­pay­ment rates. How­ever, abus­ing this strat­egy will lead to higher re­pay­ment costs, so you’ll need to main­tain dis­ci­pline to avoid rack­ing up debt again.”

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