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
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.”