How Joe and Jane should respond to junk

As the political and economic realities of South Africa’s fortunes unravel after S&P Global Ratings cut the country’s sovereign credit rating to junk, the impact of the downgrade for the average Joe or Jane is clear: the days of excess are over.

While the economic growth outlook has improved as the worst drought conditions subsided, global growth picked up, commodity prices stabilised and the electricity supply improved, predictions that the South African economy could expand by 1.3% this year now hang very much in the balance.

Expectations of two interest rate cuts in the latter part of the year – a move that would have provided some reprieve for highly-indebted consumers – will probably also be postponed at best, and may be off the table at worst. And should the economy fall into recession, further job losses will be a likely outcome.

The sad reality is that many South African consumers – even high-income earners – are already in a precarious financial position and just don’t have the flexibility to cope with added financial pressures.

Statistics from the Bureau for Market Research at Unisa suggest that on average, households earning between R33 334 and R57 333 per month, have no net income available for discretionary savings (see below).

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Source: Bureau for Market Research at Unisa; Momentum

The Momentum/Unisa Household Financial Wellness Index 2016 reveals just how precarious the financial position of many South Africans really is. When asked how they would cope with an unforeseen expense of R20 000, almost 30% of South Africans who were considered “financially well”, indicated that they probably or certainly wouldn’t be able to handle the additional burden. South Africans are considered financially well when they can comfortably and sustainably cover their current and future planned and unforeseen expenses. The situation is much worse where individuals are financially exposed, unstable or distressed.

.Source: Momentum/Unisa Household Financial Wellness Index 2016 

But perhaps the most concerning finding is that even among financially well South Africans, only about 23% plan for periods in excess of a year. Almost one-fifth of these “financially astute” individuals plan for one month or less.

.Source: Momentum/Unisa Household Financial Wellness Index 2016 

Such shortermism could have a devastating impact on South Africans’ finances in the event of a big financial shock such as retrenchment. In the wake of a downgrade to junk, the likelihood of such shocks materialising has increased. Even just a relatively small unplanned expense may cause individuals to fall into a debt spiral that can take years to recover from.

“You can’t buy financial wellness,” says Danie van den Bergh, head of brand and marketing at Momentum.

Against this background, no financial advisor can sell financial wellness – it has to be managed, he adds.

He provides the following guidelines for financial wellness.

1. Partner with a financial advisor

This has to be someone who really applies his or her mind to your personal situation and financial goals and who can provide you with a proper financial plan.

2. You won’t get anywhere without a budget

It is very important to understand how you spend your money and to stick to your budget. Engage with your financial plan and budget on a regular basis, Van den Bergh recommends.

According to the research, 64% of financially well South Africans have a budget.

3. Financial wellness requires a change in behaviour/financial courage

This is arguably the most difficult aspect of financial wellness as it will likely require some tough lifestyle decisions that may be uncomfortable in the short term, but it can go a long way in getting you on sound financial footing.

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