This is how you can weather the 2023 interest rate storm

Consumers are in the middle of an interest rate storm and the best way to weather it is to ensure they have control of their household budgets.

The prime lending rate increased from 7% in November 2021 to 11.25%, increasing the monthly repayment on a R1 million home by around R2 700.

“Sharp increases in loan repayments are just part of the cost-of-living nightmare as consumers also face electricity, food, schooling and transportation price increases due to the high inflation rate, which reached 7.1% in March,” says Lizl Budhram, head of advice at Old Mutual Personal Finance. 

The first thing you should do is to revisit your budget regularly, she says. Top of mind for most consumers is how to deal with the unchecked cost-of-living increases when household income barely keeps pace.

“One of our concerns is that households get through the tough times by reducing their life- or short-term insurance cover or halt their contributions to their discretionary savings. Households must carefully assess areas where they can safely cut expenses before cancelling or reducing insurance or savings, as these decisions can have serious long-term financial consequences.”

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Revisit budget before next interest rate hike

Old Mutual Personal Finance suggests that households revisit their income and expense spread sheets often, especially during periods of rising inflation and interest rates. “After nine rate hikes, South Africans are effectively in round nine of a cost-of-living boxing match, without much certainty about how many rounds they may still need to face.”

Budhram says at this stage of the fight, no household should be without a budget spreadsheet, as it is the only way of ensuring that you make informed, sensible and intentional decisions of where to continue spending and where to reduce or stop spending.

However, there are money-saving hacks to boost your financial well-being. “When deciding which expenses to remove, take care to consider which products or services can be repurchased or resumed in the future without significant detrimental financial impact.”

You can, for example, cancel a streaming or app subscription and resume later at similar subscription rates. However, if you cancel your life cover, it can result in significant premium increases based on new age or health conditions.

Budhram says you must also check insurance product terms and conditions as some policies allow premium holidays or have a skip a month feature. Many people also take advantage of rewards and loyalty benefits to provide budgetary relief.

Another important rule is to avoid short-term debt at all costs. “One of the traps to avoid is using your credit card budget facility to buy food and other essentials. This strategy not only delays the cost-of-living problem but makes it worse when you try to recover from it six months down the line.” 

We are at a difficult point in the interest rate cycle but this situation will play out and we will gradually revert to the average, says Budhram. “We encourage households not to turn to short-term solutions to assist with their budget shortfalls but instead find more creative ways to navigate this part of the cycle.”

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Two-stage budget review

An interest rate hike should trigger a two-stage household budget review. She says the first stage involves a reassessment and reprioritisation of each of your expenses, which could entail making tough decisions about items such as entertainment, gym contracts and subscriptions.

The second stage centres on rebalancing between your current and future needs. “You cannot spend all your money on the present and risk having no money for your retirement but you cannot save so strictly that you are unable to make ends meet today either.”

Remember you can only do a successful budget review if you have accurate, up-to-date figures, strip out emotion and if possible, get advice from a trusted, objective third party such as your financial adviser.

It is not all bad news, Budhram says, as there is budget relief for consumers ahead. “While it is still tough out there, there is some relief ahead for the remainder of the year. Inflation should ease sharply over the next few months, mainly thanks to expected lower food inflation and even some petrol price decreases and interest rates are very close to peaking.”

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Another interest rate increase in May?

The Reserve Bank might hike rates one more time later in May and then halt the hiking cycle as inflation declines,” says Johann Els, chief economist at Old Mutual Investment Group. 

However, Budhram says consumers must become more aware of the effect inflation risk on their plans. Inflation chips away at your savings by reducing the amount of goods and services you can buy with each rand over time. For example, assuming a loaf of bread costs R20 and inflation is at 10% per year, your R20 will buy nine tenths of a loaf, less than two thirds of a loaf in five years and about two fifths of a loaf in 10 years.

“You must work with your financial adviser to ensure that your investments outpace inflation by an adequate margin and that your asset allocation is suitable for inflation as well as volatility risk,” she says. 

What about the thousands of low- and middle-income South African households who do not have the luxury of a financial adviser on speed dial? “The common-sense solution to budget hiccups is to look at your budget carefully, figure out where you can cut expenses and avoid additional debt at all costs. These are fundamental principles that will serve any household well,” Budhram says. 

She also advises consumers who cannot avoid taking on additional debt to reduce the amount they have to take on by first carefully reviewing their budgets and aiming to settle this debt as soon as possible.