South Africans’ days of excess are over

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.

Predictions were that the South African economy could expand by 1.3% this year as the economic growth outlook improved after the worst of drought conditions subsided, global growth picked up, commodity prices stabilised and the electricity supply improved. But that growth now hangs in the balance.

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

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.

The three income bands from zero to R33 333 are falling deeper into debt each month. Those on R33 333 make zero savings each month on average. And the three bands above the R33 333 cut-off point are comfortably able to afford monthly discretionary savings.

But they make up less than 10% of the population. The first three bands together make up 88.6% of the population. The Momentum/Unisa Household Financial Wellness Index 2016 reveals just how precarious the financial position of many South Africans really is.

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.

But perhaps the most worrying finding is that even among financially well South Africans, only about 23% plan more than a year ahead.

Almost one-fifth of these “financially astute” individuals plan for one month or less. Such short-termism 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 adviser can sell financial wellness – it has to be managed, he adds.

He provides the following three guidelines to help with financial wellness:

• Partner with a registered financial adviser to devise your plan.
• You need a budget to implement your financial plan. And stick to it.
• Financial wellness requires tough lifestyle changes that may be uncomfortable in the short term.

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