On the one hand South Africans have had to face a hike in Value Added Tax (VAT) from 14% to 15%, but on the other hand, those in debt with financial service providers have had this offset by the recent repo rate cut.
These are confusing economic times and cash-strapped South Africans are plagued by many questions. What do these changes mean for me? What must I do? How can I improve my financial situation? The changes will affect your back pocket, and what you can do to manage them.
In the grand scheme of things, the VAT increase means that every time you go to the shops, fill up your car with petrol, or buy any product or service that is subject to VAT, you will be paying more than you did in March this year.
But it’s not all gloom and doom. While any increase in the cost of living is tough, there is light at the end of the tunnel in the form of the announcement by the South African Reserve Bank (Sarb) of a cut in the repo rate by 25 basis points.
What does this repo cut mean for me?
The repo rate is the interest rate at which the SARB lends money to commercial banks, including Nedbank, Absa, FNB, Standard Bank and Capitec.
When Sarb lowers the repo rate by 25 basis points, it means your interest rate on your debt becomes cheaper by a quarter of a percent (0.25%), which is great news if you are credit active and have a home loan, car loan, overdraft, store card or credit card debt.
The credit bureau monitor released in December 2017 revealed that more than 25 million consumers around the country were credit active.
Of these consumers:
- 49.9% held accounts which were current
- 11.8% were 1-2 months in arrears
- 21.7% were more than 3 months in arrears
- 11.1% were in adverse listing
- 5.5% were under judgements and administration orders.
These are scary statistics, as is the fact that more South Africans have loans than jobs, according to a report released in January 2018 by The Economist.
He offers these seven vital tips to households burdened by debt:
- Borrow responsibly and reduce your debt as much as possible – and as soon as possible. Consider contacting your financial providers to keep your bond and vehicle finance repayments unchanged despite the cut in interest rate. Doing this will reduce your overall home and car loans and enable you to pay them off sooner.
- Buy groceries that are zero-rated (VAT exempted): brown bread, dried mealies, dried beans, lentils, canned pilchards or sardines, rice, fresh fruit and vegetables, vegetable oil, milk, eggs and legumes. These items are not only good for your wallet, but good for your health too!
- Get to grips with your debt:
- Find out exactly how much you owe and to whom
- Calculate how much interest you pay on each debt
- Pay off the debts with the highest interest rate first – these are normally credit cards, store cards and micro-loans.
- Understand what’s happening in the economy. Every change in the economy will affect you in some way or another, so educate yourself, keep up to date with current events, and adapt your budget accordingly.
- Cut back on things you can do without. Become a disciplined shopper and avoid temptation!
- Review your loyalty to expensive brands and stores, and worry less about keeping up with the Kardashians and Dlaminis. Remember your worth has nothing to do with the labels you wear or where you buy your groceries.
A smart consumer is informed and therefore better prepared for changes that will impact their pocket. You work hard for your income, it is your responsibility and no one else’s to protect it and use it wisely.
John Manyike, head of Financial Education at Old Mutual.