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Living on less: an action plan for South Africans

25 May 2020
5 minute read

Father working from home

A recent survey by consulting firm Mckinsey found that 70% of South Africans experienced a drop in income in the first two weeks of May and expected this income reduction to last for more than four months. Even if you are fortunate enough to still receive a salary, your partner may not, or you are experiencing increased financial demands from family. The reality is that most of us are going to have to find a way to COVID-proof our budgets. 

So how do we learn to live on less?

When baggy pants become big boy pants

Finally get round to that budgetNow more than ever is the time to draw up a proper budget. I am not talking about what you think you spend each month, but actually pulling out all those statements: bank account, credit card, store card and writing down where all the money goes. Excel has an excellent Personal Budget Template or use budgeting apps. Do this for the three months of January to March – when you were spending ‘normally’. I can guarantee you that you spent more than you realised. Now compare that to your April ‘lockdown’ spend. Already you will see where you can cut your spending without too much of a sacrifice. Have a conversation with your family about your spending priorities and what you will have to cut back on. If you have your family on board, it will be a lot easier to make the adjustments.

TIP: To keep disciplined, consider using the ‘envelope’ method. Each week calculate how much you can spend on each category, draw cash and put it into marked envelopes eg: groceries, airtime, transport etc. This will ensure you make it to the end of the month.

Use the rate cutsWith a further rate cut of 50 basis points announced on 21 May, the interest we pay on our loans has decreased by 2.75 percentage points since January! For households feeling the strain, this has put a significant amount of money back into our pockets. To put that in perspective, on a R1 million mortgage you will be paying R1740 less a month. This rate cut will also result in lower repayments on your car and other loans – unless you had a fixed rate. Unfortunately, if you had fixed your mortgage or car finance rate then you do not benefit from these rate cuts.

TIP: If you are not feeling the squeeze, use these rate cuts to pay off your mortgage sooner. If you keep the same installments as January, you are effectively paying an extra R1740 (on the R1 million mortgage) which reduces your mortgage period by as much as five years. When rates go up again, your budget will not be affected as you are already paying the higher installment.

Speak to your creditorsIf you are struggling to meet your repayments talk to your creditors as soon as possible. Find out whether you have credit insurance. This covers your loan installments if you are retrenched or if your employer has put you on unpaid leave. This is more commonly found on credit cards and short-term loans, but some banks included it on mortgages for people earning less than R25 000 a month. FNB recently announced that it is paying out R100 million in credit insurance claims.

All banks have offered payment holidays of up to three months, but this is not a freebie. Interest will still accrue, which means that the term of your loan will be extended. For example, if you take a three-month payment holiday on your mortgage, it could extend the repayment term by eight months. Only take this option if you really cannot afford to meet those repayments. If you are still unable to meet repayments after three months, you will need to discuss your options with the bank including the restructuring of your debt over a longer period of time.

The payment holiday is only available to customers who were in good standing before lockdown. If you were already falling behind on payments, then this option may not be available to you. If you are overwhelmed by your debts then you may need to consider debt counselling.

TIP: If you do opt for the payment holiday, try to increase your original monthly installments once your finances stabilise so that you are not extending the period of the loan. The longer it takes you to repay, the more interest it costs you.

If you need help or advice with managing your debt, 1Life’s Truth About Money offers telephonic debt counselling and debt consolidation at no charge to successful applicants.

Should you dip into savings?You are trying to limit the impact of COVID on your finances and the best way to do that is to cut spending rather than dip into savings or to stop investing. However, if your income has reduced significantly or you have lost your job – you may have no option.

If you are fortunate enough to have some emergency funds, consider how this will be spent. It would make more sense to keep up with monthly debt repayments, which carry a higher interest rate, than leaving your emergency fund in cash earning just a few percentage points. If you have been retrenched and received a severance package, don’t rush to use the lump sum to settle debt – you need to make sure you have funds available to meet other expenses. Rather pay debts monthly from your retrenchment package.

Before you stop contributions to your retirement or other contractual investments, speak to the service provider. There may be some penalties for simply stopping the debit order, but if you notify them first, they could provide a premium waiver.

TIP: Do not just let debit orders bounce. Speak to all your service providers including insurers. You will be charged a high penalty fee by the bank and even possibly the service provider. It will also negatively affect your credit record. Many insurers are offering a premium waiver or discount so your cover stays in place even if you cannot make the contributions.

Plan for big changesThere is still so much uncertainty around the future and how long our economy will take to recover. While you can make some immediate adjustments there may be bigger decisions to make like whether or not to sell your car, or even change your children’s school. If the local school in your area is not an option, would homeschooling be an option? If you are struggling with mortgage payments do you need to consider alternatives like renting out a room or even renting out the house and moving in with family?

While these actions may not be necessary yet, they are conversations you need to start having and investigating.

The best way to tackle any problem is to be proactive and to have a plan. Don’t panic, take a deep breath and start taking control.

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