The greatest financial risk that South African families and businesses will face this year is the possibility of an inflation-fuelled global recession impacting the local economy.
According to Kerry King, Advisory Partner and wealth management specialist at Citadel South Africans need to be careful with their finances in 2023.
“According to the Citadel Asset Management team, the likelihood of a global recession this year has increased significantly. With inflation already sky-rocketing and interest rates sure to be hiked again, the cost of living will continue to rise,” King said.
King shares four important personal finance survival tactics that people need to stick to in 2023, regardless of whether they have savings, assets and/or cash-flow.
Remain as financially liquid as possible
King said: “It is advisable for you to not have all your money tied up in illiquid assets. There should be some accessible savings available that could be accessed in case of emergencies.”
If they can manage it, people should try to put aside at least twice their monthly expenses in savings, which will be used for emergencies, or if people should find themselves unemployed for a period of time.
Children will practice what financial habits they have seen their parents or loved ones do, so parents should demonstrate and show their kids good financial habits, such as saving for an emergency or having an emergency fund.
According to Katlego Gaborone, a financial planner at Momentum, people need to have at least three months’ salary saved in an emergency fund.
Don’t take on new debt if you can avoid it
King said that major global financial markets, like the United States (US) and the United Kingdom (UK), are expecting further interest rate increases before inflation starts to moderate sufficiently, and South Africa will also experience this.
“This means the cost of borrowing will increase, and bond repayments that are affordable today might become less so in the next 12 months. The cost of living is also likely to rise sharply over the next year or two, so don’t get into debt for luxuries you don’t need,” King said.
According to King, it is a challenge to predict how long interest rates will remain high, which means that people may have to start dipping into their emergency funds.
Pay off your debt as fast as possible
King said: “Echoing the rise in lending rates in other countries, including the doubling of mortgage rates in the US over the past year, South Africa has already seen the prime lending rate increase from 7.5% to 10.5% over the past few months.”
With the possibility that interest could be higher a year or two from now, people should prioritise paying off their debts and accelerating their debt repayments.
Stick to your long-term investment plan
King said that people should not be spooked by short-term noise, instead, they need to stick to their long-term investment strategy by riding out short-term crises.
“Hold onto your investments, assets and savings as much as you can. The financial markets go through constant and continuous up and down cycles – so as the saying goes, keep calm and carry on. If you keep a cool head about your investments today, your future self will thank you,” King said.
According to King, as people enter another year of global and local economic and political volatility, they must apply the lessons they have already learnt during previous recessionary periods, including:
– cash is king
– radical financial moves and unnecessary debt are to be avoided
– saving and investing unlock long-term financial opportunities.
“This, too, shall pass – so hang in there and make the best of the year ahead,” King said.
IOL Business