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Financial Planning
Sunday, March 1, 2009
Consumer caution

Lower petrol prices and reduced interest rates will leave consumers with more disposable income available at the end of the month. But consumers should be careful how they allocate this extra cash, counsel Old Mutual.

“The temptation to spend the extra cash will be difficult to resist and consumers should practice caution. Reassessing your financial situation with the assistance of a financial adviser or planner is key. Working with an adviser will help you prioritise your finances and assist you in spending the extra cash wisely as part of a holistic financial plan,” says Ralph Mupita, Managing Director of Retail Affluent at Old Mutual.
He says that, for now, consumers should not be fooled by lowered interest rates and petrol prices. A weaker rand may still push inflation up that could lead to higher interest rates. Although the extra rands will help a lot, one should not forget that 2009 will probably be a challenging year financially and the economic situation may only improve by the end of the year.
  “People should focus on managing their debt by starting to pay off the most expensive debt first,” he says.
It is vital to entrench responsible financial habits with the extra disposable income available. Once debts are settled, one should put savings away to carry you through the tougher times.
“Consumers should beware of buying luxury items rather than necessities. It is advisable to think beyond living for today and focus on your future financial well-being,” suggests Mupita.
With the changing economic environment, clients are advised to:
• Re-visit their monthly household budget;
• Confirm what expenses need to be provided for; and,
• Confirm the amount of disposable income that is in fact available.

As far as the extra cash goes, one should consider:
• Settling any outstanding short-term debt with high interest rates such as credit cards and shop cards.
• Paying more than the required payment into outstanding long-term debt such as one’s home loan. This will reduce the payment period and reduce the interest burden on the outstanding amount.

Changes should not be made to investment portfolios or underlying asset allocations unless done as part of a holistic financial plan with the assistance of a financial adviser or planner. Ideally, changes should help one align ones circumstance to one’s needs, financial planning goals and investment horizons.
Mupita urges investors to take a long-term view and refrain from drawing o­n investments during bear markets. In fact, when share prices rise there will be good opportunities to start investing in growth assets again (such as unit trusts).
South Africa does not have a strong savings culture. The ratio of our household debt to disposable income is still high at 75,3%, while debt servicing costs to income are just above 12% - having doubled over the past two years. It is therefore not surprising that millions of South Africans find themselves in the debt trap. The average South African saves less than 2% of his or her income.
“It is a wise decision to act with resilience and restraint, to ride out the storm in the financial markets and stay invested. What comes down must go up again,” concludes Mupita.
 

Copyright © Insurance Times and Investments® Vol:22.3 1st March, 2009
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