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Consumer Affairs
Friday, December 1, 2006
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Despite another 50 basis point hike in interest rates possible this month consumer spending continues unabated.

“The end of the year and the festive season is full of excitement and expectation, but consumers should avoid being tempted into greater debt,”says Mike Smith, managing director of independent payment service, EasyPay.
Debt accounted for 69% of disposable household income in the first six months of this year according to the Reserve Bank’s Annual report. This figure outstrips the highs experienced in the nineties, which measured 61% at its peak in 1998. The fact there has been consistent improvement in real disposable income suggests consumer spending is getting out of hand.
Meanwhile, the savings side now amounts to less than 0.5% of disposable household income according to a recent report by financial newswire I-net Bridge.
Mr Smith attributes the exponential rise in debt to the increasing pursuit of lifestyles that are way above affordability for most people. This ‘must have’ mindset has triggered another worrying trend – that of taking out additional bonds on family homes to finance expensive tastes.
Not only are people forfeiting short-term savings, but they are also eroding their long-term asset base, and may never be able to afford to retire – all the money would have been swallowed by their debtors.
He says there is a real danger for consumers if they don’t change the way they deal with money. Most household’s disposable income is spent on paying back debts. This, however, makes savings impossible and could potentially lead to a similar situation to the US where 43% of families spend more than they earn - never getting out of debt.
“Consumers need to be educated about the long-term implications of debt and the importance of saving to insure themselves against unforeseen circumstances. As a responsible provider of convenient account payment and prepaid services to consumers, EasyPay looks forward to partnering with like-minded organisations in driving this education process.”
Mr Smith says consumers can make a good start by putting their end-of-year bonuses into their bond or a savings investment. “Ideally, it should go into an investment that can’t be easily accessed, so they aren’t tempted to dip in. Also, once a start has been made on savings it can become an instinctive habit.”
It would, of course, help if taxpayers did not have to keep funding the essentials normally the responsibility of government: healthcare, crime prevention, security, and education. What’s worse is that such costs (increasing faster than the average rate of inflation) have to come out of after-tax remuneration; and they are becoming considerable, upwards of R30 000 a year for a family of four. It would be interesting to find out how much hardcore debt existed, built up from education costs, say, five years ago. 
 

Copyright © Insurance Times and Investments® Vol:19.6 1st December, 2006
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