John Manyike, Head of Financial Education at Old Mutual.
John Manyike, Head of Financial Education at Old Mutual.
Berry Everitt, MD of Chas Everitt International property group.
Berry Everitt, MD of Chas Everitt International property group.

Keeping calm, wise financiaI planning and not making rash decision are key to surviving the economic crisis, say finance experts.

Liberty’s executive financial adviser, Phillip Kassel, said people had expressed concern over how the downgrade of the South African economy to junk status by Standard and Poor’s and – yesterday afternoon, by Fitch – would affect their personal finances.

“We believe the most important thing you should do right now is remain calm. Yes, your investments are facing political and economic challenges, but now is not the right time to make any sudden investment moves.

"It will take time for the financial markets to feel the full impact of the political changes; if you make hasty investment decisions now, without a clear understanding of what is to come, you could increase the risks in your investment portfolio. At this time we need to make careful, strategic and well-planned moves to weather the impending storm. It is important to remain calm and stay invested,” he said.

Kassel said in the short term, families needed to ensure that items such as school fees for the following year were budgeted for.

“For shorter-term investments, between 6 to 12 months, you do not want to risk your capital because there would not be time to recover any losses. While capital guarantee is very important, over a short time period inflation is less of a concern. You would consider money market funds or a fixed deposit which can guarantee your capital and a reasonable rate of interest,” said Kassel.

Old Mutual’s John Manyike, head of financial education, said the government was under increasing pressure to balance its own budget.

“The country currently has debt of R2.2 trillion, which is the equivalent of 49% of GDP. This makes any significant increases in the level of social grants or pensions for struggling South Africans highly unlikely,” he said, making reliance on the state for a pension inadvisable.

To put money into a retirement fund, however, people would need to save, and consumers would need to stretch their incomes.

“Cutting down on indulgences such as eating out in restaurants or buying clothes on a store-card that has a high interest rate, or even packing your own lunchbox instead of buying takeaways, will go a long way towards enabling you to save a little extra each month. Even a small increase in the amount that you put away each month can make a huge difference over time, thanks to the power of compound interest,” he said.

He advised families to undertake a “financial fitness” session and work out the reality of their bills, set goals, determine needs, tackle bad debts and budget.

“Open all your bills, review your bank statements and request a credit report from one of the credit bureaus. You are entitled to a free credit report once a year, in your birth month. This will give you an idea of what your credit profile looks like and alert you to any negative listings your creditors may have registered. Most credit bureaus have call centres, try one of them.”

Families should cut back on lifestyle expenses. “If you eat out in restaurants once a week, decide as a family to reduce that to once a month. The money saved will help you settle debts or save for your children’s education. Before you spend money on ‘nice-to-have’ items such as home décor, expensive shoes, or a new car, ask yourself if it is a ‘need’ or a ‘want’. Don’t spend on items that are not absolutely necessary when your goal is to destroy debt,” he said.

Berry Everitt, chief executive of the Chas Everitt International property group, said much had been written on the downgrade “and the terrible consequences it could have for ordinary South Africans. But unfortunately most of it is thin on advice about what consumers can and should be doing to mitigate those consequences”.

He said people should not let the opinions or actions of others cause you to panic or to fall into despair. “It is human nature to get caught up in the hype, but this is really not a time to be making impulsive decisions based on hearsay, or on the other hand to feel so helpless that you do nothing. There are ways to cope with the economic fallout that getting junked is likely to cause, but the key is to keep a cool head, move fast, and have the nerve to stick to your plan over the coming months,” he said.

Everitt urged families to keep an emergency savings fund, and divert any other savings into paying off debt. “This may seem like a radical move but one of the worst effects of reaching junk status is that interest rates are likely to rise, and that hurts most when you have a lot of debt,” he said. “Do whatever it takes, from making your own lunch for work and not buying anything new except food and other absolute necessities, to selling your second car and any other extraneous belongings, and do it soon, before other people are also all trying to sell things and prices take a tumble.”

If someone in the family had a hobby or a “weekend business” that has been making extra cash, nurture it. “Try to find ways to grow your customer base and income from this source. Job loss is a real risk in a declining economy and you need to face up to this and think about having an alternative source of income,” he said.