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Our Covid credit bubble is about to burst – how households need to prepare

Published Feb 25, 2022

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By Janine Horn

The National Budget Speech has come and gone, and South Africans are already preparing to bear the brunt of a broad range of price increases as taxes, inflation, interest rates and rising food prices all seek to escalate the cost of living to unmanageable heights. These are inevitable outcomes that we anticipate every year, but this year something else is looming over our bank accounts.

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In the two years since the pandemic officially hit our shores, Covid-19 has created something of a credit bubble. Our month-to-month relationship with interest rates and inflation was disrupted, and we lived in limbo for a while. All of a sudden, prices have skyrocketed as demand for goods outstrips the capacity of a global supply chain.

Simply put, the Covid-19 bubble is about to (or has) burst, and we are now facing the realities of rampant inflation growth. In other words, as prices go up, so too does inflation. And as it gets harder to maintain a lifestyle, people dip into their credit cards, which only exacerbates the problem as one of the methods to curb inflation is to make the cost of credit more expensive. We are now sitting in a vicious cycle of cost and we need to come to terms with reality before it’s too late.

How did we get here?

Long story short, the height of Covid-19 meant that many people became cash strapped. Demand for goods went down to record lows, and with less money to spend, it was in the government’s interest to keep inflation and interest rates low for an extended period of time. This meant that credit was relatively cheap to amass, and considering the fluctuating levels of income people were experiencing, credit was the only way forward.

Once people used credit to pull themselves out of the Covid-19 hole they were thrown in, all of a sudden markets began clawing their way back to normal. Although we are not quite there yet, it would seem the markets are bouncing back quicker than many people’s abilities to earn an income.

Now we are stuck with people who are over-indebted yet still struggle to earn a consistent income. If we start to raise the price of credit by readjusting inflation levels (which is inevitable at this point), then the Covid-19 credit bubble will burst and consumers will be left in financial trouble. Which is exactly what is happening to so many people around the world.

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Consumers are feeling financially exposed, insecure and vulnerable, meaning any small market change (such as an interest rate hike) is going to negatively impact the state of personal finances in this country. Record levels of unemployment, a stagnant economy focused on recovery, and the price of fuel and therefore food. The list goes on, yet our income levels remain at risk. Now we have to pay more on our debt, including our credit cards, our houses, our cars, our businesses and anything in between that we borrowed money to achieve.

It may seem hard to overcome, but there are avenues still left to explore for many South Africans who feel trapped.

One method of getting a handle on your rampant debt is to take out what is known as a debt consolidation loan. This is where you take out a single loan to pay for numerous others. This has two advantages, the monthly instalment is often less than all the smaller debt repayments combined, and the interest rate charged is often lower.

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The point is, you should assume you have no way out because the system is such that there are many roads one can travel down depending on their situation. This is why people need to consider letting a financial adviser into their lives to assist with a robust and achievable financial plan based on current circumstances and realities.

The Budget Speech will not be the last curveball to come our way, so we should always prepare our financial plan for what comes next. The least we can do is take control of our finances and accelerate our momentum on our journey to success.

Janine Horn is a Financial Adviser at Momentum.

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PERSONAL FINANCE

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