Category: Blog

In light of the difficult times recently, Southern Africa has been awash in low interest rates. When South Africa significantly cut its base interest rate from an already-low 6.25% down to 4.25%, it officially became the lowest interest rate the country has ever had. In late 2019, the Bank of Namibia’s Monetary Policy Committee reduced the rate to 6.5% from 6.75%, then lending rates at Bank Windhoek were slashed further come 2020.

Interest rates, particularly interest rate cuts, typically have complex and far-reaching effects on the market, but what does it mean for you?

From you as a consumer to you as an investor, we’ve rounded up the most significant ways the low interest rate affects you – and how to best capitalise on it.

Cash is not king (when investing…)

In the wake of the devastation of the markets, economy and the enormous volatility in recent history, the interest rate cuts came as a boon to consumers to keep their heads above water. But what is a help to the consumer is a hindrance to the investor. Yes, money not appreciating in value means that goods and services won’t cost more and a household’s day-to-day dollars will stretch further, but any money set away in savings won’t appreciate in value.

Now is not the time to be overweight in cash investments. “If you’ve got money in a bank deposit account, money market account or other “cash-type” vehicle, your interest rate earned will fall by a full 2%,” said Prudential earlier this year. “According to Prudential’s calculations, cash-related investments are now only likely to return around 0.2% p.a. more than inflation over the next three to five years. With its potential returns so much lower, the cash holdings in your portfolio could now be too high if you have a medium- to longer-term investment timeframe, acting as a drag on future returns.”

Risky business

Fortune favours the bold, especially in this kind of market. As we have mentioned above, simply leaving your cash to sit in an account as a means of saving will not get you any richer (in fact, it’s now worth 2% less!) and so higher risk, with higher yield, options need to be considered. For example, things like equities, investing offshore and gold have all found favour recently. 

A debt to pay

A recent communication from insurer Liberty outlined another useful aspect of the low interest rate. “This is the lowest interest rate cycle we’ve seen in a long time – cut off your debt and do not get into new commitments right now,” said Liberty economist Tendani Mantshimuli.

In addition to this, your home loan costs are lower, because the value amount in your bond is worth less than it used to be when interest rates were higher. It’s a great time to repay your debts faster, but try not to extend debt as it will be more affordable now, but will become expensive when the interest rate increases again and markets strengthen.

Now is the time to save

Compound interest is one of the most wonderful roads to wealth creation – it’s why financial advisers urge people to start saving younger. Unfortunately, it is hamstrung by low interest rates. In our current environment, any savings will take longer than it would have in the past to be worth as much and then to appreciate as much as when rates were higher.

For that reason, it’s even more important than ever to set aside as much for savings as you can, as early as you can, because more than ever you can’t afford to lose out on valuable time that will make you compound interest later. 

Ultimately, like every move of the market, low interest rates have their good sides and bad, opportunities and dangers. That’s why it always helps to stay in touch with your financial adviser who can help you make the most of exactly where you are.

Most of us are chronic under-savers even in the best of times. Yet with the current economic environment, lots of previously hypothetical concepts like ‘what if I’m retrenched or have my salary cut?’ are far more concrete – and, unfortunately, more likely to happen.

There’s never been a time when saving is more important, but there’s also likely never been a time when it’s more difficult.

Do you want to put something away for a rainy day (or retirement) but don’t know how to stretch your money far enough to do so? Here are some ideas.

Change it up

Most of us want to budget, but the truth is that it’s tough and can be really… really boring. We want the benefits, but not to cut our creature comforts out of the picture. One of the most effective ways to have your cake and save it, too, is to put away all spare, leftover change. Got a cheeseburger for R53? Put away R7 to make it an even R60. These tiny amounts are not only indiscernible to the average person, even on a budget; they also add up fast.

There are apps and platforms that can help you do this – micro-saving on a daily basis makes it much easier than trying to commit to a large some at the start or end of every month. If you practice a cash-diet – you can even use a jar for these savings. Old-school can be cool.

Vegetate

We don’t have to eat so much meat. In fact, we don’t have to eat meat at all! Tally up your grocery bill, and you’ll often find that by far your most expensive items are from the meat, dairy and egg isles. Find some good recipes online and try to go vegetarian for dinner two nights a week. Calculate how much you would have spent on meat for those meals and put the money in a savings kitty instead.

Hard cash

It’s so easy not to stick to a tight budget these days, when money is nothing more than a few numbers on a screen. To help you save on day-to-day smaller expenses like weekly groceries, toiletries and your daily work cappuccino, try withdrawing the amount of money you’ve budgeted for those items, for that week. Seeing the physical money in your hands and being able to note how much or little is left is a powerful savings tool that can help with splurging only on what really matters to you.

Journalling

Another way to be mindful about not only cutting expenses, but actively saving, is to write down all the money you spend and all the money you put away. Patterns might suddenly become obvious to you that weren’t before: ‘wow, I always spend too much money on groceries when I shop on an empty stomach!’ Knowledge is power in this case, and this mindfulness can help with saving cents and getting competitive with yourself about putting more and more away each month for the future. There are plenty of handy apps for it, or you could buy a hip notebook to jot them down in.

(Don’t) take the credit

If you have them, get rid of clothing accounts, cellphone contracts and credit cards as soon as you can. The interest in repayments on these is excessive – you’re often paying more than double what the item actually costs! Repayments like these also eat up your monthly budget without you even realising. Buy only what you can afford, don’t spend unnecessarily. Try keeping your same phone a little longer (or springing for a reputable second-hand option) and pay off credit card debt as fast and as often as you can.ups

Go pro

When saving and scrimping rands and cents, it might sound like madness to spend money on a financial adviser.

At the end of the day, these are just ideas – no one can grow your savings for you but you, and no one will have the best idea of what method works for you individually except yourself. Still, as a starting point, give these a try. With these tips, some planning and some determination, you’ll reach your savings goals in no time.

Most Sub-Saharan African countries are chronic ‘dis-savers’. But, you don’t have to be. Before we look at the options, let’s take a snapshot of recent events.

Last July, the South African Savings Institute gave the country a wakeup call when it said that the average household rate had plummeted further from 0.5% per month in 2018 to 0.4% in 2019. 

While 2020 figures are not out yet (at the time of this blog) anywhere in the continent, there’s a likelihood of more challenging times – unemployment is rife, little to no growth pervades most asset classes and economies around the world are suffering mightily.

Another look at South Africa’s Household Saving Rate shows that it decreased to 0.20% in the fourth quarter of 2019. That means, of every R1000 coming into every household, R20 or less was being saved. (according to Trading Economics)

Desperate times

In the current economic climate, we are finding that very few people have an umbrella to help them weather the storm.

Last year, even before the current lockdown impact, over 80% of people did not have sufficient savings to last just three months if they lost their job.

Or, when faced with an unforeseen emergency of around R10 000, many people would have to ask family and friends for help, or take out a loan or cover the emergency costs with credit.

Numerous studies, including the well-known True South one a few years ago, show that many of us don’t have sufficient income protection cover or any other form of insurance, leaving us completely vulnerable when (not if) disaster strikes.

Are you one of the many or one of the few?

You are part of the greater statistic, and aren’t financially protected and prepared enough, if one or more of the following is true of you:

• You do not have an emergency savings fund
• Of every R10 000 you earn, R200 or less is saved
• You do not have life insurance or income protection insurance
• You do not have a financial plan worked out with a professional financial adviser

The good news about saving is that it’s never too late to start and more is always better. So, if any of the above sounds familiar, let’s have a virtual coffee and help you secure a sturdy financial future.