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Category:
Insurance
News /
Life Insurance /
Sanlam
/ December 2006
New Year is right time to get financial
affairs in order
The important question is what is in
store for their finances in 2007
The recent interest rate hikes and an
expected further increase in the prime rate should cause many people
to take another look at their financial affairs.
 According to Francois Marais, Head of
Strategic Initiatives at Sanlam Life, the lower interest rate
environment of recent years up to 2005 and the virtually unlimited
supply of credit during the past year have resulted in many people
borrowing far too much money.
Much of this debt is not incurred
directly at banks, but is the result of hire purchase agreements and
the large number of credit cards made available widely by banks via
retail groups, airlines, cell phone companies and others.
This means that many consumers are now
indebted to the extent that they should be rather anxious about the
future, especially as the festive season goes hand in hand with so
many additional expenses.
In order to redeem your debt in 2007
and take control of your finances, you need to plan carefully. So
draw up a simple income and expenditure statement, taking into
account all your fixed obligations and provision for day-to-day
expenses.
It need not be a complicated process,
and when you have completed it you should have a pretty clear
picture if you live within your means.
”The effect of interest rate hikes on
bond repayments is however a major problem. According to Marais, "In
the lower interest environment of recent years many people bought
houses to the maximum of their disposable income."
"So when interest rates are increased,
as they have been in 2006, they struggle to carry the extra
financial burden. At the beginning of 2006 the prima rate was still
10,5%, but now is it 12,5% per annum. As a result the bond repayment
on a house of R500 000 has increased by nearly R700 a month to R5
700 a month in 2006."
“Fortunately interest rate hikes do not
impact short-term debt, such as credit-card debt. However, the
problem is that the injudicious use of credit cards, which carry a
very high interest rate, could add to your debt burden very
quickly."
"The first step in getting your
finances under control for the new year is therefore not to incur
further debt. Decide to pay only cash for products and services. The
next step is to pay off your debt - that with the highest interest
rate first," says Marais.
A combination of this increased bond
instalment and the short-term debt incurred on hire purchase
agreements and credit cards could mean that financially the new year
suddenly no longer looks rosy. Marais explains that every additional
interest rate hike of 1% will increase the monthly instalment on a
bond of R500 000 by a further R350 a month.
According to Marais couples often fall
into the trap of calculating their bond on their combined salaries.
Sometimes one of the two salaries falls away, such as when a wife
becomes pregnant and then wants to be a home-maker, or when someone
decides to start his own business and cannot contribute to the joint
income for a period of time.
"Therefore, try to be prepared for
unforeseen circumstances in the new year and not to stretch your
loan to the maximum," he says.
Once you have redeemed your short-term
debt, it could be very advantageous to make an additional payment on
your long-term debt. For example, if you pay R350 a month more on a
20-year bond of R500 000 (without interest rates rising!), you will
pay off the bond in 16 years and save a total of approximately R200
000 in interest.
If your short-term debt has been
redeemed, you will also have surplus funds to save or invest every
month. A good New Year's resolution would therefore be to get your
financial affairs in order - it's easier than you think and
definitely not an insurmountable obstacle.
Should you need professional
assistance, consult an accredited financial adviser who will be able
to give you appropriate advice.
Source: ITInews – Insurance
Times and Investments Online
www.itinews.co.za
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