Kerry King, Advisory Partner and wealth management specialist at Citadel, advises South Africans to be careful with debt as the world faces a possible recession in 2023.
The greatest financial risk that South African families and businesses will face in 2023 is the possibility of an inflation-fuelled global recession affecting the local economy. South Africans need to be careful with their personal finances this year, cautions King.
According to the Citadel Asset Management team the likelihood of a global recession this year has increased significantly. With inflation already skyrocketing and interest rates sure to be hiked again, the cost of living will continue to rise.
King says there are four important personal finance survival tactics to stick to in 2023, regardless of whether you have savings, assets and/or cashflow.
- Remain as financially liquid as possible
It is advisable for you to not have all your money tied up in illiquid assets. There should be some accessible savings available that could be accessed in case of emergencies. If you can manage it, try to set aside at least twice your monthly expenses in savings, for emergency backup. This will also help should you find yourself unemployed for a period of time.
Children learn their spending patterns from their parents, so it is also wise to teach your children as early as possible to save up an emergency fund from an early age.
- Don’t take on new debt if you can avoid it
Major global financial markets such as the United States (US) and United Kingdom (UK) are expecting further interest rate hikes before inflation starts to moderate sufficinetly, and South Africa will also experience this. This means the cost of borrowing will increase, and bond repayments that are affordable today might become less so in the next 12 months. The cost of living is also likely to rise sharply over the next year or two, so don’t get into debt for luxuries you don’t need. It is challenging to predict how long interest rates will remain high and this may mean you will have to tap into your emergency funds.
- Pay off your debt as fast as possible
Interest rate hikes by the Federal Reserve are typically echoed by the South African Reserve Bank within three to six months and these have a general knock-on effect on the South African economy. Echoing the rise in lending rates in other countries, including the doubling of mortgage rates in the US over the past year, South Africa has already seen the prime lending rate increase from 7.5% to 10.5% over the past few months. With the prospect that interest rates could be much higher in a year or two, it’s a good idea to prioritise and accelerate your debt repayments.
- Stick to your long-term investment plan
Don’t be spooked by short-term noise. Stick to your long-term investment strategy by riding out short-term crises. Hold onto your investments, assets and savings as much as you can. The financial markets go through constant and continuous up and down cycles – so as the saying goes, keep calm and carry on. If you keep a cool head about your investments today, your future self will thank you.
As we enter 2023, another year of global and local economic and political volatility, we must apply the lessons learned during previous recessionary periods ― cash is king, radical financial moves and unnecessary debt are to be avoided, and saving and investing unlock long-term financial opportunities. This too shall pass – so hang in there and make the best of the year ahead.
Written by: Citadel Advisory Partner, Kerry King