The most affluent consumers in South Africa have the highest increasing default loan rate. Experian Consumer Default Index (CDI) statistics reveal a rapid increase in the rate of people who defaulted on their loans in the fourth quarter of 2021.

“The most affluent consumer group, the luxury living segment, makes up 2.5% of the South African population, yet accounted for 35% of total credit exposure in 2021 Q4 [quarter 4],” explained Jaco van Jaarsveldt, the chief decision analytics officer at Experian Africa.

The CDI of this group became progressively worse, with the default rate rising from 2.30 in the previous year to 2.47. This resulted in a 7% deterioration in the CDI.

Balance debt and savings

We need some debt to maintain our lifestyles. A bond to buy a house. A loan to buy a car. A credit card for living expenses. If the monthly cost of this debt is more than your savings then your financial freedom will take a lot longer.  Very few of us achieve this in our life times and yet it can be attained if we scale down on our dependency on debt. The affluent consumers highlighted in these stats from Experian clearly are living above their means, essentially buying now and paying later. They cannot maintain their lifestyles within their incomes so they resort to borrowing more. The cost of this debt leaves less to save which pushes the financial independence further away into the future. 

Work on earning interest instead of paying it
If you are borrowing to maintain your lifestyle your standard of living is too high relative to your income. You should be able to service your debt comfortably after having firstly set aside the appropriate amount for savings.The cost of your total debt should not exceed 30% of your monthly income and your savings for retirement, insurances and contingency fund should be 30%. If your debt costs are higher than your savings you should be living in a smaller house or driving a cheaper car.

Take charge
Many of us leave it too late thinking that we have plenty time ahead to build up a nest egg. 
We then don’t see how critical it is to save now. Instead we only wake up much later and then have to play catch up which often ends up being too late.
The only realistic way to building enough capital is compounding over time. The sooner you start saving the less it will cost you as the power of compounding increases exponentially the longer you save. Its the only magical way to reach financial independence, but it does need time to make it happen. Having too much debt to pay off stalls this opportunity.

The higher you climb the more your need 
The higher your lifestyle the more your will need to maintain it. So savings will have to be that much more for someone earning R100 000 per month compared to R10 000. These affluent consumers credit exposure should be much less leaving much more to savings. Especially in the face of rapidly rising inflation and the consequential rise in interest rates. 

Your financial independence relies on your savings compounding at a higher return than the rate of inflation over the longest possible time.

The huge surge in the oil price has sent the price of fuel into the stratosphere with petrol reaching a record high of over R21 per litre. During my last drive to Natal I noticed hundreds of trucks transporting goods up and down from the Highveld. Each one driven on diesel the cost of which is included in the price of the goods being transported.

Add to this the new hike in electricity tariffs and we can only expect inflation to get ugly.

Expect interest rates to rise quickly

The Reserve Bank will struggle to keep inflation under 6%. So expect interest rates to rise sharply in an attempt to curb the rapid price increases.

So what should you do?

Tighten up your budget quickly and drastically. Sift through your bank statements and find ways to cut back on your expenses. Every rand will count…..

Get creative with ways to save more . Perhaps bulk buying essentials with family and friends. Lift clubs to work and school. Shopping on line.

Get creative with a side hustle. Using your spare time on income generating projects will certainly soften the blow. There are many opportunities but you have to search and find them.

What you shouldn’t do

The last thing you should think about is borrowing more to keep up with the rising cost of living. This puts you in a space of living above your means which in turn will dig a deeper hole for you as the cost of interest rises into the future. Your debt needs to decrease if you are to have any hope of getting through.

Don’t bury your head in the sand. The impact of inflation will not go away on its own. It will have a very harsh affect on your cost of living. Taking action now will prepare you for what is to come.