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LOWER inflation of about 6percent will leave consumers with more disposable income at the end of the month. But consumers should be careful how they allocate this extra cash, counsels Old Mutual.
The temptation to spend the extra cash will be difficult to resist.
Reassessing your financial situation with the assistance of a financial adviser is key. Working with an adviser will help you prioritise your finances and assist you in spending the extra cash wisely as part of a holistic financial plan.
So what is inflation?
Inflation is a continuous decline in the value of money and is measured by the consumer price index (CPI).
It is the rate at which prices increase over time or the decrease of the purchasing power of the rand. So if inflation is high you will pay a lot more for a loaf of bread because the buying power of the rand is weaker.
When inflation is low the price of bread will go up by less so you will be able to buy more than when inflation is high.
The inflation rate is widely publicised in the media, but why is it important to know what the current inflation rate is?
When you increase your savings every year by more than the inflation rate, you are growing your wealth. So when your investment return after tax and costs is more than inflation, you are getting richer.
Though the extra rands will help a lot, you should not forget that the remainder of 2009 and the beginning of 2010 will probably continue to be financially challenging and the economic situation may only improve towards the end of 2010.
People should focus on managing their debt by starting to pay off the most expensive debt first.
It is vital to entrench responsible financial habits with the extra disposable income available.
Once debts are settled you should put savings away to carry you through tougher times, ensuring that you put enough away to grow your wealth.
Consumers should beware of buying luxury items. They should rather stick to buying necessities.
It is advisable to think beyond living for today and focus on your future financial well-being.
With the changing economic environment, consumers are advised to:
l Revisit their monthly household budgets;
l Confirm what expenses need to be provided for; and
l Confirm the amount of disposable income that is available to save.
As far as the extra cash goes, one should consider:
l Settling any outstanding short-term debt with high-interest rates, such as credit cards and shop cards;
l Paying more than the minimum required instalment into outstanding long-term debt such as a home loan. This will reduce the payment period and reduce the interest burden on the outstanding amount.
Changes should not be made to investment portfolios or underlying asset allocations unless done as part of a holistic financial plan and preferably with the assistance of a financial adviser who complies with the Financial Advisory and Intermediary Services (Fais) Act.
Ideally, changes should help you align your circumstances to your needs, financial planning goals and investment horizons.
Investors should take a long-term view and refrain from drawing on investments when markets are low. In fact, with share prices low, there are good opportunities to start investing in growth assets (such as unit trusts) that beat inflation.
It is a wise decision to act with resilience and restraint, to ride out the storm in the financial markets, to stay invested and to continue buying through the dips. It is also important to save more than the rate of inflation in order to grow your wealth.
lThe writer is managing director of retail affluent at Old Mutual.