3 Tips to face the new year with a strong financial base

The start of a new year continues to be a time to celebrate and often, to loosen the purse strings. However, the economic pressures South Africans are facing these days, like higher inflation and interest rates, and slower growth, have brought about the sobering reality that our future earnings may not be as guaranteed as we might have thought.

In fact, the new year may very well require some significant adjustments to the way in which we think about money, and consequently, how we spend it. What about making your new year’s resolution about strengthening your financial base? To help you, we’ve listed three tips on how to navigate this year’s financial challenges sensibly.

Live within your means

Your financial plan should be your guideline when it comes to knowing what you can afford to spend this year. Overspending or going into debt comes with additional risks. For example, if you can’t pay back what you’ve spent on credit in full, you will be charged interest, and this will keep happening until the debt is cleared. Credit card debt attracts the highest interest rates of all types of debt, so you could end up paying more for something you have already ‘bought’.

It’s worth noting that when interest rates were at exceptionally low levels due to the pandemic, taking on additional debt may have seemed like an attractive option. But interest rates have been rising sharply, and the cost of living is becoming more expensive. So before you tap into your credit card or take out that personal loan, keep in mind that the more debt you have, the more interest you’ll end up paying in the long run.

One of the most effective means of recovering from financial difficulties is to do your best to live within your means and avoid spending money you don’t have. It’s so easy to convince yourself to spend instead of saving, but you only cheat yourself (for a short-lived pleasure such as an expensive meal out, or shopping more than you should) if you become financially overextended. So do all you can to avoid getting swept up in overspending.

Let a budget be your guide

A good way to manage finances in the new year is to draw up a new budget that takes into account 2023’s higher interest repayments and higher costs for essential goods like petrol and food. This will not only give you a good idea of how much you have available to spend, but also where you might be able to free up some extra cash. Two of your goals for shoring up your finances should include reducing high-interest debt and investing more. If you can only afford to do one of these, generally repaying your debt more quickly is the most sensible option. 

Stay strong

Another very real temptation is to withdraw from your existing investments to make ends meet. By withdrawing, however, you not only reduce the value of your investment in the present, but you also risk eroding the potential for future gains in years to come. Simply put, these days you simply can’t afford to be out of the market.  

We need only take a short trip through history to demonstrate this point. Looking back at the start of the Global Financial Crisis in 2008, many investors cashed in their investments at significantly low values due to fears over losing money. But what followed next was the longest equity bull run in history. Those who took advantage of the cheap valuations and stuck to their investment objectives during the GFC benefited from the market recovery, while those who sold out of their investments locked in their losses and missed out on the significant returns that followed. Patience is crucial, while persevering with your financial plan.

If you’re feeling demoralised and facing financial pressures in the new year, the reality is that you’re not alone -- 2023 will be a challenging one for many. So, if you’re feeling the financial pinch, employ these strategies to get through the current difficult economic conditions with your finances intact. Remember that the economy goes through cycles, and eventually interest rates and inflation will start to fall again, and growth to pick up.

Hopefully, these tips will help you begin 2023 in a financially healthy position and ready to tackle the new year with a renewed sensibility about your spending and investing choices to come.

To invest with M&G Investments, please feel free to contact our Client Services Team on 0860 105 775 or email us at info@mandg.co.za.