We tend to think our income stream will never dry up, so we end up having a 1:1 income to expense ratio; sometimes even more on the expense side of the ratio. Our employment contract says “permanent”.
This can be a problem because “permanent” doesn’t always mean “forever”, especially in South Africa where jobs are lost all the time. The other part of this problem is changes in the economy.
Recently, we’ve been hit with petrol hikes and a VAT increase. We see the ripple effect on the shelves when we buy our groceries. This is why living on the edge of your income becomes a problem even if you are guaranteed a job for as long as you live.
If you live on 100% of your income and everything goes up, you will find yourself being a debt taker and/or a forced “downgrader” of lifestyle, because you would need to cover the shortfall caused by an increase in prices.
I personally experienced this in recent months. Filling up my car costs significantly more than it did in January. Fortunately for me, I wasn’t spending 100% of my income. However, I did find myself having to decrease my savings/investment contributions to cover the shortfall, to a point where the savings ratio went down to 0%-9%. If I was living on 100% of my salary, it would have been even harder to cover the shortfall. R10 can’t buy a loaf of bread anymore, but I still need a loaf of bread.
Not only has the increase in the petrol price been a problem – winter hasn’t been too kind either. My electricity bill skyrocketed, making the cost of living even more expensive. Also, as you can imagine, “black tax” rates are also on the up because your assistance is needed even more.
All this happens during a time when everything goes up but your income.
What’s the moral of the story? Keep your lifestyle costs low while things are still great, because you might pay the price when the economy surprises us in a bad way.
Njabulo Nsibande is a Just One Lap user-turned-contributor. His “Cash Club” blog details his experiences balancing the financial obligations of a young parent with his investment aspirations. Njabulo is a founding member of an investment club. In this blog he shares his experiences trying to work out the intricacies of collective investment in the true sense of the word. Follow Njabulo’s journey here every month. Find him on Twitter: @njab_soul.