Advice for Rich and Poor: Decrease your Expenses

Mark Cliff of Alphen Asset Management says that the affluent need to decrease their expenses too. He writes that right now, many people are taking home less each month than they did over the past few years. This is either because their income has decreased, or their expenses have increased, or both.

Cost of Living and Inflation Up

Increases in the cost of living over the past two years have been pronounced. The rate of consumer inflation (as measured by CPI) was about 6% in December 2006 and recently peaked just shy of 14%. The rising costs of two things we can ill afford to go without - food and petrol - have been major contributors to this situation.

Salary and wage increases have lagged actual rates of inflation and the result has been a compression in real disposable income across the board. People with debt (like mortgages, hire purchase contracts, credit card debt and personal loans) are also feeling a significant pinch with their cost of servicing such debt spiralling: the prime rate has increased by almost 5% since early 2006.

The good news is that inflation looks to have peaked. Commodity prices are significantly lower than where they were a few short months ago and we have enjoyed two successive cuts in the petrol price with more to come. This bodes well for the prospects of interest rate cuts in 2009 and the consumer looks likely to get some respite on both the cost of living and debt servicing fronts.

But, before you prepare for a shopping binge, we do feel compelled to warn you that tough economic times are upon us and they look to be around for at least a year or two. There is absolutely no way that South Africa will emerge unscathed from the dark cloud descending on economies around the world. The global slowdown (in some cases recession) is real and, unfortunately, we anticipate a negative impact on both growth rates and employment levels in South Africa.

If you have not yet started to cut your expenses, do so now. And if you have any capacity to cut your expenses any further, read on and see why you should do so some more.

The Haves and the Have-Mores

We have looked above at those people who are not very affluent. But what of those privileged people who can still go shopping for silk ties and shrimps, for ski-holidays and sushi?

It seems that it is not only the less-affluent members of society who should now be trimming-back their expenses as the markets decline. I was priveleged recently to read what John Montgomery - Founder, President and Director of the US-based Bridgeway Funds investment management company wrote to his investors in October of this year in relation to the recent decline in the markets.

 "I'm planning to wait. Actually, I'm cutting back my expenses some so I can afford to invest more while stock prices are lower. (But If I had too much debt or didn't have an emergency fund, I'd consider funding these needs first). The most powerful weapon at your disposal while awaiting a recovery is your expense level. Say you could save an additional 10% by cutting back in certain areas of your budget. If you were to invest those savings, I call this "super dollar cost averaging." Because you do it when the market is down, these dollars buy more shares (than previously), and can more significantly boost your long-term wealth whenever the market does eventually recover.

My wife and I are practicing this currently, cutting some expenses and saving and investing more.

If you have found that you made a mistake in your asset allocation-for example, you didn't take money out of the stock market that you needed in the next handful of years-this method also works to replenish your finances at a faster rate. Interestingly, this approach works even for retired people on a fixed income, assuming that they have some "variable" portion of their expenses. (At least to some extent, we all do.)"

Conclusion

To some degree or another, each one of us can decrease our expenses. Even just a little bit. To follow Montgomery's advice and take the opportunity in tougher times to allocate resources to that space which has caused much of your present misery may take courage, but the rewards over time will be there. Can we find a way to decrease your expenses just a little bit more right now? Yes we can!  

* The full text of Montgomery's letter can be read at the link below. In it he also describes his 5 principles for long-term investing which cannot be included herein for reasons of space, but are well worth the read.

http://www.bridgewayfund.com/assets/pdf/Surviving%20a%20Bear%20Market%202008.10.17.pdf