Key financial skills for survival in 2024
It is an open secret that Malawi is not in the best economic position right now. Inflation and interest rates are high. The government, through the Ministry of Finance and Economic Affairs, expects the economy to grow by 3.6 percent but there are questions over how realistic that is.
Last week, this column argued that there are little prospects that inflation will go down in the near future based on the premise that food prices, the main driver of headline inflation in the country, will remain elevated following the disruptions to the agricultural season caused by El Nino.
And as long as inflation is on an upward trajectory, it would be incredibly naïve to think that the policy rate—the rate at which commercial banks borrow from the Reserve Bank of Malawi and a key determinant on interest rates on bank loans—to go down.
But why should anyone bother with these two macroeconomic variables? Well, for two very important reasons. First, inflation erodes the value of your income and savings. Second, policy rates determine the cost of the loan that you will get from commercial banks and sometimes, even microloan foundations.
To put it into context, inflation is currently hovering at 35 percent, according to figures from the National Statistical Office (NSO). What this means is that if a person was earning K100 000 at the beginning of 2023, the real value of that salary this time around would be somewhere around K65 000.
In the long-run, for as long as annual salary adjustments are below the inflation rate, which they usually are, you will be earning relatively less income as you go. The same goes for the personal savings. Inflation will eat up your savings if the interest on those savings is below the inflation rate.
All things being equal, people resort to loans to mitigate this loss in real monetary value. This is where the second set of problems come in. When interest rates are high, the cost of borrowing goes up. Since 2022, the policy rate has gone up 1 200 basis points from 12 percent to 24 percent.
To put it into context, considering that banks add a premium of about 10 percent above the policy rate on any loan extended to an individual, a person who got a five-year loan at a commercial bank at 22 percent in 2022, is currently servicing that loan at about 34 percent per annum this year.
That is a steep financial burden to carry when the amount of money in your pocket can get you less products and services. It is a tricky situation that can easily cascade into a never-ending cycle of loans that will hold that person back financially in the long run.
Fortunately, the situation is not all that dire. There are some “adjustments” that a person in this situation can make to survive in this hostile environment without compromising their financial stability.
To begin with, work to pay off all the high-interest debts that you have. Banks usually allocate a significant portion of the monthly payments to interest charges. Making additional payments targeting the premium can reduce the amount of time and the interest that you will pay on that loan.
Aside from that, always strive to save above or close to the inflation rate. If it is within your means, hire a specialist to direct you to savings and investment vehicles that will ensure that you can earn a decent interest on your savings or investment.
The Malawi Stock Exchange is one such avenue. Some investors have earned more than 100 percent on their investment by investing in some counters listed in the local market.
And last, but not least important, find a second source of income. Finding an alternative source of income aside from your day job or business. Use the free time away from work to explore online platforms for opportunities to get some freelance work.
To paraphrase former US President John F. Kennedy; ask not what the government can do to make things easier for you, ask what you can do for yourself to improve your financial position.
