Box smart

Entrepreneurs and homeowners who were feeling a cash flow crunch may have been offered some relief by Reserve Bank Governor Mboweni's rate cut announcement - but only if they adopt sensible investment practices and "don't binge".

Old Mutual marketing development manager for Small and Medium Enterprises (SMEs), André Diederichs said that small business owners would need to make strategic choices now that would impact on them in the long run.

Many small business owners have funded their businesses through home loans and overdraft facilities.

The clever thing to do when interest rates go down is to pay off more of the capital, by sticking to current installment levels.

As banks compound interest on loans, merely by paying off a little more into your bond each month, you could substantially reduce the period of the loan.

Another boost for small businesses is that the percentage cut should stimulate more consumer spending.

"When people have more cash in their hands, they tend to spend it. It's human nature," Diederichs said.

Another aspect to consider was that a low interest environment meant that consumers would need to adjust their expectations for returns on their investment.

It was more realistic to focus on a real rate of return, meaning returns higher than the inflation rate, rather than a nominal rate of return.

Moving money out of banks into unit trusts might be a good idea at this stage, as the interest rate provided by cash in the bank became too low to warrant the low risk of a purely cash investment.

Don't go on a big spending binge.

We saw the US increase their interest rates this week by 0.25% and the other world markets have also increased their rates.

This will in due course have a spin off in South Africa, as we may end up importing some of their increased inflation.

This coupled with a historic high oil price, a current weakening rand will mean that imported products will become more expensive, putting pressure on our own inflation figures, which in turn could force the Reserve Bank to increase local interest rates.