6 Important Questions You Should Be Asking About Your Finances Right Now
Whether you’re fortunate to have worked all through lockdown, albeit from the kitchen counter with a cat in your lap, or are one of many South Africans who got hit with retrenchment, short time, pay cuts or no-work-no-pay, your finances are most likely not looking as healthy as you’d like. That includes your investments and retirement savings, which would have taken a gut punch along with the markets when the world economy suddenly slowed to a crawl. But whatever your situation, the decisions you make right now will affect your financial future. Asking the right questions is a good place to start.
1/ Should I Change How My Money Is Saved And Invested?
Your investment statement post market crash may be an unsettling collage of nosediving line graphs, and it’s totally understandable if you’re thinking your bank account may be a safer place for your finances. But resist the temptation to make a rash decision. “The question you should be asking is: if you did a proper review of your portfolio just before the crash would you have made changes then?” says Andre Wentzel, Solutions Manager: Recurring Savings at Sanlam. “If no, then it doesn’t make sense to do so now – crashes like the current one are part of the nature of long-term investing.” That said, he does recommend re-looking at your portfolio. The crash would have affected different asset classes in different ways and you want to make sure you have the best investment strategy for your goals. Time to ring up your financial advisor.
As for your bank account, it may be more stable, but you’re not going to see any major growth in your finances if you stash them in there, says Wentzel. “History has shown us again and again that these ups and downs average out over time and markets recover from crashes so that risky assets like equity consistently beat inflation. It’s unlikely you will earn an inflation beating return in your bank account, especially with the recent reductions in the repo rate. This means if you have long term savings goals (like retirement, tertiary education funding, seed funding for a business) you put these at risk by leaving them in a bank account as the return on the your savings will likely be lower than rate at which the cost of your goal increases each year.”
2/ Which Of My Debit Orders Are Really Necessary?
Those amounts coming off your account every month are probably looking pretty appealing right now. But if you’re going to pause some, be smart about which you choose so you don’t jeopardise your finances.
“What can be compromised is shorter term goals, such as saving for that holiday, wedding, or redoing the kitchen,” says Nicholas Riemer, FNB Investment Education Head, FNB Wealth and Investments. “The world we knew has changed and for travel and events like weddings, it could be a long time before these become feasible again. Putting a pause on these types of contributions will not set back long-term investment and savings goals and can be resumed when there is less financial pressure.” That said, he suggests you speak to a financial advisor first as there may be Ts and Cs you need to consider.
“Another temptation that must be avoided is cashing in a retirement or pension policy early,” he says. “Although this may seem like a solution to free up cash in the shorter term, a large amount of tax will be paid on early withdrawal and funds depleted when the time comes to retire. And your health is something that must never be jeopardised. Contributions to medical aid or your own medical savings account must be continued at all costs.”
3/ Do My Investments Still Suit My Goals?
“The current situation is the ideal time for reviewing your personal finances, i.e. your expenditure, your assets, long term cover (life, disability) and short term cover,” says Wentzel. “This is best done with the help of a financial planner. Work with a financial planner to review the appropriateness of you cover and the priority of your long term goals.”
If you’re tempted to ditch some of those policies, think long and hard about what the implications will be for your future yourself. “This comes down to what is important to you,” says Riemer. “For most people family and lifestyle are at the top of the list and the reason for saving and investing in the first place. Retirement and pension contributions are, in my opinion, the most important. Saving and investing for retirement takes time as people will need to live off this for 30 years and more.” Riemer also highlights your kids’ education as a priority investment. “Like health, your children’s education is vital and an expense that is not going to disappear. Saving and investing for education takes time and consistency and contributions should be made at all costs.”
4/ How Can I Be Smarter With My Finances?
According to Riemer, your first port of call should be to reduce your debt. “Look to eliminate short term, high interest expense debt first such as credit card debt. These monthly interest expense costs add up, and if these monthly costs were instead invested or saved it could mean achieving longer term goals faster. Becoming debt free is key to financial independence,” he says.
He points out that with interest rates being lowered, you might be saving on bond and car repayments. “This can be one of the options to save monthly and maintain investment, savings, and retirement contributions,” he says.
5/ What Can I Do With All That Petrol Money I’m Saving?
If you’ve relocated your base of operations from the office to your home, you’re saving on transport costs and other incidental drains on your finances like lunch from the canteen and your daily flat white. It all adds up, so make it work for you.
Wentzel recommends using that money to start an emergency fund if you don’t have one already, and pay back short-term debt like credit cards and store accounts. “Next consider earmarking the savings to a long-term savings goal like retirement or your children’s education,” he says. “It may not seem like it but small amounts contributed to these can make a big difference in the long term.”
But it doesn’t have to be all sensible and no fun. “Lastly if your personal finances are in order, including reviewing that you have sufficient risk cover in place, set aside the savings for something you plan to enjoy post lockdown. This gives you something to look forward to and also helps you avoid spending your lockdown expense savings just because you have it,” says Wentzel.
6/ How Can I Make Sure I Don’t Get Caught With My Pants Down Again?
The sudden escalation of covid-19 took the whole world by surprise, so don’t feel down on yourself for not seeing it coming. Instead, make sure that the next time there’s a major upheaval that can affect your finances, you’re ready to to ride out the storm.
“As much as the pandemic has taken from us, there are lessons we can certainly take from it,” says Riemer. “Emergency savings in a time of crisis provide that element of safety. They can be used in a time like this, to make up the difference in shortfalls, so that no compromises need to be made. Having 3 months’ salary saved and accessible provides that safety net needed for uncertain future events. It allows for easy access to cash, without the need to exit current investments at unfavourable times.”
“Ideally, you should be able to access your emergency savings quite easily and it should be a low-risk investment to avoid the situation that it dips in value just as you need it,” adds Wentzel. “So one could consider a money market fund, either a unit trust or through a tax free savings account (if you’re not already using your annual allowance). You could also consider various call deposit accounts. These would offer higher interest rates, but note that these will have notice periods so would only work if you wouldn’t need the funds immediately or you had other sources in place, like cash in your primary bank account or access to credit, to tide you over.”