Financial Lessons We Can Learn From a Pandemic
The financial and trauma and emotional toll that the pandemic has had on South Africans (and the world) is immense. Unemployment is at the highest percentage ever, and the health system is completely overwhelmed. The primary reason for the extent of the escalating infection rate is simply that the country didn’t have the infrastructure – across all sectors – to combat a viral outbreak.
South Africa is still very much in an unstable state as it waits for a vaccine to be developed. In the interim, the best is to prepare ourselves for the unknown by implementing strategic financial planning as a pre-emptive measure. Here are a few salient actions that can be taken to safeguard economic security.
Rethink the importance of implementing an emergency fund
Reputable independent financial advisers will always emphasise the importance of having an emergency fund (if you don’t have one, set it up now.) The suggested amount you should save will vary depending on your financial situation. Still, the principle remains the same: the fund is geared to augment the need to grab a credit card to pay for large unexpected expenses. In saying this, the generally agreed-upon amount you should aim to save is three to six months’ salary to cover living expenses.
Speaking about the financial impact of COVID-19, an article published by Psychology Today, said that when people started losing their jobs in March and April, many ‘had to resort to making bad financial choices like taking cash advances, or deferring rent payment and facing potential eviction. This is precisely the problem solved by an emergency fund. By saving anywhere from three to eight months of expenses (expert recommendations vary), an emergency fund cushions a sudden reduction or stoppage in income and gives breathing space.’
Zero your debt
Please take a look at the outstanding amount on your credit card(s) and prioritise paying it back. Remember, the amount of credit you have actually belongs to the bank; so, any purchases you make on the card(s) is essentially using the money you haven’t earned yet.
Take a bit of time to list your expenses; make sure you include fixed costs such as a mortgage, rent, car payments. Calculate how much of your income is needed to make those payments. Now, you can identify how much you require in your emergency fund to meet these expenses and budget to ensure you eliminate the debt as quickly as possible. It’s also worth phoning your bank annually to negotiate a lower interest rate. This will help give you more financial flexibility in the long term.
Debt consolidation tip:
Credit cards can carry interest rate percentages up to as high as 30%! An IFA may suggest refinancing your mortgage to pay off your total accumulated debt in one shot. The reason this would be recommended is that mortgages usually have a much lower interest rate than credit cards, and are payable over a maximum 30 years.
Budget Planning is essential
The reality is that we live in a consumption-based economy, and the pandemic has flipped it 180-degrees. Although times are tough, our plight has forced us to view needs and wants from a new perspective.
Okay, so you now have a grasp of how much is needed to cover fixed expenses. Remember, these are costs you can’t do much about, so the rest of the budget will consist of your variable expenses – these include entertainment, restaurants, groceries and gifts etc.; Basically, the money you choose to spend. The foundation of your budget should revolve around two key areas: Lower your consumption and focus on saving.
Spending behaviour patterns
When the country went under hard lockdown, non-essential items were banned from being sold, which included alcohol as well as clothes. The financial magnitude of the closure of the liquor and retail sectors was evident by the decline in South Africa’s gross domestic product (GDP).
The severity of the impact on the GDP has shown how much consumers were spending in those sectors. It’s provided us with a snapshot of wants being prioritised over needs. The lesson here is that when consumer behavioural sentiment had to adapt to new social conditions, it resulted in variable expenditure decreasing based on the banning of only two sectors.
Psychology Today, further comments, ‘consumers spent less because they couldn’t shop for clothes, shoes, accessories, perfume, and other discretionary items according to their usual patterns. Research shows two factors that help consumers to break entrenched habits: the disruption of environmental cues that trigger the habitual action and changes in social norms. Habit researchers have noted that “Successful habit change interventions involve disrupting the environmental factors that automatically cue habit performance.”’
It can be argued that these restrictions acted as a microcosm that has forced many individuals to determine what they really need versus what they want. This is a critical, holistic, financial lesson that should be considered and implemented even after the curve has been flattened. It will give you flexibility savings into various investment products such as retirement annuities and unit trusts – both will help you grow your wealth.
As mentioned above, the implementation of an emergency fund, eliminating debt and trimming expenses that should transcend any social and environmental triggers. If you need some assistance to understand and implement these mechanisms fully, Fio Financial Planning has experienced independent financial advisers. They are equipped to educate you so that you can make informed decisions about your structuring of your finances.