The financial impact of the coronavirus pandemic has shaken South Africans – and the world – to its core. Now, more than ever, it’s vital to assess and structure your personal finances for today and the post-COVID-19 future.
Here are three suggestions to preserve your finances in the current unpredictable economic landscape.
Ditch short-term as quickly as possible
If you’re lucky enough to be earning an income and can save money during the lockdown, use it practically. Contribute as much as you can to pay off any short-term debt such as loans, store accounts and your credit card(s). If you don’t make any contributions, the compound interest will accumulate very quickly, leaving you in a potentially irrecoverable position.
Remember, that you can be charged as much as 30% interest on a credit card. It’s perhaps a good idea to remove your credit card(s) from your purse/wallet, put them out of sight and only use them as an absolute last resort.
Reassess your budget
There are two aspects to budgeting: what you earn and what you spend. If you’ve already taken a financial hit due to the pandemic, it’s simply not feasible to live off the same budget. Plan your budget by looking at it through a new lens: make a list of your expenses and cut out what you don’t need.
It’s beneficial to break your list into two categories:
Standard of living expenses
These include bond and personal loan repayments, utilities, food and insurance. Commercial banks in South Africa have offered specific relief scenarios – speak to your bank for more information. It’s critical to understand that even in times of financial hardship, you shouldn’t cut expenses that can put you at risk such as short-term insurance premiums, vehicle and life insurance. Instead, cut luxury expenses.
These expenses include money usually spent on entertainment, recreation, travel, clothes, and dining out – they are off the table, so pay off short-term debt, or add to your savings, with that money instead.
Get advice from a reputable independent financial adviser (IFA)
As you may know, the South African Reserve Bank has cut the repo rate by 2%, making it 4.25%; therefore, the prime lending rate (the interest rate used by banks to lend you money) is 7.75%. This will provide a small reprieve to those who have debts. Relief measures such as payment holidays have also been offered. This is a silver lining for people who are under financial pressure through job loss or salary cuts.
However, economists have recommended that if you are still earning a full income, rather refrain from taking a payment holiday because the lender can still charge interest during this time. Even though the relief measure extends the repayment period, it may increase the final payment due to compound interest, which is calculated not only on the initial amount but also on the accumulated interest. Conversely, the repo rate cut will benefit people who can sustain the same instalments, providing you with the opportunity to pay off debt sooner.
You may be thinking of withdrawing your investment funds to cover expenses; if you have to, make sure you’ve spoken to an independent financial adviser who will explain the implications of withdrawing funds from your investment. People over 55 years of age may withdraw from their retirement annuity. There are numerous tax implications on these types of savings products now, and in the future, if you withdraw.
For example, if you retire now you will pay income tax on any withdrawals from the living annuities portion. You’ll be taxed according to your current income tax bracket. If you’re still working that percentage will be high because you’re earning a salary as opposed to when you retire and aren’t actively earning.
In a crisis, adrenaline surges in our body inducing an emotional response. Speak to one of fio.life’s independent financial advisers before you make any impulsive investment decisions. He/she will assess your current financial situation objectively and advise you on the best steps to take to ensure you COVID-19-proof your money.