A money checklist for navigating tough economic times

Originally published on Sanlam Reality’s Wealth Sense blog

While the country is going through a financial crisis, being prepared is essential. Pandemic-proof your finances with these practical money tips.

1. Have an emergency fund

As a result of the COVID-19 pandemic, it’s understandable that money may feel too tight to allow for saving. But it would be a big mistake to neglect your savings or not to start a savings pot at all.

When an economy starts to dip, our jobs and our income can easily be put in jeopardy, and it’s for this reason that a savings fund is crucial. Whether your hours have been cut back, you’re out of a job, or your business isn’t making money, “a savings fund can provide a much-needed safety net to fall back on in case of a financial emergency,” says Nomvula Nkosi, a financial planner at Sanlam4u.

Remember: you don’t need a lot of money to start saving; even putting away as little as R50 a month can help you to take advantage of compound interest. What is compound interest? Kenosi Magosha, Head of Client Solutions Savings at Sanlam, explains: “When you start saving, most of what you get is what you put in. But as time goes on, you get interest on what you save. And you get interest on top of that. Then the growth starts compounding on itself. So later, most of your money’s growth is down to the fact that you’ve managed to grow money on top of what you put in. That’s why the role of compound interest is so vital.” Basically, compound interest is money you earn just for having money saved.

If you’re not sure where to start, speak to a financial planner. They can suggest ways to start small to ride the wave and emerge from the recession back on your feet. If you’re a Sanlam Reality Core, Plus or Health member, you can also earn up to 8 000 tier points for booking an appointment.

2. Pay down your debts

South Africans have shockingly high levels of debt. According to DebtBusters’ (the country’s largest debt counsellor) 2019 Q3 quarterly analysis report, people who earn less than R5 000 a month need 63% of their income to repay their creditors. Those who earn over R20 000 a month have debt levels of, on average, 133% of their net annual income. As a nation, we’re also three months or more behind our debt repayments. During uncertain times, it can be challenging to cover day-to-day expenses – let alone debt repayments – and this can cause your debt to spiral out of control.

“In normal circumstances, we encourage individuals to make a budget monthly and pay extra money whenever possible to pay down debts to kill the interest and ultimately get rid of debt faster. It is especially important to pay debts down in this trying time,” says Nkosi.

How to do this? Do not neglect your repayments. “Sidestepping debt is merely compounding the interest you are going to pay and therefore increasing your debt,” explains Nicki Blignaut, a Senior Financial Planner at 2one2 BlueStar. “Rather pay as much as you can whenever you can,” Blignaut recommends. “Come up with a strategic debt pay-off plan and stick to it,” adds Nkosi. “Take stock of your financial situation and identify spending areas where you can cut back on the go.”

Want to create a plan but don’t know where to start? Register for Sanlam Credit Solutions for free and get help from a coach to improve your credit score and make better financial decisions.

3. Create a budget and stick to it

“We don’t realise how much we spend on things if we don’t budget,” says Blignaut. “You may think a cappuccino is only R30, but if you have one every day over 20 days, suddenly you have spent R600 that month! If you saved that R600 over a year, you have R7 200.” How to get started? “First, list all of your NB items: expenses and income,” says Nkosi. “Sort through your expenses and see if it’s possible to trim some of these. Do this monthly. Track your progress and adjust accordingly.”

Want to budget, but don’t know where to start? Click here for more on budgeting and free budget templates.

“For those who have been retrenched, do not spend money on unnecessary items and don’t dip into your savings unless absolutely necessary,” says Nkosi. “If you receive a retrenchment package, concentrate on paying off debts first and carefully spend on necessities (needs). Forget about ‘the wants’ for now.”

It’s also time to negotiate with companies to whom you were paying monthly debit orders. A big no-no: cashing in pensions. Magosha says: “Every time you make a withdrawal, you are just punishing yourself in the future.” Rather, see what debit orders you can pause, what repayments you can negotiate and what expenses you can cut back on first – drawing from your long-term savings should be your last resort.

4. Diversify your investments

Most of us are familiar with the saying ‘don’t put all your eggs in one basket,’ and this saying could be applied to your investments. An economic downturn could be a financial disaster if all your money is tied up in one type of investment.

What is diversification? It’s is a type of investment strategy whereby you invest your money into several different financial instruments, industries and sectors. Diversifying your investments is one way to protect your money from the ups and downs of the markets.

“Diversification is key,” says Blignaut. “Markets are changing all the time with different portfolios performing differently. Fund managers have different goals and targets, and by having investments in a few, you catch them up somewhere to make up for the down somewhere else.”

“No one knows what the future holds,” says Magosha. “Something may look good today, but you don’t know what happens five years down the line. You could invest in one sector, and if that’s negatively affected, then all your savings are negatively affected. Spreading your money across different sectors, asset classes and companies can help protect you from losing all your money in one place. It’s minimising what will happen if things go bad.”

This is where a financial planner comes into play, as they have the knowledge and expertise to know how to invest your money in a way that offers good diversification, based on your needs and goals.

Get personalised advice on how to keep your finances under control by speaking to an expert financial planner. Book a meeting with one today.

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