This crisis is not the first and it will certainly not be the last one in our lifetime. The next crisis may be deeply personal, only affecting you, or it could be another global pandemic. We have no idea how this calamity will manifest, but what we can do is to be prepared for it.
Fifteen years ago, having just bought a new home and given birth to my second child, I found myself unemployed and my husband retrenched. It was, for us, a financial Armageddon equivalent to the economic crisis the world faces today. It was a tough time in our lives, it took sacrifice and discipline, yet thanks to the lessons we learnt and changes we implemented 15 years ago we were ready to tackle this one.
We learnt that living on credit was not an option, that an emergency fund of three month’s expenses would give us breathing space, that we will one day want to retire and need money to do that, and most important of all, we learnt to live within our means.
Rahm Emanuel, former President Obama’s chief of staff once said “you never let a serious crisis go to waste. And what I mean by that is it’s an opportunity to do things you think you could not do before”.
Step one: Build that emergency fundIf you keep falling back onto your credit card/overdraft or need to cash in long-term investments due to some calamity, you will never get off the starting block. An emergency fund is the foundation of financial resilience. You will never be able to get out of debt or to even start building wealth if you do not have liquidity to meet unexpected expenses. Start with at least R10 000 and when you receive a bonus, tax rebate or any other windfall – rather than spending it, boost that emergency fund. Your aim is to have three months of your expenses tucked away. Just imagine right now how you would feel if you had that emergency fund already? Believe me, you would feel a lot less anxious.
Tip: Invest your emergency fund in an account that earns interest, but which is accessible, eg: a 32-day notice account. If you have an access home loan, you could pay in a large portion of your emergency fund to reduce the interest on the home loan but is still accessible when you need it.
Step two: Reduce debtMost households have become increasingly reliant on debt. Access to credit has become so easy that we have forgotten how to live within our means. We live on credit cards and overdrafts, never really knowing when we are spending our money or the bank’s, and without realising it we are living a pay cheque behind. Hence, when we face a financial crisis, we spiral very quickly into a debt vortex.
Getting on top of debt starts with living within your means so you stop relying on credit to survive. The best way to pay your debt is to follow the “snowball” effect by targeting one debt at a time – starting with your smallest debt. As soon as you settle this one debt, you take the funds you were paying towards it and add it to accelerate your next debt. You get the feeling of “quick wins” which keep you motivated as you see results far quicker than if you tried to tackle all debts at once. The key to success is to close those credit facilities as soon as they are settled.
Build a buffer into your home loan repayments by paying an extra 10% above your normal installment. You will be able to absorb future interest rate hikes and it will build up access funds which you can use to fund your mortgage if you lose your income.
Tip: The best way to settle your credit card debt is to stop using your card! Then increase your payments each month and as the balance reduces, ask your bank to lower the credit limit.
Step three: Understand your insuranceInsurance is there for those big calamities that you could not fund from your emergency fund. It is an important part of financial resilience.
Credit insurance really came into its own during COVID lockdown because it covered people’s debt repayments. Very few people were even aware that they had credit insurance and had never paid much attention to it until now. Find out which of your loans have credit insurance in place and familiarise yourself with the terms and conditions. What events will it pay out for? In most cases car finance and home loans did not automatically include credit insurance. This may be something you want to investigate if you do not yet have your three-month emergency fund in place.
One of the biggest mistakes people make when under financial pressure is cancelling their car insurance. Accidents happen and it is not uncommon to find yourself in a position where you have no transport and yet owe the bank a lot of money! Shop around every two years to make sure you are getting value for money. If you have built up sufficient money in your emergency fund, you can lower your premiums by increasing the excess.
Life insurance is not just about death – it is also about living through a crisis. What many young people don’t realise is that their future income is their biggest asset. What happens if you suffer a severe illness or are disabled, how will you be able to earn an income? What happens to your family if you are unable to provide for them? Review your insurance policies, understand what they cover, when it pays out and whether this fits in with your needs.
TIP: Check that you have premium waivers on all insurance policies. These come into effect if you are retrenched and cover your premiums for a period. This means cover stays in place when you need it most.
Step four: Get your paperwork in orderPut together a life book that includes all those important documents from your will, birth certificates, marriage certificates as well as your medical details including your medical scheme and life insurance. If something happens to you, your family needs to know where these documents are held. Make sure you review your will – especially if your marital status has changed or you have had children. This is an important discussion to have with your partner – what happens to you and the family if something happens to them? If you have children or a large estate, it is worth paying for expert advice on estate planning. Ask your employer for details on your employee benefits and make a note of your UIF details.
TIP: Write up a spreadsheet that has the details of all your bank accounts, credit accounts, investments and policies. This will make it easier for you to keep track of your paperwork and is an easy reference to have at hand.
Step five: Leave retirement money for retirementThere is the temptation to view your retirement fund as an emergency fund. Most people cash in their retirement benefits when changing jobs or retrenched. While it may appear to solve the immediate problem, it creates a far greater financial issue in later years when it becomes more difficult to solve. Sadly, more than 90% of South Africans enter retirement with insufficient money mostly because they withdrew the funds at some stage. With proper financial planning, reducing debt and having an emergency fund in place, your retirement fund can be left to be just that – your retirement.
If you start saving for retirement from your first pay cheque, you need to save a lot less over the years to secure a decent retirement. It will also give you flexibility should you put your retirement contributions on pause due to a job loss or even taking time out the workforce to start a family.
TIP: When changing jobs if you transfer your retirement fund to a preservation fund you still have the option to make a one-off withdrawal before retirement. This grows and protects your money from the taxman but gives you flexibility if you ever need it.
A crisis gives us the motivation and discipline to change, make sure you don’t waste this one.