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By Marise Smit*
The Covid-19 pandemic caught many people off guard, the subsequent economic downturn perhaps more so, but with financial markets flat and businesses going bust, investors everywhere are taking a big financial hit, which many were and still are not prepared to handle.
But while the country and economy have started to reopen, and the markets are recovering to pre-Covid-19 levels, we are far from out of the woods yet, and it won’t be the last financial crisis we experience in our collective lifetime.
A sound financial plan has several elements. These must be reviewed on an ongoing basis as personal circumstances change. And if no comprehensive plan is in place, these steps can provide protection against the effects of future upheaval similar to the current disruption of economies worldwide.
- Put something away for a rainy day.
Always save a portion of your income. Even if it is only 5% of income, it can make a difference in difficult times. Ideally the savings percentage of income should be above 20% or even 50%. This can be a mixture of savings and investments, but always make sure to have cash that can be accessed with ease, in times of difficulty. Having three to six months of living expenses in cash is a massive step in the right direction and make all the difference when regular income is lower or interrupted.
- Understand your personal cash flow.
Knowing what your essential spending needs are will allow you to extrapolate what you should hold in savings to “keep the lights on” in case of unemployment or adverse investment outcome. Make a priority list of critical expenses, for instance contributions to medical aid, housing (bond, rent, utilities) costs, groceries, insurance, and contributions to retirement savings.
- Eliminate debt.
Limiting – if not avoiding – debt while also building strong cash savings is paramount to surviving a financial crisis. Store cards and credit cards in particular must be avoided and if finances can be improved by scaling down a current vehicle and so reduce that debt burden, this should be considered.
- Relook your health savings account.
Reconsider whether health savings accounts are right for you. With health insurance most frequently tied to employment, many people will be surprised at the true cost of paying premiums and usage if separated from their job.
- Take advantage of relief measures.
When times are abnormally tough, the government and business community at large may step in to provide relief. Take advantage of tax incentives, unemployment benefits and other relief measures announced and access money from retirement plans in a tax-advantaged manner. However, make sure to understand the terms and conditions of ‘payment holidays’ before accepting it to protect cash flow.
- Diversify your investments
Surviving Covid-19 with no income is frightening. Rather than only investing in a retirement fund, start small and invest for income as well. Diversify more than just your stock holdings—diversify your products, too. Explore more conservative products that can help you weather volatility, like low risk government bonds.
The current crisis has delivered a perhaps unexpected but a good lesson for most of us. To be prepared, it is important to meet with an experienced and expert financial advisor who can guide you through the process of financial planning for the current crises and sustainable future. Risk cover should also never be underestimated. We have seen overnight tragedies, and you want to prepare and protect not only your assets but also your loved ones.
Read more about financial planning.
- Marise Smit is a Certified Financial Planner® professional.