Global economies have come under extreme financial pressure recently, due to the Coronavirus pandemic. It’s precisely during times like these that an individual may require cash from funds they had previously “saved for a rainy day”. In such volatile financial times it’s always best to focus on that which can be controlled – such as your individual spending and saving habits.
JustMoney spoke to Greig Phillips, financial adviser at Personal Trust, for some tips on how you can get into the routine of saving, even when times are tough.
Tip: Use our calculator to see how much you need for a decent retirement.
Establish an emergency fund for unforeseen events
An emergency fund is generally anywhere between three to six months’ worth of household expenses. It needs to be easily accessible and will ideally be invested in low-risk assets.
You need to be sure you have access to funds in a crisis. There couldn’t be a more appropriate time than right now to reiterate exactly why it’s so important to have quick, easy access to emergency funds.
“Rather cut down on your spending than cut out on saving altogether,” says Phillips.
He says one of the biggest mistakes people make is to not budget for their expenses, and many fail to allocate money first to savings. According to him, monthly savings should form part of your budget.
Make saving automatic and consistent
If possible, make use of a monthly debit order when investing for a future goal, as opposed to trying to save what you have left over at the end of the month.
Phillips says you must make use of rand-cost averaging.
“It’s a very important tool for an investor. This removes the risk of trying to ‘time the market’. This is when you invest an equal rand amount in an investment at regular intervals (debit orders work well), ensuring that the price you pay for the investment averages out over a period of time,” he says.
When the price is high, you buy less; when the price is low, you buy more. This may mean you miss out on some of the gains, but it certainly helps reduce the sting of downturns, he explains.
Pay off your debt as quickly as possible
Consumers are susceptible to the mental accounting bias, says Phillips.
For instance, some people keep a special fund set aside for a vacation or a new home, while at the same time carrying a substantial credit card or other debt.
In this specific scenario “saving” for a specific goal (home or vacation) can actually be detrimental to your total net wealth. You’re likely to treat the money in this savings account differently from the money you use to pay off your debt. This is in spite of the fact that diverting funds from the debt repayment process increases interest payments, thereby reducing its total net worth.
Phillips also points out that it doesn’t make sense to maintain a savings account that earns little interest while simultaneously holding credit-card debt.
“In most cases, the interest on this debt will erode any interest you could earn in a savings account. Individuals in this scenario would be better off using any money already saved up to pay off the more expensive debt,” says Phillips.
Let compound interest work for you
Phillips says you should start saving as soon as possible because every rand counts.
“Compound interest takes into account not only your original savings amount, but also accumulated interest of all previous periods. This shows how much money you can save by paying off loans quicker, and how much you can earn by starting to save as soon as possible,” he says.
Reduce unnecessary capital withdrawals where possible
Phillips says if you currently receive an income from a living annuity, try to reduce your withdrawals when possible.
“Government has temporarily increased access to living annuities for a 4-month period from 1 June to 30 September 2020. During this time, you can change your income withdrawals outside of your anniversary month and reduce or increase your income to 0.5% and 20% (normally 2.50% and 17.50% respectively),” he says.
He says you should try to withdraw a lower percentage from those investments that have been the most severely affected by the global pandemic.
Review medical aid/insurance policies
Re-evaluate your medical aid, funeral and insurance policies and premiums to ensure that you’re getting the best deal. Make sure that you or your assets are not over-insured, says Phillips.
Make use of financial products that offer tax relief & other benefits
Take advantage of the tax relief offered by products such as tax-free savings accounts and retirement fund contributions.
Phillips says you should compare the cost and features of financial services products before committing to one. These will range from a wide variety of loans, cheque accounts, debit cards, foreign exchange and unit trusts investments.
Don’t be afraid of taking on some risk
Phillips advises you to not be afraid to take risks when focusing on making long-term investments.
One of the biggest mistakes people make is to stick to low-risk investment instruments such as money market or cash accounts, he says.
Your funds require some riskier asset class exposure to give you a return that will beat inflation – for example growth assets such as offshore and local equities. The level of risk you take must match your ability to tolerate risk and fit into your investment expectation, he adds.
He says you should never invest out of fear or greed. These are the times when you’re most likely to make emotive and irrational investment decisions.
Phillip says it’s important to remember that everyone has their own unique financial situation and circumstances.
“That is why it’s highly recommended that you consider contacting a competent financial adviser, if you don’t already have one. They can help guide you to achieve your future financial goals. It all comes down to establishing a suitable but realistic plan and sticking to it over the long-term,” he concludes.
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