Negative oil prices, plummeting stock markets, home-schooling young children, shutting down the economy: the Covid-19 pandemic has brought about circumstances we never in our wildest dreams could have imagined – especially when putting our financial plans in place. While even those with the best intentions may have tried to plan for every eventuality, it is likely there are not many people who can say they were financially prepared for this crisis. As with many industries, the financial planning arena has changed forever. Here’s how we are likely to do it differently in the future.
Enhanced need for emergency funding
For many of us, our emergency funds were earmarked for eventualities such as emergency travel, large vet bills or unexpected vehicle repairs, and the industry ballpark has always been to hold between 3- and 6- months’ worth of income in an accessible emergency account. Prior to the Covid-19 crisis, many may have considered this an excessive level of funding to have in place. Without adequate emergency money, the coronavirus has forced many South Africans to incur debt in order to cover their monthly expenses, and the long-term costs of doing so are enormous – especially as the economic effects of the pandemic are likely to impact us for a number of years still. This pandemic has likely resulted in us viewing our emergency funding in a completely new light and dramatically ramping up our savings.
Balancing of investments
The pandemic has also highlighted the need to ensure that not all of our investments are housed in compulsory funds, and that we create a balance between our retirement funds and our discretionary investments. While there are obvious tax advantages of investing through a retirement fund, it’s important to balance these tax benefits against the need to have quick access to capital in times of crisis.
Keeping our wills updated
As the first cases of coronavirus were reported in South Africa, many of us instinctively pulled out and dusted off our wills. There’s no doubt that many have been surprised at how outdated their wills were, and there appears to have been a heightened increase in estate planning over the past few weeks. Going forward, it makes sense for you and your financial planner to review your will at least annually to check that it still reflects your wishes.
Organising our estates
Together with updating wills, there has also been a scramble for information pertaining to estate planning such as signing a living will, ensuring estate liquidity, setting up trusts, organ donation, setting up a digital will, signing a power of attorney and putting business succession plans in place. The very real fear of severe illness and death has made us sit up and appreciate the value of having an organised estate planning file.
Committing to annual reviews
Like a dental check-up, many people brush off their annual financial review as an unnecessary inconvenience in their busy schedules. As the economic effects of lockdown become more real, many have come to realise the value of performing a review, especially when it comes to cost-cutting. For instance, if you haven’t reviewed your life cover in a while, there is a distinct possibility that you are over-insured on some benefits and can safely cut back on some cover.
Formalising your business structures
Whatever entity you choose to run your business through, government’s relief measures make it clear that only those businesses who are registered and up to date with their taxes will qualify. This highlights the importance of complying with laws regarding company registration, HR, tax, UIF and financial reporting. It’s also highlighted the need to understand your personal and business taxes to ensure that you are taking advantage of all the mechanisms available to you.
More cautious and regular budgeting
Nothing has prompted as many South Africans to prepare a personal budget more than this pandemic, as many scramble to cut costs and make ends meet. Many have found room in their budgets where previously no room was thought to have existed. We’ve proved to ourselves that we can be truly ruthless with cutting costs, and this should be a habit we stick to going forward.
While revisiting our budgets many of us have taken the opportunity to revisit our goals. Do we really still want to own a holiday house? Do we need a bigger house? A new car would be nice, but is it necessary? What part of ‘normal’ life do I want to go back to? With more time on our hands as a result of lockdown, many have found that their financial and lifestyle goals have changed, and that they probably should be visited more often.
Being more fearful of debt
If you’re servicing retail or credit card debt, it’s likely you’re regretting whatever it is you purchased with the credit, especially if your income has been affected as a result of the pandemic. Retail debt is easily accessible, and too many people use debt to sustain unrealistic lifestyles. Hopefully this crisis will create a greater national awareness for the dangers of debt and will make us all more fearful of it.
Not skimping on life cover
For many, life cover is a grudge purchase because most of us think it’ll never happen to us. The pandemic has caused many of us to confront our mortality and the reality that it can happen to any of us. Life cover is a key estate planning tool that can be used to build liquidity in your estate, cover your debt and make provision for your loved ones, and you shouldn’t skimp on this cover.
Prioritising income protection
Also often perceived as unnecessary cover, the pandemic has reinforced the need to protect your income against ill health or disability, whether temporary or permanent. Uncertainty around Covid-19, its severity or long-term health effects are cause for concern, and a comprehensive income protection benefit is an imperative.
Knowing your rights as an employee
With retrenchment on the increase and many jobs at risk, the need to understand your employment contract and your rights as an employee have been highlighted. It’s also reinforced the need to understand any group benefits you may have in place, your rights on retrenchment and any severance package you may be entitled to, any retrenchment cover you have in place, and how to claim from UIF if the need arises.
The value of a passive income
It’s in times like these that we realise the true value of having a second or passive income. Having an alternate source of income, regardless of how small, can help to mitigate the risk of income loss or reduction. If you don’t currently have any form of passive income, now is the time to start exploring options for generating an alternate form of income especially if your job entails selling your time.
More cautious spending
If you’ve prepared a post-Covid-19 budget, it’s likely you have been pleasantly surprised by the drop in your convenience spend. Spending on take-ways, ready-made meals, coffee-on-the-run, Uber rides, Uber eats, impulse purchases, parking, tips and eating out all adds up and eats away at our disposable income. Going forward, it’s likely we will all tighten up on our convenience purchases and adopt a more careful approach to spending.
If one or both of you have been impacted financially as a result of the pandemic, it’s likely that you will need to join financial forces to survive this crisis as a couple. If you haven’t previously undertaken joint financial planning, the Covid-19 may well be the catalyst to set you on the path of planning together, making provision for each other, spreading the risks, and working towards a common set of goals.
Investing for the long-term
If nothing else, Covid-19 has created a resounding case for having a well-diversified, long-term investment strategy that is not affected by short-term market fluctuations. Picking stocks and timing markets is difficult to do even at the best of times and trying to do so in these historically uncertain times will be near impossible. If your investments aren’t already diversified across all industries and asset classes, now is the time to set a strategy in place so as to de-risk your investments.