Unexpected macroeconomic events can have a serious impact on people’s financial security, as we’ve seen most recently with the global COVID-19 pandemic and the economic chaos that has ensued. Unfortunately, one thing that the COVID-19 crisis has highlighted in South Africa, is just how many people were living from month to month, or even day to day, without any financial security blanket to protect them during times of emergency.
This is according to Ray Mhere, Head of Investment Distribution at Momentum Distribution Services, who says South Africa is stuck in a cycle of bad savings behaviour. “This poor savings culture is nothing new in South Africa, but the recent economic upheaval and subsequent job losses has brought to the fore, just how unsustainable and dangerous it is.”
To help South Africans gain better protection from future crises, Mhere suggests the following four tips:
1. Set up an emergency fund
“An emergency fund can help you to avoid incurring debt when you are exposed to unexpected medical and other expenses,” says Mhere. “The general rule of thumb to survive possible financial setbacks is a buffer fund of three to six months’ income in a liquid savings account at all times. If you are a single income family, it would be better to buffer yourselves with at least a year’s income.”
2. Save with a plan
In today’s tough economic climate, putting money aside can be a real challenge. However, Mhere says that the key to achieving long-term financial goals is disciplined planning over the short-term. “Start with a short-term goal of depositing as little as R250 a month into a savings account, where it can accumulate until you are ready to invest in something more long-term such as unit trusts.
“Saving requires discipline, and if you automate the process, you avoid the temptation to spend it on something else. The easiest way is to set up a debit order that transfers the money from your salary as soon as it lands in your bank account.
“But don’t despair if you didn’t do this,” Mhere adds, noting that it’s never too late to start. “The best time to start investing was yesterday, the next best time to start is today. Discipline is essential if you want to stick to your plan.”
3. Get adequate cover
Mhere highlights the importance of being sufficiently covered by making provision for medical aid, having short-term insurance for properties, vehicle and other important belongings, and life insurance such as income protection, disability cover, critical illness cover and life cover. “Only once these are in place, can you assuredly survive most unforeseen crises.
“Adequate life insurance, for example, will ensure that if something happens to you, your family can settle any debts and maintain their lifestyle; while disability cover, income protection and critical illness cover help in managing expenses related to unforeseen events, especially for events for which an emergency fund would be inadequate.”
4. Build up a cash cushion if you are a contractor or freelancer
Finally, Mhere touches on the financial vulnerability of contractors and freelance workers during crises. “If you are doing work that does not provide additional unemployment benefits aside from UIF, it is essential to save for a separate emergency fund that can see you through times of business interruption. The funds that you build up during your busy months can then see you through slower times.”