Seeing many South Africans – even those who are fully employed – battle during the Covid-19 pandemic, Desiré Pauw, Divisional Executive for Human Capital at Momentum Investments, shares her tips on where to start if you’re in over your head financially.
Working in human capital (human resources), I interact and engage with an array of people every day – people in different stages of their lives and careers, of different cultures and religions, and with different life priorities. During the Covid-19 pandemic, however, I have seen some challenges that are universal to everyone, no matter their position in a company or their stage of life.
One of these is managing one’s personal finances. As Divisional Executive for Human Capital at Momentum Investments, I see increasing numbers of employees asking for salary advances or selling their vacation leave to make important payments like school fees, medical expenses, or even to manage their dire debt situations. From senior executives to newly employed junior staff, I have seen a distinct uptick in these employee requests since lockdown hit.
Managing – or sometimes completely restructuring – your finances has become increasingly important to make it through these difficult times, given the challenges Covid-19 has presented. The most critical piece of advice I can give anyone is to think of a defined budget and savings plan as non-negotiable if you want to navigate through it successfully.
Budgeting might have been a nice-to-have in the past, but today, proper budgeting is a necessity. In the past, a savings ‘buffer’ of a month or two to sustain you in times of need would have been sufficient. Today, with the uncertainty of Covid-19, high unemployment rates, a struggling economy, and so many other difficulties, this is not enough. Planning and budgeting for the future – not just the now – is imperative.
Everyone must build in a buffer or accessible savings for times of need. But, it can be difficult to re-evaluate what you need to do when you’re in a crisis. Consider these four steps to show you where to start to re-examine your finances and secure a better financial future:
1. Step one: Have a ‘buffer’ goal in place
It is much easier to save if you’re saving for something specific. If you have something definite you are working towards, it will be personally rewarding each time you add a little to your savings and move a little closer to realising it. Importantly, define the Rand value of your buffer/savings goal. The size of your buffer might differ depending on where you are in life, or what your future ambitions are.
2. Step two: Define your essential expenses
Start by looking at your income, and then define your essential expenses – the hard costs that you absolutely have to meet every month (for example, rent or a bond repayment). Put together a budget based on your income that will cover and manage your essential expenses. Remove the nice-to-have items so that you can maximise your savings, which will put that financial ‘buffer’ in place for when things get hard.
3. Step three: Re-evaluate your retirement contributions
Once you have your essentials-only budget in place, evaluate your retirement contributions. I cannot stress enough that these contributions are critically important and must be in place, even if you’re only contributing the minimum amount to your retirement savings each month. Most employers have an option to change your percentage contributions – which means that, if you’re contributing more than the minimum requirement, you may be able to reduce these contributions until your financial position strengthens.
Only you will know what you can and can’t afford, especially once you’ve done your essentials-only budget. You will need to determine if you choose the maximum or minimum contribution given your personal circumstances, so that you can still build your retirement buffer while also meeting your current financial needs. Keep in mind tax deductibility to ensure that your choices make sense – and if you’re not sure about this, speak to a financial adviser for advice.
4. Step four: What to do with your buffer, now you have it
Once you have that buffer in place – even if it’s not very big initially – you should think carefully about where you will keep it. By this I mean, think about whether you want it in an easy-to-access savings account (which usually has a lower interest rate), or a longer-term investment offering that will likely earn more interest and grow your money more over time.
There are also numerous investment vehicles that can help you build your buffer, while also giving you quick access to funds in times of need. A certified financial adviser will be best placed to give you guidance on where to ‘store’ your buffer.
It is easy to lose focus on a plan when things go well, or when we come across spectacular savings or feel like treating ourselves. Put your goal down on paper, don’t stop until you have achieved it, and don’t let others get in the way of reaching it.