As we all long for the life we had before COVID-19, are there any adjustments from the life that’s been thrust upon us that should be incorporated? Tamryn Lamb investigates.
It is hard to remember what a “normal” day looks and feels like. It has been almost three months since COVID-19 was declared a national disaster. In a typical year, three months isn’t a long period but 2020 is far from typical. I can scarcely remember gathering with friends at a busy restaurant, being within two metres of my parents or snaking through traffic into the office after dropping the kids at school. COVID-19 has taken a lot more away from us than simply basic freedoms. There has and will be a tragic loss of life, and – for many – a material loss in income.
In any period of abrupt change, we are forced to make adjustments. Not all of the adjustments we have been forced to make recently are negative, and some may prove to be the start of new, positive habits. This is true across several areas of our lives, but none more so than when it comes to our finances.
Key reflections on how to make positive changes in your finances
1. Budgeting is not just for those who are worried they will run out of money
Start with making a plan. Budgeting is simply the process of creating a plan around spending your money. This should benefit everyone, irrespective of your circumstances, as it allows you to understand your current situation – arguably an important first step before deciding where you want to go. You wouldn’t start a long-distance journey to a new country without figuring out how you were going to get there. Equally, a spending plan helps you calculate how much money you have for the things you need and focus or prioritise your money on the things that are most important to you. Of course, all good plans benefit from an element of flexibility: The last few months have reinforced how important it is to be able to adapt to changing circumstances.
2. Be conscious of unconscious spending
There is nothing like a radical change or curtailment in our day-to-day activities to force us to reflect on our normal spending habits. While it’s common practice to think hard and research the available options before making big purchases, like buying an item of furniture or a fridge, we often give little thought to the small, relatively inexpensive items that we purchase every day. This unconscious spending adds up.
As an example, if you normally buy one take-away coffee every workday, you conservatively spend about R500 a month on that item. That’s the same as the minimum monthly contribution for an investment. If we are conscious about where we spend our money, we are able to identify where we can make seemingly small changes. If consistently applied, these can have a big impact over time.
3. Focus on both the distant goals as well as the immediate needs and wants
We often live day-to-day focused on the most immediate needs – school fees, mortgage costs and groceries, to name a few. It isn’t easy, but an important – but not immediate – need is carving out a portion of your spending to meet your longer-term goals. You might have thought about at what age you would like to stop working, but do you know if you will have enough money to live on when this time comes around?
This crisis caught many of us off guard. While tough to bear, it is also a good time to reflect on what we can start to do differently to ensure we cope better with the next crisis. This may involve saving more, better debt management or cutting back on non-essential spending. One important longer-term, and often overlooked, need is that of an emergency savings account. A good rule of thumb is to try and accumulate a savings amount equal to three or six months’ worth of your expenses.
This pandemic has taught us that things can change unexpectedly and quickly. A savings pot can give us protection and options. Think that just six months ago we barely knew about coronaviruses, and yet today we are all budding epidemiologists. A famous Danish physicist, Niels Bohr, once said “Prediction is very difficult, especially if it’s about the future”. We may not be able to predict what will happen; however, we can try to be as prepared for it as possible when it does.
4. Put your savings to work for you – but focus on the long term
We all have to make sacrifices to carve out a portion of our budget to save. Make sure you make those sacrifices count, by investing in assets which will grow faster than the cost of the goods or services you are going to consume in 20 or 30 years’ time. This typically means you have to accept some risk or volatility in exchange for returns that outpace inflation.
If you have existing investments, you may understandably be worried about their performance in the face of the market turmoil. When reviewing your investments, you’ll likely see the impact of the recent market volatility resulting from the COVID-19 pandemic on the value of your investments. It may be very tempting to “cash out” and avoid the pain of any further sharp moves. Remember that you only crystallise losses when you sell out of your investments. Historically, the best course of action in times like these has been to stay invested, however uncomfortable it may be in the short term. Trying to time the market and determine the most favourable exit and entry points is virtually impossible and usually leads to bitter disappointment. Research shows that the majority of the best trading days on stock markets occur shortly after the worst ones, which means that you could miss out on the recovery if you disinvest at the wrong time.
If your circumstances have changed, and you need to make some temporary adjustments to see you through this trying time, take only what you need to see you and your family through. Try not to dip into savings that are earmarked for other important goals, such as your retirement or your children’s education. You can also pause contributions to your investments if you’re not able to afford them right now.
5. Partner with trusted experts
It is essential that you invest with a manager whose philosophy you understand and agree with. That’s the only way you’ll be able to trust them to see your investments through the hard times.
It also isn’t easy to build the right plan, and then stick to it. You may benefit from the services of a good, independent financial adviser (IFA) who can help you shut out the noise and keep calm and rational. An IFA will take a holistic view of your finances and help you craft a personalised plan – and ensure you stick to it when it’s most difficult, or help you figure out how to adjust it to take account of your changing circumstances. Read more about the value an IFA can offer in Part 5 of this series.
6. Focus on what you can control
It isn’t hard at the moment to find good reasons to be worried. In this kind of environment, it may be helpful to try and focus on what you can control, while trying to be prepared for what you can’t control. Consider implementing a plan and avoid letting those old spending habits resurface. Hopefully when life resumes, we will be able to reflect on these learnings just long enough to be able to profit from them in the future.
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