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Planning in a pandemic

Getting your affairs in order to be better prepared for the next crisis.

Emergency funding is an imperative

Even at the best of times, having access to emergency cash is a financial planning fundamental – more so in times of crisis. Sadly, the coronavirus pandemic hit us on the back of an already downturned economy, and many South Africans were caught financially off-guard with little or no access to emergency money. While the three- to six-months’ worth of income rule of thumb is something most of us aspire to work towards, most South Africans fall hopelessly short of this benchmark. That said, even holding six months’ worth of emergency cash would have been insufficient for many South Africans who are already in their sixth month of no earnings with potentially many more months to follow. The reality is that this rule of thumb is just a guideline that has very little relevance to the personal circumstances that we each find ourselves in. If the pandemic has taught us anything, it’s that each of us needs to determine for ourselves what level of emergency funding we should be holding by taking into account a broad range of factors. What industry you operate in, how much you earn, whether you’re a single or double-income family, whether you have alternative sources of income, your age, your earning trajectory and your propensity for saving are all factors that should be considered when setting your emergency funding level.

Reading the fine print matters

When banks, insurers and other service providers announced financial relief measures for their customers, many of us scrambled to find our policy documents, credit agreements and finance contracts in order to read the fine print. Do we have credit life insurance? Does it cover retrenchment and/or loss of income? What are the implications of non-payment? How will non-payment affect our credit scores? Who do we contact and how? How is our financing currently structured? What are our consumer rights? Trying to locate and understand the contractual fine print in a state of high anxiety, and possibly even panic, is not conducive to problem-solving. As a result of this pandemic, many of us have learnt the value of reading the fine print up front, filing it in a safe place, and knowing our consumer rights so that we are better prepared next time a crisis hits.

Be cautious of fixing your interest rates

If you have fixed your home loan or vehicle finance interest rates prior to April 2020, you will have lost out on the recent repo rate reduction. That said, with interest rates currently being so low, you may now be tempted to fix your bond rate. However, just as financial institutions offer a higher interest rate on longer-term fixed deposits, so too do they offer higher interest rates for those seeking fixed interest depending on the period. With uncertainty as to what will happen with interest rates, now may not be the opportune time to opt for fixed interest, but rather to consider increasing your repayments to a level that you are comfortable with. Consider increasing your repayments in line with what you would pay if your interest was fixed to create a buffer against any future interest rate hikes. This will have the effect of paying off your capital quicker and reducing the amount of interest you pay over the longer term.

Discretionary investing has a place

If you’ve been channelling all your savings into a retirement vehicle you may have found yourself without access to much-needed capital in a time of crisis. While the tax benefits of retirement fund investing are undisputed, from a cashflow planning perspective it’s important to find the right balance between compulsory and discretionary investing especially if you’re still relatively young. Most retirement annuities allow you to access your capital from age 55 onwards, while pension and provident fund retirement ages generally range between 60 and 65. For those in the early stages of their careers, having all one’s savings in compulsory investments can be limiting especially if you need access to large amounts of cash to, for instance, set up a new business, pay a deposit on a new home, or inject capital into an existing business.

Policy RAs can be restrictive

If you have a traditional policy retirement annuity in place (as opposed to a unit trust-based RA), you may have found it to be somewhat restrictive when trying to place your contributions on hold. Some old-style policy RAs prohibit the policyholder from stopping their contributions without making the policy paid up (cancelled) and charge penalties for doing so. If you own a policy RA, you may want to investigate transferring it to a unit trust-based RA which provides full contribution flexibility with no penalties for stopping and/or starting your contributions at any time.

Lifestyle debt is dangerous

Incurring lifestyle debt is dangerous at the best of times. While the reduction in interest rates may have somewhat cushioned the blow for those living on credit, it’s certainly not a panacea for those accustomed to living well beyond their means. If you’ve been retrenched or suffered a loss of income as a result of the pandemic, your pre-pandemic debt may well serve as a daily reminder of debt’s dark side. Debt is an easy place to slip into but a difficult place to extricate oneself from, especially when facing economic challenges on multiple fronts. If you find yourself heavily indebted and/or unable to pay your debt, now is the time to take bold and decisive steps which may mean placing yourself under debt review.

Don’t wait to get your affairs in order

Increasing Covid-19 infection rates were coupled with a rise in demand for estate planning. Faced with the fear of infection and untimely death, many people prioritised drafting their will, signing a living will and registering for organ donation. A heightened focus on Covid-19 mortality rates seems to have distracted us from the many other risk factors we are faced with including crime, road accidents, cancers, heart disease and diabetes to name just a few. We all face numerous potentially life-threatening risks on a daily basis, and it shouldn’t take a pandemic to make us take our estate planning seriously. If you haven’t already drafted your will and put your affairs in order, take the time now to do so. While it may be a sizeable task upfront, once done it is relatively easy to keep updated.

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Craig Torr

Crue Invest (Pty) Ltd

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