By: Essie Bester
Almost all of us are affected by the current economic unrest, but for those individuals who are used to living from salary cheque to salary cheque the impact is much greater. Especially if you are forced to incur credit card debt with high interest to carry you and your family through this difficult time. The secret lies in preventing yourself from landing in this vulnerable position in the first place.
Lesson 1: Realise that debt can be frightening
Probably there are few things as alarming as losing your income while you know that you have debt that has to be paid at the end of the month. If you find yourself in this situation – ask your creditors to help you with a manageable repayment plan. A proactive attitude can help you negotiate better conditions and protect your credit record.
Use the low interest rate to your advantage as soon as your income has been restored and settle your debt as soon as possible. Also use the money that you saved on expenditure such as fuel and other costs during the lockdown to pay off as much of your debt as possible. Start with the most expensive debt, which would normally be your credit cards, clothing accounts or uninsured loans.
Lesson 2: Build an emergency fund before investing
While investments are a good way of letting your cash grow and saving for the future, not all options offer immediate liquidity during an emergency. An emergency fund can buy you time and give you the opportunity to get back on your feet, even if your sources of income dry up. Try to at all times save up to six months’ providence savings – which should ideally cover six months’ expenses – in an emergency fund.
Lesson 3: Invest for the long term
It might not seem fair to see how investments that have been part of your portfolio for years lose a large portion of their value within a few weeks. However, the short, sharp fall only accentuates the long-term nature of successful investments. When looking at history, we know that even in the darkest time markets bounce back and reach even higher heights.
Lesson 4: Diversify
It is of critical importance to spread your investment cash over shares, commodities, metals and more. When one industry is affected, another usually benefits during financial crises.
Lesson 5: Keep your consumer credit minimal
There are people who commit up to 50% or more of their monthly income to the repayment of loan instalments. Confronted with the prospect of job loss or considerable salary decreases, it however becomes difficult to pay back all instalments in time. The moratorium on the repayment of term loans offers temporary relief but is not a solution.
The crisis teaches us that, just because we can get credit, it does not mean that we should consider more credit than is necessary. Experts suggest that your credit payment should never be more than 20-30% of your net monthly income.
Lesson 6: Health insurance is of cardinal importance
When you are fit and healthy you easily question the importance of your medical fund and insurance policies. However, a health crisis such as Covid-19 only reminds us once again why these are necessary. If you cannot pay your premiums, you could consider downgrading, but try to retain your cover.
Lesson 7: Live within your means
Within a flourishing economy your income will also increase. However, in such times rather focus on keeping your expenditure in check. You don’t want to be saddled with the maintenance of your previous lifestyle and spending habits when something like Covid-19 brings the entire economy to a halt.
A proportional increase in your lifestyle, together with your income, is not a good idea. As soon as you have established your permanent expenses – try to maintain a discretionary expenditure of up to and including 20% thereof and save the rest.
Lesson 8: A personal budget is essential
A personal budget gives you insight into your fixed costs, variable expenses etc. With a budget at your disposal you can also plan long term by deciding whether you should accept the credit moratorium offered by the banks, or if you will manage by decreasing your other expenses and saving on your interest payments. A well-planned budget will help you use your available financial resources at their best in uncertain times.
Lesson 9: A second source of income
Build different sources of income so that you aren’t dependent on a single source that could fall away. This means you should have different kinds of businesses or income streams that are independent of each other, with one being able to replace another should the latter present a problem. However, this requires a lot of effort and extra working hours.
Lesson 10: Build income investments
The easiest solution for a second income that will not tap your personal time and energy sources, is to start saving from your first salary, live with less money and build not only capital growth investments, but also income investments.
Income investments that achieve regular, fixed yields, can contribute to an additional income stream. The investment can settle a specific expenditure, for example your rent or insurance. It generates passive income and gives your cash flow more security. The art is to protect as much as possible of your expenditure with investments so that you build extra security, over and above your salary.
While a worldwide economic downturn such as the one we are now experiencing is beyond your control, you now have the opportunity to learn the necessary lessons from it so that you can apply them successfully in the future.