The coronavirus has turned our world upside down; not only has it created havoc for healthcare, it has also resulted in unprecedented financial hardships. The pandemic has forced us to make behavioural changes that will stand us in good stead in the years to come, especially when it comes to financial wellness.
With surging coronavirus cases in South Africa and the rest of the world, the wearing of masks, hand sanitisers, and physical distancing between ourselves and our fellow citizens has become the norm. Figuratively speaking, distance also provides us with the opportunity to see things more clearly and make much-needed changes. One of the most crucial adjustments we need to make concerns our financial health. It is important that we keep our focus on the essentials of budgeting and financial planning; we must not be tempted to make short-sighted decisions that are ruinous in the long term.
The poor savings and spending culture of South Africans is well-documented. Even before the pandemic hit our shores, a mere 40% of South Africans surveyed by the Organisation for Economic Co-operation and Development (OECD) indicated that they were actively saving – that’s well below the average of 64% of other countries (as published in G20/OECD Report of Adult Financial Literacy; 2017). In addition, more than half of the respondents said that they borrow money to make ends meet.
The arrival of COVID-19 dealt an extra body blow to the finances of many a household. A study done by a credit reporting agency, TransUnion, showed that the incomes of 83% of consumers were adversely affected by reduced working hours or job losses.
Just as we can implement safety measures to avoid getting infected with the virus, we can also take financial precautions to shield us against financial hardship. There are five practicable behaviours that can have a significant impact on our financial health.
1. Spend less than you earn
Stating the obvious is often easier than doing it! If we can learn anything from the lockdown, it’s that we can make do with less, especially when we spend money on non-essential items.
During lockdown, we had to make do without our daily take-away coffee, for example. If we can continue this behaviour into life post-lockdown, this can result in immense savings down the line: a 2018 survey by Discovery called The Growing Insurance Gap for Millenials, found that approximately 50% of South Africans between the ages of 18 and 34 spent more on coffee than on any form of retirement. By making an undertaking to stop buying your daily cup of joe you can save at least R20 a day. This results in an annual savings of R47 000!
Claire van Wyk, a financial advisor at Discovery, suggests the following to curb spending: “Cut up the plastic, budget and allow yourself to sometimes spend money on nice things, but limit it.”
2. Save regularly
Claire says her clients who have religiously continued with discretionary savings through the years are now much better placed to weather the financial storm brought about by COVID-19.
One such client is a doctor who, unlike many of his peers, can keep his practice going at a time when doctors visits are at an all-time low. “His accountant told him that he is one of the few who have sufficient financial reserves to make it through this torrid time,” says Claire.
Many of her financially disciplined clients are lower income earners, which shows that financial health is less about salary levels and more about the way they in which people manage their money.
Claire’s advice is that people should avoid so-called “lifestyle inflation” by adjusting their spending habits upwards as their income levels increase. “Find a happy station and keep your spending at that level,” she says.
3. Insure for adverse events
South Africans should at all costs avoid cancelling health or life insurance. Discovery financial advisor Adam Helper reminds us that severe life events are financially disastrous, and should not be neglected, especially during the Covid crisis. “More than ever you should plan around events that could knock you out financially, such as an untimely death or a severe illness or disability,” he notes.
This is illustrated by a client of Claire’s, who cancelled her medical aid recently. Just a few weeks later she had to undergo emergency surgery. This shows the importance of looking at the bigger picture, reminds Claire. “Don’t cut back on crucial expenses, like medical aid”
4. Invest for the long term
According to a Financial Services Board study in 2016, called Financial Literacy in South Africa, 86% of South Africans either have no plan or are not confident in their plan for retirement.
“Unfortunately, human beings are wired to believe that things will change and that they will have more time to save in future. But investing should be treated as a tax. It should be regarded as a non-negotiable,” says Adam.
Investing differs from saving in that the assets you buy – be it equities, bonds or property – will make money for you. The cornerstone of successful investing is to start as early as possible to allow capital growth that will produce a good return.
If you’ve been putting off retirement savings, all is not lost. Recent research suggests that people can mitigate against lost time by focusing on their present consumption rather than on anticipated future needs. In other words, ask yourself what lifestyle you can afford now and work to maintain it until and during retirement.
5. Facing our Fears
COVID-19 is a time of fear and uncertainty; during such times, we may be tempted to focus on getting through the present and stop planning for the future. But our fears should be confronted, not avoided: succumbing to panic will not stop the pandemic. Likewise, avoiding our financial health will lead to further dis-ease down the line.
Claire says she deals regularly with the phenomenon of “hyperbolic discounting” – a situation in which people fear the truth about their true financial affairs. In other words, given two similar rewards, people show a preference for one that arrives sooner rather than later. People are said to discount the value of the later reward, by a factor that increases with the length of the delay. The most important consequence of hyperbolic discounting is that it creates temporary preferences for small rewards that occur sooner over larger, later ones.
“But COVID-19 has pushed us to the brink and forced us to look carefully what we’re doing with our money.”
The virus requires us to make sweeping adjustments to the way we behave: the way we work and socialise, but also how we spend our money. Exponential growth has its benefits: small positive changes now will result in large gains later. Now is the time to make sure these behavioural changes bring about a better future.
Internal analysis done on data from the Vitality Money Assessment.
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Behavioural theory shows that we humans don’t always make the most rational choices that serve us well in future. In uncertain times, we may also take more risks or make hasty decisions. Stop, take a moment and look these five behaviours and how you rate.