How you can build financial resilience by becoming more money savvy
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By Joseph Phiri
Covid-19 and the global financial crisis highlighted how vulnerable some households were to the financial shocks that followed.
These events have led people and firms to rethink how prepared they are to weather financial shocks. This has resulted in financial resilience awareness and strategies such as cultivating habits of savings, debt reduction and smart money management.
What is financial resilience?
It is the ability to cope with income or expenditure shocks as a result of life events and how quickly you recover from periods of financial adversity. Many events lead to these shocks such as loss of household income, retirement, divorce, disability, ill-health and accidents. The extent to which a household can recover from loss of income or an unexpected increase in expenses through savings, insurance or both determines their financial resilience.
Households can adopt the following habits and strategies to deal with events that affect their finances, whether it be a sudden fall in income or an unavoidable rise in expenditure.
Have a financial plan
A plan helps you to stay disciplined in achieving your goals. Review your goals regularly to ensure that you are on track, resetting them if you get a salary increase or increased responsibility, get married or divorced, or have children.
A financial plan is a good starting point in creating financial resilience and setting your journey in motion. A licensed financial adviser can help in drafting a plan that takes into account your circumstances and reduces the impact of applicable taxes.
A budget helps you:
- understand where your money goes
- control your finances while avoiding any wasteful spending
- spend within your limits
If you want to be savvy with your money, invest time in budgeting and know where your money is going – this includes understanding your exposure to debt which affects the health of a household’s finances.
Some debts can be beneficial to households when they help to accumulate assets and to pay for education. However, if overused, debt can be detrimental to the financial health of a household. It can lead to untold distress on household disposable income, lower saving and possibly an uncomfortable retirement.
An increase in the cost of servicing debt such as interest rate increases will crowd household disposable incomes. Limit the use of and reliance on debt and if possible, only consider it for asset accumulation such as buying a house and car. Avoid unsecured lending as it is costly – rather save for some big items, use laybys or limit it to an interest-free term.
Retirement saving and investing for the future
The average South African employee retires on a pension income that’s around 30% of their last salary according to the Alexander Forbes Member Watch. Most have not saved enough to replace at least 60% to 75% of their income at retirement. This statistic shows that retirement can be a huge event with most South Africans experiencing a significant drop in income. Unless you are deliberate in your planning, your life may be uncomfortable in retirement.
The government has given households tax incentives to save. Tax concessions or tax relief on pension contributions can have huge benefits if you use your tax reduction strategies fully. Tax-free saving schemes also promote a culture of saving, but are accessible in the event that you require the money, which assist with your resilience. Don’t leave the retirement planning conversation to the last minute - it should be a continuous conversation that starts as soon as you are employed.
Have adequate insurance
The death or ill-health of a breadwinner in a household leads to household income being cut and leaving a gap that will never be fulfilled. In some cases, retirement and other savings may not be sufficient to replace such an income loss. It is prudent to buy:
- adequate life insurance to protect dependants against the loss of a breadwinner’s income
- disability insurance to provide continued income after an accident or illness
This category should also include insuring household goods, buildings and cars against events that may lead to unplanned increased expenses that squeeze household incomes.
Do proper estate planning
An estate plan aims to protect and preserve your assets so that:
- they are distributed effectively to intended beneficiaries
- the impact of taxes is reduced
- assets don’t need to be sold unnecessarily to pay for cash flow, expenses or tax
You can be better prepared to face life’s future storms by taking steps that will help you to achieve better financial resilience outcomes. This is a continuous, deliberate effort of planning and commitment to a plan. In this way, you can be cushioned from unforeseen storms that put pressure on the s health of households.
Joseph Phiri is a Certified Financial Planner at Alexander Forbes.