It's the start of a new year and a new decade. The ’20s are upon us. Let us hope they are not too similar to the 1920s, which saw society’s elite leading an increasingly decadent lifestyle, only to be followed by despair and untold suffering by the greater population over the next decade as a result of the Wall Street crash, Great Depression and the rise of fascism. The parallels are there if you are looking for them.
I think now is an opportune time to pause, reflect on, and, if necessary, make changes to your finances. While I am not wishing another Great Depression on anyone, this is certainly a time to be prudent with money and do what you can to protect yourself and your loved ones against hard times that may come your way. The local economy is not going to pick up any time soon, particularly with the situation at Eskom.
There are many things we can do to improve our financial position: sticking to a household budget and saving more are the obvious ones. Besides those, here are three “resolutions” you might consider to buffer your finances and give you a degree of protection:
1. Reduce your debt
This is not a time to be adding to your debt burden. You should be doing just the opposite - ridding yourself of debt by first paying off the smaller, higher-interest debts such as store card and credit card accounts, and then tackling the bigger ones, such as those on your car and property.
Thinking of buying a new car? Maybe your existing car can last another year or so. If your mind is made up, how about lowering your sights a notch or two, from an Audi to a VW, or from a Lexus to a Toyota - from something that would cost you perhaps R6000 a month to something for about R4000 a month? (You could still pay R6000 a month and bring that debt down a whole lot faster.) If your prime motivation for driving an upmarket marque is to impress family, friends and colleagues, I have it on good authority that the people who matter will be impressed far more by your responsible approach to money.
Regarding your mortgage bond, it is likely that your interest rate is about 11% or higher. There are few investments around offering that, so why not use it as a savings vehicle?
2. Revise your insurance
This is not the time to be ditching insurance policies - they are there to protect you. But you could be revising them. If you are the average South African, you are underinsured, both for life cover and for the insurance of your possessions.
Your personal circumstances may have changed - you may have changed address, got married, got divorced, changed jobs, lost a job, had your kids leave home (permanently), made alterations to your home or put in a swimming pool. In such instances, your insurer needs to know, and you may need to revise your cover up or down. While it is prudent to be well covered, there may be things among your household contents or personal possessions that really don’t need insuring. For example, I have excluded books (of which I have bookshelves full) from my policy.
You may also reduce the insurance on your car slightly in line with its depreciation - some insurers adjust this automatically.
For short-term insurance, it’s a good idea regularly to shop around for the best (but not necessarily cheapest) deal. But you can’t do that with life insurance - it’s unlikely you’ll pay a lower premium for the same amount of cover and you will inevitably have to be re-underwritten, meaning having to complete medical questionnaires and even undergo a medical.
3. Diversify your investments
No matter where you are on life’s journey, you should not have all your eggs in one basket. The closer you are to retirement, the less risk you should have in your portfolio, but you will always need a certain degree of risk to counteract inflation. You should also not be switching investments at whim according to media reports and daily market news.
A well-diversified portfolio, with diversification across asset classes and across geographies, will afford you protection against the vagaries of the markets and provide some stability to your investments.
In such a portfolio, investment performance will not be correlated - some investments will move up, while others may move down (don’t be alarmed if this happens).
Higher-risk assets, such as equities and property, will display more volatility than the more stable, but generally less profitable, interest-bearing assets, such as bonds and money market funds.
So, a mix is good. Offshore investments will hedge against a weaker rand, which is likely this year, according to economists.
You can also mix active and passive - theoretically, an actively managed fund should be less risky than a passive one, because the manager should be taking steps to contain risk.
You may even consider alternatives such as artworks, Krugerrands, private equity and cryptocurrencies. But such investments should always form only a small portion of the total - a flutter on the side, as it were.
Be particularly cautious of scams - when the going gets tough, scamsters’ investment propositions can sound like manna from heaven.