5 financial planning essentials for the Covid-19 crisis
Despite our intelligence and past learnings, it’s challenging to maintain composure and make rational decisions during such a crisis. Here are five financial planning essentials to guide you through this period.
1. Stay calm when the bear growls
When stock markets fall, it’s natural to want to sell your shares and invest in less risky assets, such as cash and bonds, in an attempt to avoid further loss. To do this, however, is to lock in a loss forever. If your share portfolio falls by 20% – a normal occurrence in the course of investment cycles – and you sell, the loss becomes permanent, as opposed to a “paper loss”.
Another critical point is that if your investment drops in value and you sell, you need to achieve a higher return to get back to the initial value. For example, if your investment drops from R1 million to R800 000 and you sell, you must achieve a 25% return to get back to your original value of R1m.
The situation we’re in now is a similar black swan event to the market crash that followed the 9/11 terrorist attacks in 2001 – it might even be worse. Still, the tide will turn. Nobody knows when, even the smartest analysts, but if you sell out of the market, you will miss out when the bull starts to run again. When it does, it’s unpredictable and fast, and you can’t afford to be disinvested during the best-performing days.
2. Protect your emergency funds
This is crucial. Don’t dip into your emergency funds to stockpile groceries. The food supply chain is not in danger at the time of writing this article. If you stockpile, you’re putting others at risk of going without, and yourself at risk of not having funds for your own emergencies. Emergency funds should be reserved for the loss of income because of redundancy and potential medical expenses.
Similarly, don’t stockpile using credit. You may be given some grace on the interest repayments, but the principal debt follows you.
3. Check your insurance
Many of us avoid reading our insurance policies. We’re human, naturally optimistic, and we believe that things won’t ever go wrong. This is the time to knuckle down and get to grips with the fine print.
You need to know what expenses your medical scheme will cover if you become unwell. That said, most medical schemes won’t be able to increase your cover now. You need to reassess and prioritise increased medical cover at the end of the year when you’re allowed to make a change.
It’s also important to check your life cover policy. Covid-19 is a real threat, and you can’t hide from the fact that your life may be in danger. Make sure your beneficiary nominations are appropriate and that your family will be protected in the event of your passing.
If you have an income-continuation benefit on your policy, it’s important to find out if it will pay out if you fall ill and you’re unable to work – a real threat to many. You also need to be aware that income continuation doesn’t pay out if you’re made redundant.
4. Update your last will and testament
It’s estimated that 40% to 60% of South Africans will get the virus. Even though the recovery rate from Covid-19 is high, it’s still a good time to check your last will and testament, or to write a will if you haven’t yet done so.
A last will and testament is one of the few documents that is required in writing. If you don’t have a will and you pass away, you’ll die “intestate”, which means that the state will prescribe the manner in which your assets will be distributed to your family. This might not be in accordance with your wishes.
Writing a will also prompts you to consider critical decisions, such as who to nominate as guardians of your children. Your will can also include an instruction for the creation of a special trust to manage funds for your children – and who the trustees should be. If you don’t do this, any money set aside for your children will go to the government-run Guardian’s Fund, and you will have no say as to how that money is invested.
5. Contact your financial adviser
Now, more than ever, we all need someone to help us make rational financial decisions. Schedule an online meeting with your financial adviser to discuss how the crisis affects your financial plan, and whether there’s a need to make any changes. If you don’t have an adviser, find one using the Financial Planning Institute’s find-an-adviser function at www.letsplan.co.za
Reasons to be hopeful
This is all pretty heavy stuff, but there are reasons to feel hopeful, or at least a little less anxious about the situation. Families and friends who haven’t spoken in years are reconnecting online, people in Italy have been singing patriotic songs from their balconies, cities are finally showing appreciation for overworked and underpaid health care workers, and pollution levels all over the world have plummeted.
Lelane Bezuidenhout is the chief executive of the Financial Planning Institute of Southern Africa.