By Alan Shannon
FOR years, we have all been told to save for a rainy day.
Since the inception of the pandemic, there has been a need for business owners and professionals to survive.
With Covid-19 came many challenges, however, it also presented many opportunities. For some, tapping into their savings and investments was a means to get by, while others continued to save and invest.
The latest Momentum household wellness insights report, has revealed that dipping into precious savings and investment reserves were among the top five selected coping strategies during lockdown. However, understanding inherent biases that impact our decision-making, especially in times of fear, could help us to avoid costly money decisions.
The responsibility of managing your finances begins on the day you earn your first rand and continues throughout your life. Just as you would take care of your physical and emotional health, you also need to maintain financial fitness. When it comes to our physical well-being, many of us attempt to exercise, manage our weight, commit to healthy eating, or have regular medical check-ups, yet only a few of us invest the same amount of time and effort to take care of our financial well-being. Financial health is an area that we neglect – often out of ignorance or the perception that it is overwhelming. The good news is, it’s never too late to start.
Understanding and adopting healthy money habits is essential to your financial well-being.
Follow these common tips to shape your healthy journey:
Healthy money habits and budgeting – A good starting point for any money management plan is to understand your current expenses and spending habits. Whether you are in the fortunate position to have money left over at the end of the month or are managing your money tightly to make ends meet; analysing and keeping track of what you spend your money on, will form an important pillar of your financial well-being into the future.
Responsible borrowing – While debt often carries a stigma, not all debt is bad. In fact, if used smartly, debt can be a great tool to accelerate your financial plan and wealth creation. Debt can also be an efficient tool to optimise tax, and debt well managed helps to build your credit profile, which in turn will unlock access to more finance. The trick is to know which type of finance to use for what purpose and to differentiate between good and bad debt and to avoid the latter. If you do find yourself in a situation where the debt you carry has become too much for you, there are mechanisms – such as debt counselling and debt consolidation — to help you get back on track.
Preparing to invest – The investment benefits you will reap in future depend on how much and how well you invest today. To come up with the optimal investment strategy you need to understand some basic investment principles, such as risk versus return and risk returns relative to your investment horizon, compound interest and risk tolerance.
Insurance to protect – For most of us, insurance is considered a grudge purchase or necessary evil. After all, unless something bad happens, we might never see the benefit of the premiums we pay. And if you don’t have dependants or responsibilities, have not accumulated any real assets, and do not have much to worry about in life — then why bother?
The reality is accidents, disasters and illness do happen, and if you are not adequately insured, an unexpected event of this kind could not only destroy your existing financial position but threaten your livelihood. Insurance provides not only the necessary protection, but can also act as a savings vehicle and a tax-efficient way to build long-term wealth. As such, insurance forms an integral part of any comprehensive financial plan and often acts as an important foundation.
Investing for growth – A comprehensive and balanced investment strategy should seek to balance short, medium, and long-term objectives and attempt to tackle them in parallel.
Estate planning – At its core, estate planning is about protecting your own and your loved ones’ interests when you die. It helps you preserve your lifetime assets and ensures the most effective distribution of your estate to your intended beneficiaries.
Alan Shannon is executive: client engagement, professional banking and small business services at Nedbank.
For a guide to financial planning, read the October 2021 edition of IOL MONEY, our free monthly digital magazine. Go to the issuu platform here.