3 ways that the national lockdown can help us see money, and savings, differently
The first few months of 2020 will go down in history as some of the most financially and emotionally draining experienced by South Africans. While most of us understood and supported the rationale behind government’s lockdown response, none of us could have anticipated the massive impact that total lockdown would have on our lives, finances and mental wellbeing.
While much of the world, including South Africa, is still trying to come to terms with many of the aspects of the Covid-19 pandemic, the crisis has created an opportunity for us all to learn some valuable lessons about our finances, particularly our approach to the all-important matter of saving.
According to Amy Underwood, a Senior Behavioural Economist at Nedbank, there is a lot of value to be added to our lives and finances by taking these savings lessons to heart. She lists three that have particular relevance during National Savings Month:
Lesson 1 – If you wait for the perfect time to start saving, you’ll never get started
The first lesson we all need to learn, according to Underwood, is that when it comes to saving, we should not let fear of the unknown, or a lack of financial knowledge, prevent us from making a start. 'The chances are good that millions of people who have been meaning to save were caught out with little to no savings in the bank when Covid-19 hit,' she explains. 'If the lockdown has taught us anything, it is that we cannot allow our human nature to get in the way of good money management.'
She explains that, while most of us know that we need to be saving, none of us have the time to become financial experts and figure out how much to save, or where to save it. Fortunately, there are things called rules of thumb, which are essentially shortcuts designed to help most people to achieve a desired outcome. 'While they are not set in stone, saving rules of thumb – like the one that says you should try to build up three times your salary in savings – are a good guideline for most people,' Underwood says. 'They are a great way to help us overcome the inertia that many of us have because of our fear of the unknown, and simply get started on our savings journeys.'
Lesson 2 – Only you really know how much emergency money you need
The rule-of-thumb approach mentioned in lesson one is a great starting point. But let us face it, every person is different and has different financial needs. Until Covid-19, most of us struggled with getting to grips with exactly how much money we actually need to survive. But, as Underwood explains, separating our needs from our wants became a whole lot easier during lockdown.
'The money challenges we all faced during lockdown enabled most of us to figure out exactly what our essential expenses are,' she says. 'Since that amount is probably less than our total income, it is an easier savings target to shoot for when we want to build up a reliable emergency savings fund.'
She suggests that instead of being intimidated by the prospect of trying to save up three full months of living expenses, a more achievable target to aim for could be enough savings to cover three months of lockdown essential expenses.
Lesson 3 – Having savings in the bank is about much more than just money
While having savings gives you a financial buffer in times of economic difficulty or when you need to fund emergency expenses, a well-funded savings account also makes a valuable contribution to your psychological wellbeing. To explain this, Underwood refers to research done by Sendhil Mullainathan and Eldar Shafir in which they use the term ‘bandwidth tax’ to explain how any type of scarcity in one’s life – whether money, time or food – effectively takes up so much of our focus and attention that we run a much higher risk of making bad decisions in other areas of our life.
'A savings buffer tells your mind that you are okay in the financial department,' she explains. 'This effectively frees up the mental space that you would have used worrying about money, allowing you to use more of your brain’s "bandwidth" to focus on any other decisions you need to make.'
'These, and the many other financial lessons that lockdown has taught us, while very challenging for most of us, also helped reveal those areas of our finances that we need to address to build more financial resilience in our lives,' Underwood explains. 'By taking these lessons to heart, and using them to think about our money differently, we will be better equipped to not only overcome the current money challenges we are facing, but also to ensure our long-term financial wellbeing once the Covid-19 crisis has passed. '