We need to cut costs - What are the right steps to take now?
Share this article:
By Gerard Visser
The Covid-19 pandemic has put significant strain on the finances and financial plans of everyone. The weakening South African economy and highest unemployment rate in 12 years are placing even more stress on us. As a result, debt balances have increased for many people, who are relying on credit to keep going.
Beware of what you cut back on
Financial advisers have noticed an increase in queries from clients about reducing their retirement fund contributions, insurance premiums and cover amounts as they try to find ways to cut costs. In some cases, clients have cancelled policies entirely. Decreasing cover amounts and contributions or cancelling policies entirely will most certainly create a shortfall in your financial planning. For those who have made such changes during the pandemic, it will be vital to review investments and policies once your financial situation improves.
The importance of an emergency fund
Now more than ever, advisers see clients realising how important emergency funds and voluntary investments are. These investments are there to help with cashflow and unexpected expenses in times of crisis. When setting up an emergency fund, you need to try to save any disposable income remaining from your monthly budget and build up an emergency fund of three to six times your monthly salary. You should be able to access the investment easily.
Review policies regularly
Review your policies and insurance cover to ensure that:
- the cost for the cover you have in place is within what the market offers; and
- you are not overpaying on costs on policies.
You might have cover both in your personal capacity and through your employer – for example, disability income protectors and life cover. If you have policies with similar benefits, this is a good time to review them and make sure that you are not over insured.
The importance of budgeting
If you did not receive a salary increase, your salary has been cut or your expenses have increased, your budget will need to be stricter, with less money allocated to entertainment.
Unfortunately, some of us might be getting behind or creating shortfalls in personal financial planning. It is important to have the right mindset to ensure that the change is temporary. Once stability returns, you should review your financial needs and try to make up the shortfalls.
Those who are facing a high debt burden will certainly struggle to save, as most of their income is going towards paying off their debt. If you are going through the same situation it is important to reset your base. If you are struggling to cover all your expenses, completely relook your current situation. Start your budget from scratch, including essential needs only. Try to adapt to your new circumstances. Don’t work with what you once had – work with what you now have. If you are really struggling to make your debt or loan payments, contact the respective institutions and try to agree on a payment plan.
Saving from a young age is beneficial
While it might be difficult for young investors looking at starting their financial planning to take their first step in the midst of the effects of the pandemic, it is definitely better to start sooner rather than later. Poor spending habits are not easily broken.
Many employers often offer financial well-being programmes and financial advice, where employees can get information on their retirement funds and financial advice. It is an easy way to get hold of a financial adviser when you are unsure of your options. Your adviser can help you and ensure that you have all the information to make an informed decision.
By Gerard Visser is a Certified Financial Planner at Alexander Forbes