The Great Lockdown is likely to be the biggest disruptor of the upward personal and global trajectory since the Second World War. Most of us have had occasional setbacks but this upheaval will cause economic hardship for many people who have never had much reason to worry about money. There have already been many job losses or salary cuts and there will be even more permanent unemployment in the coming months. Most of us will have to help family or friends through this and most of us will feel an obligation to extend a helping hand to our broader communities.
How should you react to these threats? Perhaps you are already in a situation where you have temporarily or permanently lost income. What should you do?
Keep a cool head
Cutting back your lifestyle suddenly is not easy, especially when it was not your choice. In most cases, sudden income loss is traumatic and it interferes with your rational thinking. Decisions driven by fear can turn out to be damaging. The best way to protect yourself is by either taking the time to think and/or discussing your decisions with an adviser or a friend. It is in these times that a professional financial planner can help you to think through your decisions, even if those decisions do not pertain to financial products.
You may find that it is more difficult to make decisions, in which case, an accountability partner can help you to move forward.
Project your cashflow
You need to figure out, quickly, how long your cash will last. Sadly, most South Africans do not keep much cash or save enough, so this crisis will expose those lacking savings habits.
I have found that building a simple cash-in & cash-out projection into the future helps. If you still have some income or savings, you can work out when you will run out of money. It will not only help you to focus your energy on making the necessary changes but may also help you to calm your anxiety if you see that your cash will last longer than you imagined.
Put your expenses under the magnifying glass
Knowing your monthly expenses is key. Surprisingly, many people do not have a clue about how much they spend and what they spend on.
If you have never analysed your spending, we recommend the three-bucket approach, which consists of Needs, Wants and Wishes. You can read more about this in our article The Art of Budgeting.
If you find yourself in a situation where money is suddenly tight, your first response should be to find “easy” items to remove from the budget. You identify the wants and wishes and you cut back on the entertainment expenses, holidays and luxury items. Within days you will have tightened the grocery budget and yes, poor ol’ Fluffy will now be on supermarket dogfood. Other categories to tackle include convenience services, like gardening or pool cleaning services. We have found that cleaning our pool and mowing the lawn is better exercise than the best gym contract.
Knock on the principal’s door
Educational fees are one of the priciest items in a household, often more than a bond repayment. Whether your child goes to private or public school, this will no doubt be an important, yet expensive, line-item on your budget.
Luckily, most schools can accommodate parents who fall into temporary financial distress. Talk to the school and find out how you can apply. This is a private arrangement, and your child will be none the wiser.
The last thing any parent wants is to uproot their child or destabilise their day-to-day routine. If circumstances become dire though, you may have to cancel some/all extra-curricular activities for a while. If this becomes your unfortunate reality, talk to the coach or the teacher and find out how your child can continue lessons or practice on their own for a while.
For us as parents, it’s normal to want to ensure that our children have well-diversified lives and perhaps have opportunities that we never had. But there’s always a chance that the piano lessons matter more to you than they do to your child. They may not be as devastated to take a break as you think!
Tackle your base costs
But what can you do if you need to cut back further, and with immediate effect? The items in your needs column then also need to be revised. These are often the most difficult. You need to review how much it costs you to stay in your current property. Although banks have provided loan holidays or extensions to mortgage bonds and facilities for a few months, you may need to sell your house or rent a cheaper place. If you do not take action, the bank will eventually force you to. Talk to the bank about the best course of action.
Decipher your insurance
There are very few scenarios where cancelling your medical aid would be advisable but there may be cheaper options, which cover you for the big events.
You also should not cancel your short-term or life insurance without consulting an advisor or the service provider. Like the pool guy, it may be worth talking to other providers. Insurance is an aspect that we often leave for years at a time because the administrative hassle seems overwhelming. Set one morning aside to make a few calls and make sure that you’re getting the best value for the best premium.
Talk to your family
It is better to play open cards with your spouse and children and even your extended family and circle of friends. Your children will feel your anxiety around money even if you do not tell them. How you deal with the situation, will teach them valuable money skills or damage their relationship with money. If they do not understand the money pressure, they may also demand the same lifestyle – which could put a strain on your relationship. We frequently see people with so much anxiety around money. Anxiety which started with a traumatic event, such as the sudden loss of income in their childhood homes.
Spouses should be clear about their spending limits and accountability otherwise it can cause additional tension and resentment. Managing the money should preferably be a shared experience, a practice that then ensures shared accountability.
Get over shame
You may feel shame over having to change your lifestyle or admit to your problem. You may not be able to keep up with your friends’ standard of living anymore. You may have to make decisions that will impact your children’s friendships. This time, many people will be in the same boat. It will not be unusual for people to have to make adjustments. Times will be tough for most and it will be in-vogue to live a frugal lifestyle.
However, if you feel overwhelming guilt or shame over your situation, you should seek help. Not only will it help you to protect your mental wellbeing at a time when you really need to think straight, it may help you to move forward. Shame and guilt are destructive forces which hold you back.
Drawing retirement savings is a last resort
You should preferably leave your retirement savings alone. Not only will you lose the tax benefits of what you have saved but you will be heavily taxed on withdrawing the funds. However, sometimes, this is exactly what it is, a last resort and you have no choice but to use these funds. You can and should postpone the withdrawal of your pension fund until you really need the money. Last year, we wrote an article about the options for retirement.
Deal with your ability to save less
In an ideal world, every household should have an emergency fund or monthly household savings. But what do you do when you just can’t put away the 25% of your paycheck, as your mother taught you to do?
The golden rule is not to go into debt so that you can save somewhere else. It doesn’t make sense, for instance, to borrow money at huge cost so that you can invest it “wisely” elsewhere. Rather break even every month, than borrow from Peter to pay Paul.
A strong word of caution: if you are unable to continue saving towards your retirement, talk to your financial advisor first. It may be unavoidable, but you must be clear on the consequences, and how you can possibly make up for the break in contributions in the future.
Earn an income fast
If you have lost your job, it may be difficult to find something in your line of work again. Sadly, the unemployment will pile up, not only in South Africa but globally. Find some way to earn an income. At a time like this, we need to put away our ideals and focus on what is in front of you. One thing we have learnt from lockdown is that we no longer have to work in our own city or country. We can stay right where we are and do work somewhere else by using digital platforms. You may have to think out of the box. Look at your accumulated skills rather than at your previous job to expand your range of potential jobs.