25 March 2020: Travel bans, lockdown, working from home and avoiding public spaces have suddenly become the new normal, and you may be feeling unsettled and anxious as the coronavirus crisis wreaks havoc on our everyday activities and routines. But for many, this sense of fear and uncertainty has been made worse by financial insecurity resulting from the threat of retrenchments (as seen at companies such as SAA, Standard Bank and Group Five), and the ongoing sell-off in markets which has left investors reeling.
For some, the prospect of a three-week lockdown, with an option of it being renewed, has further added to fears of salary curtailment and even business failure.
So, what to do next?
1. TAKE CONTROL BY TAKING STOCK
In uncertain times, the first crucial step in addressing feelings of financial insecurity or anxiety is to take stock of your finances with a full and detailed lifestyle sustainability assessment, which is ideally done in consultation with a professional financial adviser. This assessment is essentially a personal financial projection that is intended to help you to determine whether you are still on track to reach your unique financial goals and a happy retirement, or whether you may need to make some adjustments to ensure that your lifestyle remains aligned with your available funds.
This begins with putting together a simple household budget, with an honest and detailed record of your monthly expenses, such as groceries, entertainment, fuel and wages, as well as medical aid contributions, home maintenance and municipal accounts. These expenses will then need to be adjusted to account for inflation to determine whether you will have enough money in your retirement nest-egg.
Your assessment should also make specific provision for expenses and liabilities such as paying for your children’s education at various levels, future holidays or the purchase of any vehicles.
Next, add up your income, including any rental income, and income from dividends and interest, as well as your salary, and weigh this against your expenses to ensure that you are not living beyond your means. You should also draw up a comprehensive list of your assets, such as any investments or properties you own.
This combination of assets, liabilities, income and expenses can then be used to provide you with a full financial profile in the form of a graph. On the one axis, your financial advisor can plot your age, and on the other your accumulated capital, and then demonstrate effect of investment growth and income withdrawal on the capital amount. This graph will form the basis for testing your lifestyle’s sustainability, and should be reviewed on an ongoing basis to ensure your financial independence and peace of mind.
With your lifestyle sustainability assessment complete, you can then evaluate whether your investment strategy is working for you, or whether you may need to make some adjustments to your portfolio to reach your goals.
2. BUILD A CASH MOAT
In troubled times, cash is king. This is particularly important if you could be facing retrenchment, or if you have any uncertainty regarding your future income.
With a full picture of your financial situation, assess whether you have a financial back-up or cash buffer built into your planning that you could survive from for at least three months. This may come in the form of an emergency fund, or you could even look to access your flexi-bond if absolutely necessary.
It is also worth remembering that good times create bad behaviour, so once you have a budget, look for areas where there may be wastage, or that you could cut back on to free up some spare funds.
Given the recent drawdown in markets, cashing in your investments should be seen as an absolute last resort. Not only will you lock in your losses by selling when markets are down, but you could also lose out on the market recovery, as well as the all-important effect of compound interest on your investment growth.
3. PRESS PAUSE ON BIG EXPENSES
Protect the longevity of your cash moat by avoiding any big expenses. As you are likely to have reconsidered any overseas trips for the immediate future, this will already represent a big saving, but it could also be wise to delay the purchase of a new vehicle or property.
If there is any spare cash in your budget, and if you already have a healthy emergency fund to see you through tough times, rather consider paying down debt or increasing your bond repayments. There are also investment opportunities given the large drawdowns we have seen recently within the volatile local and international financial markets.
4. CONSULT A PROFESSIONAL ADVISER
One of the key responsibilities of a financial adviser is to guide you in weathering any storms in times of uncertainty. This means first advising you in preparing your financial defences against future risks and the threat of the unknown, as well as assisting you in designing a tailored financial roadmap or strategy with clear benchmarks for reaching your individual financial goals.
Then, in troubled times, an adviser can help you to objectively assess your progress, and provide transparent counsel on the performance of your investments and the state of your general financial position. And where you may be facing difficulties, an adviser can assist you in finding creative financial solutions to mitigate the impact of setbacks, and offer practical advice on re-adjusting your strategy as necessary.
Christelle Louw, Advisory Partner, Citadel