If 2020 has taught us one thing about our finances, it’s that we need to be prepared for the unexpected.
The coronavirus and COVID-19 took most people by surprise. Lockdown has been extremely hard on even the most robust budgets, the economy has tanked and many have been left earning a lower or, worse, no income. There are a few steps to be taken in the good times to ensure that you are able to weather the bad:
- One of the most important elements of your financial plan is that it needs to include an emergency fund to cater for unexpected expenses which can hit you at any time. These can vary from home repairs to a job loss to emergency surgery. They all have the same things in common: they are never planned and the money needs to be spent.
As a general rule, we advise clients to set aside between three and six months’ worth of expenses for such a fund. This should be kept in a relatively liquid form – some sort of money market investment that you can access fairly quickly and one which will hold its capital value.
A further valuable source of liquidity is your bond account. This account provides the option to save in the good times and contribute additional payments (over and above your set repayment amount). In times of need, you will be able to access those additional contributions previously made to your bond account.
- Then you need to review your financial plan, at least on an annual basis. As with all goal setting, financial planning is not an exact science: part of the process of achieving goals is to check on your progress at regular intervals. As you hit obstacles, your emergency fund may be run down and need to be replenished or it may need to be increased as your circumstances change.
You might find that you have to take stock, regroup and figure out what went wrong and then set out again. On very rare occasions, you might even need to change your destination. To assist you in this process, you can use the Citadel financial planning tool.
- Lastly, you want to stress test your financial plan. The key pressure points in a budget are:
- Life expectancy
- Investment returns and volatility
Each of these will have an impact on your financial plan and ability to safeguard your financial future. Some of these factors can be mitigated (risk, for example), some are reasonably within our control (such as spending), while others may be beyond our control (inflation). However, by knowing upfront the impact that they will exert over our future finances, we will be better prepared for various possibilities.
As the old saying goes, “Forewarned is forearmed.” Having an emergency fund built into your financial plan and reviewing your plan regularly will help to fortify you against any unpleasant surprises that sometimes occur.
Written by: Citadel Advisory Partner Christelle Louw