RANDS AND SENSE:
Earlier this year, a client wanted to use emergency savings to settle some debt. The couple had not touched their emergency savings for several years and doubted whether they would need them soon.
I remember pondering the option but cautioned them against not having emergency savings. Fortunately, the couple followed my advice, as a month later Covid-19 arrived on our shores, and they received no income for three months, forcing them to use their emergency savings.
We have been lulled into complacency, thinking there will always be work, if not in our present jobs, then elsewhere. We also often overspend, thinking we will settle the overdraft or save more next month. We believe that even though things are bad, we could somehow make a plan.
Covid-19 and the resultant lockdown measures have rocked many sectors of our economy, with profound implications. There is no quick recovery, and forecasts estimate a 5% drop in gross domestic product by the end of the year.
Economic theory states that we need to save to have a healthy economy. Saving is required for investment growth, and investment growth is required to achieve economic growth.
South African households have a poor savings culture, and the largest contributor to savings in the past has been corporates. Most of us realise the advantages of saving, and, if we do not, the current crisis is a huge wake-up call.
The advantages of savings
are simple: they provide greater security and freedom. Long-term savings enable wealth creation
and provide us with options. These may include starting your own business or diversifying the operations of a business.
Where do I start?
Start where you are at. There are essentially three savings buckets: emergency, medium-term, and retirement savings. Each bucket needs savings in it, and the amount will depend on your needs, future plans, and lifestyle. Where we place those savings will also depend on our risk profile and how soon we need the money.
Research in the UK shows that the investments of individuals who use financial advisers perform 2% to 3% better than those who do not. I found this to be interesting given the fact that financial advisers also charge fees, yet individuals perform better with an adviser. The reason is that a financial adviser regularly reminds you to keep saving, not to withdraw your savings, and to stick to your plan. The adviser looks at the bigger picture and helps you achieve your financial goals.
Should I repay my debt FIRST?
Compound interest is the greatest advantage we have in wealth accumulation. The sooner you can get it working in your favour, the better. I advise clients simultaneously to save and settle debt. If you neglect either, compound interest will work against you.
Planning is key
Some key elements in building an investment portfolio and achieving financial freedom:
* Budgeting and sticking to the budget.
* Planning, planning and planning some more.
* Looking at the bigger picture and setting your eye on the prize.
* Setting achievable goals with timelines and reviewing them regularly.
Structuring a budget and sticking to it can make the difference between building up investments and going into debt. By planning, stress is removed and there is less chance of wasteful spending.
Identifying life goals and saving towards each goal separately will keep the goals in sight and more attainable. Saving and achieving financial freedom comes from small consistent, disciplined steps and sticking to your plan.
Sigrid Madonko is a Certified
Financial Planner professional
and director at Quintus Wealth
(www.quintuswealth.co.za).
PERSONAL FINANCE