Creating financial resilience and becoming money savvy

Have you given thought of how you would fair when you are hit by the storms of life? We face so many storms, some hit us leaving us unscathed whilst others leave untold suffering to households.

The advent of COVID-19 and the global financial crisis have been major storms that have affected a lot of people globally and also highlighted just how vulnerable some households were to the financial shocks that followed. These are however being not the only storms of life as some can only be isolated to individuals and are faced at various life events. Many of us have been caught in the storms by surprised and ill-prepared for shock events of any magnitude. It is however these events that have lead people and institutions rethinking the preparedness to weathering financial shocks through creating financial resilience awareness and strategies.  

But what is financial resilience? By definition, it is the ability to cope with life events that impact one's income or expenditure shocks and how quickly they recover from periods of financial adversity. There are many events that lead to these shocks such as, loss of household income, retirement, divorce, disability, ill-health and accidents. The extent to which a household is able to recover from loss of income or unexpected increase in expenses through savings and or insurance determines their financial resilience.  

We can never know what the future’s storms will be or to what extent they will impact us, we can be better prepared to face them by taking steps that will help us to achieve better financial resilience outcomes. It is however, worthy noting that this is a continuous, deliberate effort of planning and commitment to a plan that will ensure protection against unforeseen storms that put pressure on the financial health of households.  

Whilst the topic and strategies for creating financial resilience can be broad, households can adopt the following habits and strategies to dealing with events that impact their finances whether it be a sudden fall in income or unavoidable rise in expenditure. These include cultivating habits of savings, debt reduction and smart money management.

Have a Financial Plan – without a vision, it is easy to cast off restraint
Just as the old adage goes, if you fail to plan you are planning to fail. The paramount importance of having a blueprint for any thing in life can never be over emphasised as a plan helps in setting up goals, objectives and strategies for achieving such goals. A plan helps one to stay disciplined in achieving their set goals and there is need for regularly revisiting the plan to ensure that one is on track and so manage any distractions, resetting in the event of changes in life such as a salary increase, increased responsibility, marriage, divorce, children etc. 

This is therefore a good starting off point in creating financial resilience and setting one’s journey in motion. It is also recommended that one engages the services of a professional such as a financial planner/ advisor to help them in drafting a plan that take into account their unique circumstances and applicable taxes to reduce their impact or take advantage of concessions and so achieve better financial outcomes.  

A financial plan should set goals to help one stay focused on what matters most, but a plan alone is not enough as some plans can be purely aspirational, so it is essential to follow-up a plan with budgeting to ensure affordability and realise possible amounts that can be better managed or used in supporting the set financial plan.

Budgeting – take control of where and how you spend your money 
The main purpose of a budget is to help one understand where their money goes and so have control of their finances whilst enabling them to avoid possible wasteful spending. Budgeting also helps in ensuring that one spends within their limits as you cannot allocate funds that you do not have but can play around the listed expenses to re-balance spending whilst giving priorities to what is important. If you want to be savvy with your money, invest time in budgeting and know where your hard earned money is going to, after all it is a fair ask.  

Furthermore, this can help in creating possible amounts for saving when reallocating from unintended wasteful spending to savings pockets whether for the near future or in retirement. It will also determine affordability of one’s financial plan, so there is need to have an honest discussion around your personal finances with a view of setting up a financial plan than will help you improve your financial wellbeing.  

Part of this discussion includes understanding one’s debt exposures as various debts have different impacts on the health of a household’s finances.   

Managing and Limiting Debt
Accessing debt can be beneficial to households in a number of ways such as the accumulation of assets and paying for education but if overused it can be detrimental to the financial health of a household and lead to untold distress on household disposable income, lower saving and possible at the expense of retiring to an uncomfortable retirement.  

An increase in cost of servicing debt such as interest rates increases will crowd household disposable incomes and possibly lead to adverse future outcomes build on lower savings. To avoid these adverse effects, it is better to minimise or limit the use of and reliance on debt and if possible, only consider it for asset accumulation such as house and car purchases whilst avoiding unsecured lending as it is costly and mostly spent on consumption goods – rather save for some big items, use lay byes where possible or limit to an interest free term, usually six months.

*N.B. Outright ownership of your assets provides one with more of a financial cushion and increased security

Precautionary and Big Item Purchase Savings
Short term goal saving encompasses creation of an emergency fund and saving towards big/small item purchases. Creating an emergency fund allows one to have a savings buffer that can be used to maintain their current living standards in the event of their household income falling or unexpected increase in expenses without selling other assets, generally a three to twelve-month buffer is recommended depending on each household. Depending on the amount, a bank account can be a good vehicle for holding such a reserve, other an investment in a cash portfolio would be an alternative where longer term reserves (12 months) are considered.  

The same can be done for saving towards the purchase of large items or in some cases small items whose costs cannot be met from a monthly salary. This is a better option than taking on debt which might be costlier and so have adverse effects on the future income of households.  

Households vary in their ability to save and the largest determining factor is their income relative to meeting basic expenditure needs and other financial commitments, but creating a habit of saving is never about having a higher income but promoting a habit regularly saving even small amounts over a period of time.

Some organisations promote or sponsor savings vehicles that liquid at the end of the year and thus avail a form of bonus to their employees at the end of the year. There are also a number of options such as savings groups in the form of stokvels which make good starting points for short term saving in a collective manner whether these are merry go-round saving schemes and those that distribute to members at the end of the year, they still provide some form of cushion for big item spending or increased spending during festival season and limit impact of regular household incomes.   

Retirement Saving and Investing for the Future
According to National Treasury only 6% of South Africans can afford to retire comfortably – i.e. have saved enough to replace at least 60 - 75% of their income at retirement. These findings echo various economic research findings on the low household saving as reflected through income to savings ratio of South African households. These statistics show that retirement can be a huge event for most south Africans with a significant drop in income leading to well below desirable or used lifestyles. Unless one is deliberate in their planning, they may lead very uncomfortable life in retirement.   

The government has put in place policies which help incentivise households to accumulate savings, but most existing schemes tend to favour already well-off individuals e.g. tax concessions or tax relief on pension contributions can have huge benefits to high income earners where tax reduction strategies are fully utilised. There are also tax free saving schemes that have been instituted to further promote savings, however it is still possible that the intended low income earners are still not incentive to take advantage of these vehicles.

However, the tremendous advantage or power these vehicles can have whether its saving towards tertiary education, children endowment or supplementing retirement savings. In retirement, savings in a tax free savings can provided non-taxable income stream that will supplement income drawdowns from a post retirement vehicle

The retirement planning conversation should not be left to the very last minute, but rather this should be a continuous conversation that starts as soon as one is employed with constant adjustments made as earnings change and also taking advantage of tax reliefs offered on retirement savings and these currently are up to 27.5% of taxable income to an annual cap of R350 000. According to the current tax law, contributions that have not had a tax benefit at contribution stage, will have the relief at or in retirement and so still provide increased the much needed cash flow in retirement.  

Have Adequate Insurance
The death or ill-health of a breadwinner in a household leads to probably the only household income being cut and so lead to probably a gap that will never be fulfilled. In some cases, retirement and other savings may not be sufficient to replace such an income loss. To make up for these gaps, it is prudent to purchase adequate life insurance to protect dependents against the loss of a breadwinner’s income and disability insurance to provide continued income following an accident or illness. The discussion for the income gaps form part of one’s financial plan as it is important to protect one’s ability to create or earn an income.

Other issues to consider in this category include insuring household goods, building and car against events that may lead to unplanned increased expenses that have the potential to distress household incomes 

Get Thrifty
Being thrifty means finding ways to either get rid of items one no longer uses or buying used items inexpensively as ways to improve one’s financial standing. There are a number of weekend markets, online stores, second-hand stores, garage sales etc. where one can dispose of their used goods to realise or improve their cash flow from old items or clothes.  

Furthermore, one can join a number of groups that share news on specials, best buys or value for money deals etc. whilst others enjoy advantages of bulk buying through stokvel groups. All these practices can lead to saving and building towards financial resilience over the long term.  

The above are just but a few examples of the many ways one can be thrifty.   

Estate Planning 
The main goal of an estate plan is to protect and preserve one’s assets and ensuring an effective distribution to intended beneficiaries whilst ensuring minimum impact of taxes and provision of liquidity in the estate.  Careful estate planning will also ensure that there is no unnecessary sale of assets in the estates to meet cash flow needs or payment of expenses and taxes.  

By Joseph Phiri CFP®