In times of financial stress, it is vital to make savings where you can so as not to default on essential payments such as your bond, medical aid and insurance cover.
Times are tough for most South Africans as they tackle a weak economy and lockdown-related salary pressures but many homeowners are particularly stressed as they struggle with their bond repayments.
Although tenants find it difficult to move when they cannot afford their rent, life is even tougher for those who can no longer afford their bond repayments. Before approaching their banks for help, homeowners should look at their monthly income and expenditure to see if they free up some money to repay their bonds. Bongiwe Gangeni, deputy chief executive of Absa Retail and Business Banking, and financial advisers at Capitec Bank, offer some useful advice.
Know where your money is going
Creating a budget that reflects daily, weekly, monthly and annual expenses is an essential guide as to what you can afford. Often consumers fall into the trap of spending, hoping to have enough money to get by during the month, only to discover that they don’t, Gangeni says.
“This puts a consumer at risk of a ‘quicksand’ process in which each month they fall further behind in payments and this gains momentum until they evolve into a downward spiral. The solution then is either to sell assets or take on more expensive debt which snowballs into further trouble.”
She says a budget creates the confidence that you will be able to honour your monthly commitments. It also highlights waste – those things that do not add value, joy or create future benefits. “Doing a budget forces a consumer to choose between wants, needs, affordability. It engenders financial responsibility and informed decisions.”
Repay the debt you can
You should look at your budget and pay off any debt you can, advises Capitec Bank. “Begin by paying off debt faster; this can reduce the overall interest you pay. Your disposable income will increase once it’s paid off and you’ll have more money to use towards your goals.”
It advises consumers to pay off credit with higher interest rates first, such as store and credit cards which often charge higher interest rates when compared to other loans. “Prioritise paying off these to maximise your savings and, where possible, move to simpler and more affordable options.”
How to spot wasteful expenses
Your first consideration should be to allocate your income to the things you need, then to items or activities you want. Go as far down the list as you can afford to, Gangeni says. Importantly, remember to provide for emergencies – ideally a three-tosix month buffer is advisable.
“With provision for tough times, any adverse impact is likely to be softened and the risk of losing assets (like your house) will be limited. With interest rates now very low, any excess money should be saved towards your emergency fund.” It is important to live within your financial means. Luxuries and non-essential expenses can be reduced and this will enable you to save more and stretch your money.
The investment options that you could temporarily do without or reduce payments towards
Gangeni says most recurring investment products have a “premium holiday” benefit, meaning that you might be able to stop the premium for a few months. However, in each case, you need to ensure that you fully understand the rules and consequences of this option.
“Contact your financial adviser in order to ensure you have all the details before making a decision which could impact the current or future value of your investments.”
Investment options you should not do without
Life insurance, short-term insurance policies and medical aid are often the first products that people cancel or reduce when finding themselves in financial difficulties, Gangeni says.
However, consider the long-term impacts as reinstating these products at a later stage may be more expensive. And in the unfortunate event that there is a claim and you don’t have cover, the financial result may have a much bigger impact than the saving on the monthly premium.
“I would advise people to discuss the impact of cancelling any policy with your financial adviser prior to making this decision unilaterally, as there may be other options such as premium holiday benefits,” she says.
Consider bringing in additional income over these difficult months
The financial stress of Covid-19 has forced many people to find new ways of earning, even if only temporarily. Those who are still struggling with reduced or no income can use their skills to provide products or services.
Some ideas include:
◆ Sewing fashionable masks or making other necessary items of clothing.
◆ Providing babysitting and/or school work assistance to parents who are back in the office but whose children remain at home for medical reasons.
◆ Freelance writing or editing – online content is becoming more popular so look for platforms or publications that could use your skills or experience.
◆ Those with IT or web design skills can use them to create websites for small businesses or entrepreneurs who have now discovered the importance of an online presence.
◆ Look for remote or online work – even international companies offer such opportunities.
◆ Shopping and delivery services for elderly people who do not want to risk their health by going to buy groceries or household items.
◆ Those with teaching experience or particular knowledge sets can consider online tutoring. Similarly, those with excellent English can teach English online through many reputable service providers. This will, however, take some financial outlay to get a TEFL (teaching English as a foreign language) qualification.
Future-proof your income
Looking ahead, Capitec says people could consider using monthly savings, once their financial circumstances stabilise, to study further.
This could earn them a promotion, the opportunity to apply for a more interesting job or the skills needed to start a side hustle.
The bank adds: “One of the lessons to come out of the pandemic is that savings are important as life can present unexpected situations. “Build enough savings to cover at least three months’ expenses. This protects you from dipping back into debt each time there is an unexpected expense.”