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Latest study reveals consumer finances at their worst level ever - how to navigate the financial battle ahead

16 September 2020 Momentum Financial Planning

As the latest Momentum/Unisa Consumer Financial Vulnerability Index results show consumer finances are in a “Very Vulnerable state”, financial planner Janine Horn shares practical tips on how to batten down the hatches and prepare for war

The Q2 2020 Momentum/Unisa Consumer Financial Vulnerability Index (CFVI) results have been released, revealing the largest ever quarterly decrease since the index started in 2009. As a direct result of the COVID-19 pandemic and ensuing national lockdown, the findings indicate that consumer finances are in such a bad state that people are simply not able to cope and urgently need to reassess their financial plans.

This is according to Johann van Tonder, researcher and economist at Momentum who explains that the study essentially looks at four sub-components that consumers, on average feel are causing stress to their cash flow positions –their income, expenditure, savings and debt servicing capabilities. Van Tonder says that each one of these four areas decreased substantially over the quarter, meaning that consumers are so financially vulnerable that they cannot cope.

The largest quarterly decline of 13.1 points (from 47.7 points to 34.6 points) was recorded in the Income category. “This was to be expected given that the lockdown contributed to company closures and millions of consumers unable to earn an income or the same income. This had a huge knock-on effect on already strained financial commitments,” says Van Tonder.

A portion of the study is also based on responses from “key informants” - people in relevant industries such as banks, insurers, other credit industry institutions, retailers, municipalities and consumer researchers. “Worryingly, they highlighted that it appeared as if a larger number of consumers were more worried about their finances than staying safe against the virus. This demonstrates the immense pressure people are under,” said Van Tonder.

So, what should we do to try and keep our financial journeys on track amid the chaos?

Janine Horn, Financial Planner at Momentum Financial Planning, says that in crisis times our resilience – emotionally, physically, spiritually, mentally and financially – is challenged and these are moments that require us to step up to the battlefield and face the frontline of our finances. “We need to take a step back, try to still the panic, and gear up to tackle our financial situations – fully armoured, well-trained and thoroughly prepared.”

Horn shares her top three tips to help consumer get fighting fit for the battlefield ahead:

1. Be mindful of changes in your behaviour

“Key informants in the latest CFVI said they expected the pandemic to heavily impact our behaviour as consumers when it comes to our finances,” says Horn. While the report said that our awareness of the impact of the pandemic will likely change aspects such as the way we spend our spare cash (if any), reducing unnecessary travel, working remotely and online shopping to keep safe, it could also have some negative knock-on behavioural impacts such as unscrupulous financial behaviour and relying on alcohol or other substances to cope.

“A key part of weathering this storm to keep your financial journey to success on track, is to be aware of your changing money habits and behavioural patterns. Times are tough and going to get tougher. Take time to reflect on your money habits and try to identify negative ones that need to change and replace them with educated, disciplined methodologies. Challenge your mind-set,” says Horn.

2. Don’t let pressure catapult you into a dodgy debt cycle

According to the CFVI report, prices are expected to increase faster and as consumers we won’t be able to keep up with our monthly expenses. “While this is extremely daunting it means we need to be even more ruthless when it comes to our spending to make sure we don’t get into even more debt,” says Horn. She cautions that while saving may be a luxury many of us can’t afford right now, taking extra steps to ensure we don’t get further into debt is key. “Dissect and then re-dissect your budget. Make sure you cut out everything that is not absolutely necessary. Any fat you can trim will reduce the need to take out debt to make ends meet in the short term,” says Horn. She adds that once you are in a debt cycle it is near impossible to break out of it without a hefty cash injection which is unlikely to come anytime soon.

3. Stay away from any long-term savings to protect your journey to success

According to the CFVI study, the hopelessness of our current economic climate will put even more pressure on our savings. “While many of us will have to forego monthly savings, it is critical that long term investments – such as retirement savings – are protected,” says Horn. She cautions that tapping into these not only has extremely high tax penalties but the loss in the value of compound interests could set you back years.

She concludes by urging people to get in touch with a professional financial adviser to help guide them through this battlefield. “You are not alone in this. And financial advisers are not only for the wealthy among us. Contact an adviser to guide you on what actions are necessary to take to step onto the battlefield and succeed.”

 

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