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Lessons from Covid-19 to boost your budget

21 January 2021 10X Investments
Brett Mackay, Investment Consultant at 10X Investments

Brett Mackay, Investment Consultant at 10X Investments

Reflecting on the year gone by, Brett Mackay, Investment Consultant at 10X Investments, discusses how we can adapt and evolve our budgets for 2021 using five key budgeting lessons forced on us by the Covid-19 pandemic.

If there was one constant in life that we all encountered this past year, it was change. Who could have predicted that social distancing, beach closures and lockdown would be the new norm? But it has not been all bad. Perhaps a few of the adjustments we were forced to make in our attempts to survive last year could be incorporated into our efforts to thrive this year.

Here are some thoughts on five lessons delivered to many people this past year:

1. Preparation is key
It may sound simple but what budgeting is about at its very core is planning. Although the last year was challenging, to say the least, some of the financial issues we lost sleep over might have been avoided if we had prepared better.

Some think budgeting is only for people who are concerned about running out of money, but the reality is that everyone can benefit from a budget. Irrespective of your circumstances or goals, whether you want to pay off your short-term debt or to retire early, a proper budget enables you to understand your current situation in the context of where you want to be.

Spontaneity can be exciting, but your finances and life will eventually suffer if you let your money control you instead of you controlling it. Start by optimising your objectives, create a plan around your spending and refine this into a strategy that empowers you to reach your goals.

You might feel the urge to rush into your new approach, but give yourself the time to ease into it. Make sure you set realistic goals, especially when it comes to saving. As Aesop’s fable, The Tortoise and the Hare, taught us, you are more likely to be successful by doing things slowly and steadily than by acting quickly and carelessly.

2. Flexibility is important
While preparation is key, it’s not until we face abrupt or significant change, as we did during the pandemic, that we realise that even the best of plans can benefit from some flexibility. If there is a pivotal lesson many of us have learned this past year, it is the importance of being able to adapt to changing circumstances.

Think of your future goal as a destination and your finances as a vehicle to help you get there. Sure, there will be some stops along the way (a few of them unexpected) and possibly a couple of detours. You might even realise that some parts need replacing, but how you navigate the journey ultimately determines where you end up.

Make the time to review your budget regularly. Ask yourself if your spending aligns with what you need at this point in your journey.

It may be time to cut back on expenses you once thought were essential, so that you can divert some extra cash into your retirement savings fund if you see that you are not exactly on track to the dream retirement you are after. Whatever it is, you should be willing to adapt and change to keep moving towards your desired destination.

3. Think about the little things that add up
With the sudden change in so many of our daily routines we have had more time to reflect on our normal spending habits. Perhaps, in all those months of missing out on your daily takeaway coffee and lunch purchases, you became more conscious about just how much those little things were costing.

While most of us do thorough research and give much thought before making bigger purchases, like a car or a large household appliance, we tend to pay less attention to the small, inexpensive items that we purchase often, sometimes every day. As an example, if you had spent about R25 on a coffee as you headed to the office every day, you would have spent around R500 every month on takeaway coffee – money you could have invested or saved for a rainy day.

Being conscious about where we’re spending our money helps us to identify changes we can make to improve our financial situation. In fact, it’s the seemingly small changes applied consistently, that end up making a big difference over time.

4. Long-term goals should be prioritised
It’s no secret that we often live day-to-day, focusing on our immediate needs, from food to school fees and rent/bond payments. It is worth remembering that the urgency of our short-term needs is probably diverting attention from something equally important.
Although some may think of retirement as a goal that’s too far down the timeline to prioritise right now, being financially vulnerable at a time when financial security is needed most is a reality that defines the retirement crisis in South Africa today.

So, while it’s fair that your budget accounts for short-term goals, such as a vacation, it’s also important that you prioritise your long-term objectives as well. Think of this as a down-payment on your future, an investment you will definitely thank yourself for later when you’ll need it most.

If you don’t already have a retirement plan you should create one. Tools, like the one on the 10X Investments’ site www.10X.co.za, allow you to define your goals according to your age and current earnings and track your progress against them. It is simple and free and there is no obligation to buy anything; what have you got to lose?

5. Be ready for those rainy days
One lesson to be learned from the crash-course in real life that was 2020 is that rainy days can hit us when we least expect it. To help you prepare for unanticipated storms that could potentially strain your finances it is best to have an emergency fund in place. This is not an investment, but more of a savings plan. Investing will build your wealth, saving will secure it.

There is no age limit on who should have an emergency fund. Emergencies can happen to anyone at any time.

An emergency fund can be a lifesaver if your income is interrupted as it will ensure that you can still pay the bills. Building up an emergency fund will teach you the discipline of putting money away … and will also help you sleep at night. It is advisable to save at least three months of your take-home pay in a low-fee money market fund or income fund for this purpose.

We don’t know when the pandemic will be truly behind us, but it is clear that applying the valuable lessons we are learning from it will set us up for success, whatever the post-pandemic ‘new normal’ is like.

 

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Financial behaviour experts suggest that today’s risk modelling methodologies ignore your client’s emotional ability / behavioural capacity. What are your thoughts on spicing up risk profiling tools to make allowance for your client’s financial behaviours

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[a] Bring it on; my client’s make too many irrational financial decisions
[b] Existing risk profiling tools are adequate
[c] Risk profiling tools should be based on the model / rational client
[d] The perfect risk profiling tool is science fiction
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