We all know the economic impact of COVID-19 is greater than any event in the last 80 years. That is a fact. But the reality of dealing with this fact will be different for everybody.
As someone who works in the financial services industry together with a team of advisors, actuaries and relationship consultants, I can categorically say that it is our youth, and more specifically, our millennials, are going to be the hardest hit.
According to the stats provided from TransUnion Global Study, when compared to older generations, millennials have a lower income and fewer assets. Add to this a higher level of debt and more dependents and you will see how this current crisis of ours is primed to impact millennials.
But we can’t simply sit here and wallow in the doom and gloom of unfortunate financial portents. We need to find a way to be positive and reframe our position. We need to bring back the positivity that came with the beginning of the year because we still got another 6 months to go.
I’m here to offer some fundamental financial guidance, not just for our millennials, but anyone who is financially young and needs to build a solid foundation.
Fixing your finances requires taking a step back, and it starts with thinking about a collapsed building.
Why does a building collapse?
Think of a collapsed building as a representation of your financial goals and aspirations. You have to ask yourself, why did this building collapse? There are likely four reasons:
1. The foundation is too weak
2. The building materials aren’t strong enough
3. The load is heavier than expected
4. Workers make mistakes
If any one of these occur, your building, i.e. your financial situation, is likely to collapse. So how can we fix this? Let’s start from the ground up.
The foundation is too weak
How can we build our aspirations and our goals if we don’t have a strong foundation? Let’s be clear, life will happen and COVID-19 is a great example of this. When life happens, you will find that without a strong foundation your structure will fall over.
To build a strong financial foundation, it is imperative that 20% of your gross income goes into savings of some kind. You might think that is a lot, but if you work for a company with benefits, 15% of this is already saved. Although, I know that not everyone has the luxury of company benefits, but that simply means you have to seriously consider where that 15% will come from. The extra 5% should come from your income.
Secondly, if you have an emergency fund for those occasions when life happens, you need to aim to have at least six months of living expenses covered. Expenses provide a good measurement as some people have higher expenses than their income, which helps provide many people with a wakeup call and understand what it means to live within your means.
The next thing you need to do is protect your assets. A lot of millennials throw caution to the wind and decide that insurance is a luxury purchase. If you want to protect assets like your car and your home, then you probably need insurance. Think of it this way, if you can’t afford to pay for it, then you need to insure it. You need your assets to live. If your car gets stolen or your house burns down and you can’t afford to immediately replace it, then you are left vulnerable.
The building materials aren’t strong enough
If you have weak materials, your building is not likely to last. In a financial context, debt makes our building materials weak. When I talk about debt, I mean bad debt like credit cards, personal loans and retail credit. Interest rates are not a joke, especially if your income is compromised which it may very well be in the months to come.
If you keep your bad debt as low as possible, that means that your income (or building materials) are strong and fully dedicated to keeping your house in order.
The load is heavier than expected
If your building doesn’t spread out the load evenly then it is bound to fall apart. The same goes for your finances. How do you spread out the financial load? It starts and ends with a budget.
With the right budget, you can cover your needs, wants and savings all in one go. Try to keep your needs below 65% of your income so if anything should happen to your income you are not spending everything you have. After that, as I mentioned above, 20% should go to savings and then 15% can cover your wants.
The trick to doing a budget is to realise that every Rand should have a job with no exceptions. With a budget, you can see what trade-offs you are willing to make without extending your spending beyond your means and being tempted to accumulate bad debt.
Workers make mistakes
As much as you want to trust that the house you live in was expertly built and will never collapse, there is always human error to factor in. We are all human and all make mistakes.
What are the financial mistakes you should avoid? Here’s a few don’ts to remember:
• Don’t accumulate bad debt instead of tackling your existing debt.
• Don’t cancel your insurance on a whim when you may need it to survive.
• Don’t get roped into ‘get rich quick’ schemes because there is no such thing as getting rich quick.
• Don’t do nothing – because sitting back and letting your financial situation deteriorate through inaction can only end one way.
Navigating an uncertain future
Times have changed. The whole world has changed. It’s ok if your goals change, too. Just breathe, figure out what you want to realistically achieve and then put a plan in place to achieve that. There’s a famous saying that I always teach my clients: “Failing to plan is planning to fail”. If you don’t have a plan you are setting yourself up for failure. How do you ever expect to succeed if you don’t even know what you are working towards? As you know, every skyscraper started with a plan, so start building your financial tower today and do it right.
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