We didn’t ask for the COVID -19 crisis to upend all our plans and goals for 2020. But here we are. When we face a time of crisis, what makes it most difficult to manage is the fact that we didn’t have control over it. There is a tendency to resist the changes that we need to make in order to survive this time because we don’t like that it’s happened.
Our feeling of being out of control creates an internal resistance that prevents us from thinking clearly about how to best deal with the situation at hand. M Scott Peck, a psychologist who wrote the book The road less traveled, said “once we truly know that life is difficult – once we truly understand and accept it, then life is no longer difficult.”
So, the first step to creating a plan of action around coping with the financial realities brought about by COVID-19 is to accept that this is going to be difficult. If we see this as an opportunity to address negative financial patterns and behaviors in our life, that we were able to ignore before the pandemic, we will be more motivated to create and maintain the necessary financial changes that will help our family survive over the next few years.
If you have already been employing strategies to help you financially and realize that with the recent increase in taxes, you have to perhaps take a more drastic measure of downsizing your property and vehicles, as well as tighten your belt even further, this guide will help you.
Step 1: Assess what you family actually need on a monthly basis
How much does your family actually need each month? What are your basic living expenses? This will include items such as housing, transportation costs, food, education and clothing. All other expenses are non-essential items. (Yes, pay tv and streaming services and eating out are non-essential expenses).
Depending on the level of disposable income you were able to enjoy before the pandemic, it might be difficult for you to whittle your living costs to the essentials. This is a good time to question what you really believe about success and assess what real wealth is and what it means for you.
If your family is healthy and you are able to weather this financial storm together, you will come out of this with the ability to rebuild your wealth from a stronger foundation. There is no point worrying about ‘what people will say’ when you sell your house or second car. The Joneses are facing the same calamity. Possessions don’t define your value.
You can refer to this article that will help you to develop a budget for your current needs, as well as give you a process for debt reduction.
Step 2: Cut accommodation costs
This is the biggest fixed expense on any budget and the general recommendation is no more than 30% of the combined household income. If your bond or rent payment is more than this percentage, you might want to re-evaluate whether you are using that extra room or balcony? Is the view worth it?
Dedicate time to taking a realistic look at the numbers. If you currently own your property, what are the actual costs, in terms of interest, rates and repairs over a five to ten year period? Most people are emotionally attached to the idea of home ownership, as you often hear people say: “I’d rather be paying my own bond than someone else’s.”
However, you can’t just compare a bond payment of R8 000 to someone paying rent of equal value. The homeowner often hasn’t calculated hidden costs, such as cumulative compound interest, property rates and ongoing maintenance.
Let’s consider the accrued interest payment on a 20 year mortgage on a house valued at R1 000 with 10% fixed interest: after 20 years, you will have paid R1,323,928.52 IN INTEREST ALONE! A total of 134% of the house value went towards just paying off the interest. You could have bought another house with that money.
It might be heartbreaking to realize that you might need to sell your house and consider rental options. What is holding onto your current home costing in the long term? It is worth the risk of the bank repossessing the home because you’re unable to make the monthly payments, meaning that you lose all the money you’ve already invested in the property?
Make the tough decision while you still have a window period to make the necessary changes. You will regret not acting sooner if you just hope things will get better on your own and potentially lose your home, along with any opportunity to sell the house and secure alternate housing.
Think of it this way: a house is just shelter for your family. So, whether you own the roof, or it’s someone else’s roof, the important thing is to ensure that your family has a safe place to live. (Also, until you have the deed of ownership on your property, the bank owns your roof anyway!)
If you are currently renting, you might want to consider moving closer to your place of work, into an area where rental homes are cheaper. If it makes sense for you and your family, you might opt for a shared housing option with friends or family members at this time. You may need to get creative and make the most of available space using room dividers for multi-purpose rooms.
Step 3: Reduce transportation costs
Transportation costs, which include car payments, should be around 20% of monthly household income. One of the easiest ways to reduce costs in this category is to maintain just one family vehicle. Yes, it might be time to say goodbye to the shiny, status symbol car that you love.
Review petrol, maintenance and insurance costs on this vehicle, compared to a cheaper entry vehicle. You might want to consider trading in your current vehicle for a more affordable option (don’t rule out a second hand car).
Other ways that you can reduce vehicle costs include:
- Carpool to work where possible
- Work from home a few days a week
- Reduce unnecessary shopping trips by buying in bulk
- Learn to change your own oil and sparkplugs (this will save you thousands of rands a year)
- Check your car regularly for maintenance issues before it breaks down, thereby costing more
Step 4: Streamline your food expenses
The grocery budget is often the place where our unchecked purchasing habits prevent us from reducing costs. A little careful planning will generate some healthy savings:
- Start by creating a monthly meal plan
- Write down the meals that you make regularly
- Research some budget meals that you can add to the menu
- Create a monthly grocery shopping list based on ingredients needed for your meal plan
- Separate essential and luxury food items
- Buy cheaper brands and swop out fresh with long life options
- Shop with grocery list in hand and only buy what’s on your list
- Once you have purchased the bulk of your shopping, divide the remaining budget for fresh fruit and vegetables into a weekly amount
- Withdraw this money at a cash till (to save on bank costs) and place this cash into four envelopes (one for each week). Some might remember our grandmothers using this method of money management – it worked, didn’t it?
- Be more vigilant about food wastage. Everything you throw out is money you could’ve saved
- Use up the groceries in your cupboards and freezer before buying more
- Experiment with creating new meals from leftovers
Step 5: Update your medial aid
- If you have been retrenched, you will need to secure your own medial aid. Get a few quotes and make sure you do a proper comparative costing before you sign up
- Customise your cover based on your family needs:
- Comprehensive medical aid cover for chronic conditions
- Hospital plan for healthier family members
- Save cash every month for out of pocket medical expenses, such as co-payments and medication
- Request a list of associated doctors, hospitals, pharmacies and other medical professionals in your medical aid’s network
- Phone the doctors and confirm their relationship with your medical aid
- Use the generic option when getting prescribed medication
Step 6: Minimize insurance
No one enjoys the extra admin of researching alternative insurance quotes but this is an area where you can win decent savings over an annual period.
- Check around for cheaper car and household insurance
- Remove extras from car insurance like car rental
- Look for discounts when combining car and household insurance
- Revise individual or high risk items that may push up your premium
- If you have an emergency fund saved up, you can increase your excess which will lower the monthly premium
- Look for insurance options that allow you to pause the comprehensive cover when the vehicle is not in use (third party cover is still valid)
- Revise life insurance policies – make sure they are up to date and still provide the necessary cover for your situation
- If you have debt, don’t cut your life insurance
- Most financial institutions don’t offer retrenchment cover and those who do have halted this product due to the uncertainty in the current climate. There are many conditions related to retrenchment insurance products, so the best option is rather to look for alternate sources of income
Step 7: Make smart communication choices
- Review your current phone contract. If you still have a few months left on your contract, use up allotted data and minutes available
- Don’t automatically renew your contract once it comes to an end. The sales person will try and push you into a new contract but look at the packages available and downgrade to a data and call option that suits your needs, while retaining your current handset.
- With the increase in work from home arrangements, rather invest in uncapped wifi and cancel the contract phones with expensive data and call packages
Step 8: Be aware of energy usage
- Save on electricity used by ovens and kettles
- Buy a portable two plate gas stove to prevent having to buy food during power outages
- Turn off heaters/lights when not in use or only use heaters in small rooms during winter
- Switch off your geyser in the daytime
Step 9: Find alternate sources of income
It is going to take a while for the world economy to recover from the COVID-19 crisis. In the meantime, you need to do what it takes to find ways to increase your income and expand your skill sets.
- One skill set only allows you to get one kind of job. Two skills sets increase job opportunities by 50%
- Take advantage of free online courses to up-skill, re-skill or cross-skill
- Become more active on LinkedIn to increase your professional visibility
- Don’t be ashamed to look for a part time second job to supplement your income. Your livelihood is at stake, so other people’s opinion of you is inconsequential
- Working at another job will open your mindset to other skills and connect you to other people.
- Part time jobs can grow into full time jobs in the future
- Develop a consultant, not an employee, mindset
- Consider skills development and learning like a business investing in its employees
- You want to become more valuable to the changing workplace in order to be more competitive in the evolving new normal